E-checks are an electronic version of a paper check and are used to make payments online by both consumers and businesses through a data network. The automated clearing house network, or ACH, is used by millions of consumers and businesses to conduct payments, such as paying your mortgage or credit card bill, online.
Businesses use ACH to pay employees their salaries by direct deposit and vendors their bills.
ACH is preferred because payments arrive on time and it eliminates the hassle of delays and lost checks.
An e-check is a win-win for both businesses and customers because it enables faster payment processing and immediate access to deposited funds, says Bob Castaneda, program director for Walden University’s accounting and finance degree programs.
“For customers, e-checks can be a securer way of making payments as it eliminates having your personal documents being handled by other people,” he says.
What Are the Benefits of E-Checks?
E-checks are commonly used by businesses and consumers to pay their bills because they are reliable and transactions can be conducted immediately. These transactions are also less expensive for businesses than purchasing checks and mailing them out on a regular basis.
“Electronic checks also save businesses the costs of hiring employees to process checks,” Castaneda says.
These payments are also beneficial because they eliminate the possibility of being late with a payment because of delayed or lost mail. These payments can also be tracked digitally, making it easier for businesses to keep track of payments for employees and vendors and also to see when they receive payments from customers.
Consumers can budget and plan better because they know when their payments for bills such as a student loan or a car loan will occur. When they receive e-checks, they can also avoid a trip to the bank to deposit their check or having to use a bank’s mobile app to deposit it.
Since there is no interchange fee for e-check acceptance, it is beneficial for individuals or businesses who make substantial, recurring payments, says Michael Reed, president of the payments division of Deluxe, a Shoreview, Minnesota-based business services company.
“Especially valuable in the current environment, e-checks provide a way to send payments without human intervention or manual processes,” he says.
Best Example of an E-Check: Direct Deposit Paycheck
Direct deposits are commonly used by employers to pay salaries to their employees and make it easier for consumers to set up an automatic savings plan.
The use of direct deposit eliminates the risk of loss or theft of a paper check, the funds are available sooner than if a hold is placed on a paper check, and the direct deposit can be split among more than one account, says Greg McBride, chief financial analyst at Bankrate, a New York-based financial data company.
“While much of the deposit may go into a checking account to pay regular bills, an additional direct deposit can go into a savings account to pad emergency savings, save for a vacation or other financial goal,” he says. “It all happens automatically, usually before you pop out of bed on payday morning.”
One of the more frequently used versions of the e-check is the direct deposit system offered by many employers, says Belinda Reany, division vice president and general manager of ADP’s Employee Financial Services Venture.
“Before there was the inconvenience of picking up a check and cashing it, and now there are also health and safety concerns associated with those tasks,” she says.
How E-Checks Are More Secure Than Paper Checks
Another advantage of an e-check is that it cannot be stolen from an individual’s wallet or mailbox. And paper checks still need to be verified by a bank, which puts an automatic hold on all deposits.
The funds from an e-check are available immediately, and consumers can see if a direct deposit was made by their employer easily by checking online or through a mobile app.
E-checks can eliminate or lower the incidences of fraud. A company uses the routing and bank account information of a consumer or business, transmits the “encrypted information to a service that vets the information across fraud prevention tools and databases to validate the payer’s identity and transaction risk, and the transaction is approved or declined,” says Kevin Poindexter, a consultant at the Crypsis Group, a McLean, Virginia-based cybersecurity firm.