How Do Electronic Checks Work?

Digital banking can be confusing if you remember a time when the internet didn’t exist. Now, all your finances occur in the digital realm, and many of the terminologies used may sound similar. We want to help clear up that confusion by explaining what an electronic check is and how it works.

A basic definition

An eCheck is a shortened name for an electronic check, which is a digital version of a paper check. Just like a traditional check, an e-check allows you to move money from one checking account to another.

An eCheck gives the recipient’s financial institution the directive to withdraw money from your specific account and deposit the funds in their account. The notice relays the account number and routing number needed to process the transfer.

Advantages of eChecks over paper checks

Paper checks and electronics are largely similar in nature, but they have some key differences that make eChecks more advantageous. Payment Cloud Inc. contributor Allison Eilhardt points out these benefits:

• Faster: Electronic checks have much shorter clearing times than paper checks, as they can be initiated immediately once approval is given.
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• More convenient: Electronic checks don’t need to be physically deposited at a location, nor do they take time to travel through the mail or be handed to the recipient.
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• Clearer: The typed numerals on an electronic check won’t be misread like the scribbled monetary amount on a paper check can be.
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• More secure: Electronic checks won’t be misplaced or stolen like paper checks can be. Plus, the information is encrypted and sent over a secure gateway when it’s transmitted.
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• Eco-friendly: Electronic checks don’t use paper and thus help reduce the toll that paper takes on trees and the waste left behind.

How do eChecks work?

Paper checks have to be scanned or manually entered through an electronic payment system that transmits the information. An eCheck is also an electronic means of transferring funds that uses this same technology, but it eliminates the need to scan a paper copy to upload the transaction information to the Automated Clearing House (ACH).

The U.S. Bureau of Fiscal Service defines the ACH as, “the primary system that agencies use for electronic funds transfer (EFT). With ACH, funds are electronically deposited in financial institutions, and payments are made online.” In other words, this computer-based network processes most domestic transactions like credits and debits. When the information is transmitted, the payer’s bank verifies the transaction and initiates the transfer of funds.

An electronic check is not the same thing as using a check-scanning app to deposit a paper check into your financial account.

When should you use an eCheck?

Although electronic checks are not as common as they had been a few years ago, there are still some situations in which using an eCheck is advantageous.

U.S. News & World Report contributor Ellen Chang says many businesses use electronic checks to pay their employees their recurring salary installments instead of using paper checks. Plus, eChecks also allow businesses to pay their vendors on a cyclical basis.

eChecks are generally more secure than debit card transactions. Plus, this method allows both entities to avoid the fees associated with debit and credit card processing. It’s a contactless payment method that lets you establish recurring payments securely and easily.

While an eCheck may not be the most common type of electronic payment method, it still has its benefits as being a simple, secure, quick, and affordable way to send and receive money.