An electronic check is a digital version of a paper-check—and one of the most valuable tools for small business accounting teams that need to maximize efficiencies.
This method of payment is more than what you see at face value (i.e., money deposited into your business bank account). Unlike payments that arrive in the mail, e-checks automate your financial management and record-keeping.
Here’s what you need to know about accepting electronic checks and setting up a process for your business.
The Basics: What Is an Electronic Check?
An e-check is an electronic or digital version of a paper check. Like a paper check, an e-check requires standard information 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 entirely 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).
As with a paper check, you need to make sure that you keep meticulous records of your financial transactions. But because you’re likely using software to receive funds, track payments, and manage invoices with customers, you can automate this entire process.
With the right tools in hand, you won’t need to worry about record-keeping because you’ll already have a digital transaction log that is feeding data to your accounting software. You can build on this process to set up more elaborate workflows.
Let’s say that you have a core accounting platform that you use to manage your books. You can set up payment processing software like Bill.com or PayPal as an add-on, which your customers can use to make direct payment to your bank account.
Depending on the capabilities of your payment processing software, you can also monitor the status of your invoices, whether your customers are reading your follow-ups, and whether funds are in the process of clearing your bank account.
If you’re a QuickBooks customer, you can receive e-checks within your accounting software with a few clicks. When you set up the ability to accept electronic checks, you can also enable credit card transactions.
This flexibility will enable your customers to pay you faster and instantaneously. Electronic checks are just as convenient for your customers as they are for you.
The Benefits of Using an E-Check Over 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.
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
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 required 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 operation is the person initiating the e-check. In the typical 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 government highly regulates the automated systems. As a result, the e-check transactions are protected by highly secure systems.
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.
The Difference Between EFT, E-Checks, And ACH Payments
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.).
ACH is an abbreviation 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 payment 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 to convert the transaction to a digital process.
If you use accounting software like QuickBooks Online, you can monitor the statuses of your invoices, access transaction records in real-time, issue refunds, and maintain logs of customer activities.
Electronic checks have the potential to eliminate almost every administrative hurdle that comes up with getting paid: no more wondering if your customers received your invoice or remitted payment. With more predictability over your accounting operations and cash flow, you can focus on moving your business’s strategic goals forward.