An electronic check, an e-check, is essentially an electronic version of a paper check.
When the e-check was initially created, its novelty warranted distinguishing the e-check from other electronic payment methods (e.g., ACH transactions). However, as the e-check has evolved, and electronic payments of many kinds have largely replaced paper checks, the term e-check has taken on a broader definition to cover many digital payment transactions.
Today, the term e-check is largely interchangeable with ACH payment, which we recently covered at length. Nonetheless, an e-check, in its most literal sense, includes nuances worth exploring.
What Is an E-Check?
An e-check is an electronic or digital version of a paper check. Like a paper check, an e-check requires standard information in order to use the e-check for payment. Specifically, an e-check includes a routing number, bank account number, the name on the bank account, a signature, and endorsement. Further, e-checks are also deposited and settled like paper checks.
While certain paper check elements are included in an e-check, the similarities halt at the physical level. An e-check is completely digital, and it allows a bank account owner to direct payment directly from his or her bank account to a destination bank account without the involvement of a physical instrument (e.g., a paper check).
The Benefits of Using an E-Check Over a Paper Check
With the elements of an e-check established, why would you use an e-check instead of a paper check? Two common benefits are speed and security.
1. E-Check Transactions Are Quicker
Generally, initiating an e-check payment to transferring the funds from one account to another takes between three and five business days. In the first 24 to 48 hours, the funds are verified with the originating bank account, and the transaction is cleared if sufficient funds are available. Once the transaction is cleared, the funds are transferred from the originating account to the destination account somewhere between the three- and five-day mark.
When comparing the speed of e-check processing to paper check processing, there’s no competition. Think about the steps involved in drafting, sending, and depositing a paper check:
- find the checkbook
- fill out the check
- mail the check
- recipient receives the check
- recipient endorses the check
- recipient physically transfers the check to its bank
- recipient bank verifies the check
- recipient bank deposits funds into the recipient’s bank account
The above set of steps represents only one potential scenario, and they don’t demonstrate some of the extra clearing steps involved (e.g., reserve bank clearance). However, the point of the list is to demonstrate that the paper check system is both resource- and time-intensive. If you consider that the first six steps in the list above can be accomplished in a matter of minutes with a computer using an e-check, the time benefit of an e-check over a paper check immediately becomes apparent. The bulk of the time involved in completing an e-check transaction is limited to the time involved in the last two steps listed above.
2. E-Check Transactions Are More Secure
In an e-check transaction, the only human that plays a role in the transaction is the person initiating the e-check. In the common instance that e-checks are set up for auto payment on specified dates, e-check transactions can happen with no human involvement. Once the e-check is submitted, automated systems (including the ACH) facilitate the verification, transmission, and clearing of funds and the settlement of accounts. The automated systems are highly regulated by the government. As a result, the e-check transactions are protected by highly secure systems.
On the other hand, consider the number of humans involved in a paper check exchange:
- check drafter
- sending mailroom
- outbound courier
- post office
- inbound courier
- inbound mailroom
- any employees involved in physically delivering the check
- outbound courier
- post office
- inbound courier
- bank attendant
This list could be longer or shorter depending on the specifics of a given scenario. The point is, transactions with paper checks include many parties physically touching the instrument designed to transfer funds. The more people involved, the more likelihood of a security breach (whether intentional or not).
Further, with paper checks, there is no single, consistent end-to-end process. The checks could be mailed, or delivered directly from party to party. The recipient party may include multiple parties authorized to endorse checks, or just one. Banks all have their own process of verifying and distributing funds. The more options available, the less secure the overall paper check system is. With e-checks, a simple, consistent infrastructure ensures the same process governs every transaction.
What’s The Difference Between EFT, E-Checks, And ACH?
E-check and ACH payment are often used interchangeably. While the substitution his not entirely accurate, a single electronic transaction often uses both an e-check and the ACH system. E-checks and ACH represent two payment elements in a broader category: electronic funds transfer (EFT). While EFT is broader than ACH and e-checks, an EFT transaction stands as the digital counterpart to the traditional physical money transaction (e.g. paper check, cash, etc.).
As we recently discussed, ACH is short for Automated Clearing House. The ACH is a nationwide network of depository institutions maintained by the Federal Reserve. In other words, the ACH is a network that facilitates electronic payments. An e-check is the payment instrument itself. The instrument identifies the bank account to withdraw funds, the amount to be withdrawn, the party to whom the funds are directed, etc. Many e-check payments use the ACH to complete the intended transaction. Accordingly, e-check and ACH are not directly synonymous, but both terms could be used to describe a single electric transaction.
In some instances, transactions that start as physical checks are actually converted to e-checks, and funds are transferred via the ACH.
Because of the speed and security benefits of e-checks over physical checks, many companies and institutions now scan paper checks or input the data from paper checks in order to convert the transaction to a digital process.