The way payments are being made around the world is changing from a paper process to an entirely electronic solution. We’re moving away from paper checks and directly towards the eCheck. According to the 2013 Federal Reserve Payments Study:
“The U.S. payments system has evolved rapidly since 2003, the year the U.S. Congress passed the Check Clearing for the 21st Century Act (Check 21), which facilitated the development of widespread electronic check processing and clearing. Over the past 10 years, paper check payments, which—prior to Check 21—typically required physical processing and transporting, have been replaced by more efficient electronic processes and alternative payment methods.”
The result is faster payments, decreased expenses, and greater productivity. Consumers and businesses have all been enjoying these benefits that come with electronic checks.
How eChecks Work
Intuit provides a comprehensive summary that offers all the basics on how eChecks work. An electronic check, also known as back office conversions or electronic check conversions, replaces a paper check. These payments are processed through what is called an Automated Clearing House (ACH), which is a payment network that is equipped to handle the increased security features used with an eCheck. This payment network also handles other payment methods, including debit card transactions, government benefits payments, direct debit payments, direct payroll deposits and business-to-business payments.
These eChecks can start out as an actual paper check that is then converted using an electronic scanner provided by a merchant services partner. An eCheck can also be considered the process of entering a bank account number and routing number into an online form to make a payment. Either way, the funds for that payment is electronically transmitted, taking the money from your account and putting it into the person or business designated to receive it.
If you are converting a paper check to an electronic check, the paper check is then voided and returned to the customer after the ACH payment process is completed. A list of these transactions then appears on your merchant services account so you can track these payments.
The Benefits of an eCheck World
Intuit also broke down the numerous benefits that using and accepting eChecks can offer:
- Processing costs can be reduced by as much as 60 percent in terms of the materials and labor saved by switching to eChecks.
- Funds are received twice as fast as through traditional paper check processing with payments sometimes being received within one day of payment.
- eChecks offer another payment method option for customers, which can directly lead to greater sales. This includes the ability to accept international and out-of-state checks that would be impossible if you just used paper checks as the preferred payment method.
- It’s an environmentally responsible choice to make in a world that is focusing more on conserving natural resources and reducing greenhouse emissions.
- In essentially automating a process that was once manual, you are not only saving considerable time and working smarter, but you are also significantly reducing the chances for human error and fraud.
eChecks Experience Rapid Growth Among Businesses
In recognizing these benefits, more businesses are beginning to migrate to this payment process, according to recent studies. For example, the 2013 Federal Reserve Payments Study revealed some interesting insights into this growing payment option:
- Increasingly fewer checks enter the banking system as paper at all: in 2012 about one in six checks was deposited by account holders as an electronic image rather than paper. The share of checks written that were converted to ACH increased from 12 percent by number in 2009 to 13 percent in 2012.
PYMNTS.com also noted some significant changes that indicate growth in electronic checks:
- The volume of Automatic Clearing House payments rose to close to 23 billion electronic payments in 2014 with B2B payments taking on a larger portion of this figure than previously noted.
- More than $40 trillion worth of funds were transferred over the ACH Network, which is a three percent increase from 2013.
- The ACH Network recorded 2.7 billion B2B payment transactions. Of those payments, 149 million were tied to the health care industry. Overall, the rise in B2B payments over the ACH Network increased by 7.3 percent.
- The growth in B2B payments has been attributed to new payment processing capabilities added to the ACH Network, including “payroll, bill payments, business payments, online and mobile payments, international payments and a variety of others.”
Furthering these findings is a survey by the Association for Financial Professionals (AFP). The 2015 Payments Cost Benchmarking Survey reported a definitive shift away from paper checks to electronic payments as the preference in the B2B environment. In fact, it reported that nearly 80 percent of those surveyed have already transitioned to electronic payments with more planning to do so if they could determine the actual cost benefit for their company.
However, in response, the same study revealed the cost benefits of switching to ACH payments:
- Sending a paper check is 10 times more expensive than the internal or external cost of sending and receiving an ACH payment while receiving a paper check is five times more expensive.
- The median cost of sending a paper check is $3.00 while receiving a paper check is $1.57. In contrast, the median internal cost for sending and receiving ACH payments is $0.29. The median external cost for sending and receiving ACH payments is $0.27.
This type of quantitative evidence provides a clear picture of the cost benefit for switching to electronic checks. This company may be currently issuing hundreds, if not thousands of checks in a month or quarter.
Future Movement Away from Paper Checks
While many suppliers and vendors still acknowledge paper check use, more are starting to understand why their business could truly benefit from a move to electronic checks and payment platforms. Those studying the market see further growth in eChecks through 2018 as technology evolves and business benefits are verified.