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How eCheck and Check Processing Work

Check processing is the process where banks transfer the money you paid as a check

Remember checks (or cheques)? They’re used less and less these days. There’s even a Saturday Night Live tutorial if you’ve forgotten how to write one or how to use them. But all kidding aside, checks are still a good way to pay for less time-sensitive items. And, for businesses in certain industries that often have trouble being approved to take credit and debit cards, checks or eChecks are a great way to take payments. So, it’s a good idea to understand how check processing works.

Checks have been around for a long time. You sort of already know how they work. Do you really need to read an article on the mechanics of check processing? Maybe.

If you run a business in certain industries like CBD, firearms, nutraceuticals, internet gambling, adult-oriented services, you’re considered a “high-risk” merchant. It means customers in your industry often suffer from buyer’s regret and tend to want a refund or initiate chargebacks. They might even commit outright fraud and pay you with a stolen card. Credit card processing companies tend to stay away from businesses in these industries. So, if this is you, taking checks and eChecks might be your only payment option.

And, if you have to take checks or eChecks, we think it helps if you understand some of the behind-the-scenes why’s and how’s. So, here’s how check processing works. We promise this is a relatively short article and reading it is practically painless.

What’s a Check?

A check, in its’ most basic form, is a written instruction from the owner of a bank account telling their bank to pay a certain amount of money to the person who is holding the check. Using this simple definition, you’ll see that checks have been in use for more than 2,000 years.

What is Check Processing?

Checks in the form we recognize today didn’t come into being until the 1600’s, in England. When these early checks first came into use, bank clerks would go around to the other banks in town, presenting checks on behalf of their bank customers and collecting payouts.

Around 1770, instead of walking around town all day, the clerks in London decided to meet every day at a pub called Six Bells. There at the pub, they would figure out which bank owed which other bank how much. Then, they’d make the money exchange. Other large cities had the same sort of system for their own local banks.

Through the centuries until now, the system changed bit by bit and became more efficient and then more automated. Nevertheless, the basic concept remains the same:

  • Bank account holders can deposit checks at their own bank
  • The bank then sent the checks to the check writer’s bank to make sure it is real (usually checked against signature on file)
  • Then the banks tallied up who needed to send money to whom that day
  • And then the money is actually sent

In the past few decades, the final part where banks sent each other money became faster because the banks made the transfer electronically. In the US, this means the banks sent smaller payments through ACH and larger payments through CHIPS. Note both methods are net transfers. So, check processing in the US uses a netting method.

The Check 21 Act and Digitization of Checks

In the US, up until about 20 years ago, every paper check deposited was physically sent back to the bank of the check writer. Along the way, the check was inspected for fraud and other issues. This continued until 2003, when Congress passed the Check 21 Act.

When the Check 21 Act went into effect in 2004, it allowed banks to digitize checks and send them to each other electronically. There was no more need to physically pass a piece of paper around. For example, digitization allowed a person to deposit a check by taking a photo of it on their smartphone. The Check 21 Act also allowed banks to write eChecks, which is just a digitized check that never had a physical (paper) form at all.

The Check 21 Act drastically simplified the logistics of and shortened the time needed to process checks. In 2003, there were 45 check processing centers helping banks pass physical checks to each other. As of this writing, there is now only one processing center for the entire country. Everything else is digitally transmitted.

How to Take eChecks

If you want to take eChecks, you can set it up through a payment processor. The software that helps you take eChecks (and other types of payments) is called a payment gateway.

Using a payment gateway, you can set up a secure payment portal on your website. Your customers can go to your website and fill out a secure form that contains their bank account number, routing number, and give a payment authorization. The payment can be a one-time payment or a recurring payment. This is the eCheck.

Once the form is filled out, you can present the eCheck to your customer’s bank for payment. The rest of the process is the same as any check processing.

In general, eCheck processing takes a few days more than credit card processing but it also costs less.

How eChecks Can Help High-Risk Merchants Take Payments

As already mentioned, some merchants are deemed “high-risk” and have trouble getting approved to take credit and debit cards. One of the biggest reasons for a difficult approval is either an actual history of high chargebacks or just a general industry reputation for high chargebacks.

There are payment processors who work with high-risk businesses to help them take payments. These processors are called high-risk processors.

One of the tricks high-risk processors use to convince banks to approve you for credit and debit card processing is by building a clean credit history for your business. They do this by setting up eCheck payments for you, combining it with an eCheck merchant account.

eCheck payments are typically less susceptible to fraud or chargebacks. An account owner can only pull back funds if the payment was made in error or without authorization. To dispute a payment, an account holder must notify their bank of this issue within 40 days after receiving the statement.

As for bounced checks, the issue is minimized because the eCheck payment request is sent electronically, so it’s relatively fast, before the account holder can spend the money elsewhere. There are also check verification services a business can use for an additional fee to minimize bounced checks.

All this means that eChecks can minimize your risk of chargebacks. Once you’ve built a history of minimum chargebacks from your eCheck merchant account, you can then show a bank this clean history. This way, they’re more likely to approve you for taking credit card payments.

Check Use is on the Decline, but Unlikely to Completely be Gone

Here’s something interesting: we’ve operated this blog for more than a year, and we’ve never had to write a check. We don’t even miss it. For purchases and payments, we do just fine with a credit card and electronic fund transfers.

We suspect a lot of businesses can get by without paper checks these days. In fact, we know that some banks won’t even allow check writing from certain accounts anymore (typically a savings account). All money must be moved in and out of these accounts electronically. And that’s why we expect check use to continue to decline.

Still, checks do have their uses. Which is why, as a small business owner, you should still keep in mind checks as a payment option (either as the payor or as the recipient), when you need to move money that are not too time sensitive.

Interested in starting and running a small business? Here’s the beginning of our step-by-step guide: What to do right after getting that great business idea.

Questions? Comments?