Recent studies by the Federal Reserve show that the average American consumer wrote just one physical check in 2023 compared to three in 2016. No wonder that major retailers like Target, Whole Foods, and Old Navy have stopped accepting this soon-to-be-obsolete payment method.
However, as small- and medium-sized businesses embrace new customer payment options, one tried-and-true payment type is holding its own. In the non-card payment arena, eChecks—i.e., electronic check processing—have become a very popular digital payment method across the United States.
The total number of ACH transactions (eCheck payments, direct deposits, etc.), reached 8.4 billion ($21.5 trillion) in Q3, 2024—an 8.9% increase from 2023. This trend is only expected to grow more as cash payments continue to decline.
As such, small businesses must learn how to process eCheck payments if they want to stay ahead of the curve. This article discusses everything you need to know about eCheck payment processing and whether it’s a good payment choice for your business.
What Is eCheck Payment Processing?
An eCheck is essentially a digital representation of the traditional paper check. It is a type of electronic funds transfer (EFT) that doesn’t involve a credit card issuer (unlike wire transfers).
Let’s say a customer makes a purchase and requests to pay with an eCheck at checkout. With their authorization, you’ll direct debit their checking account for the payment amount rather than using a card. Electronic check payments provide the payer’s bank routing number and checking account number so funds can be rapidly transferred between banks. Most well-known payment gateways offer an eCheck payment option.
Your customer drives the eCheck transaction, providing their bank account number and routing number instead of using a credit card. The transaction automatically travels over the Automated Clearing House network (ACH network), administered by Nacha. Within a few days (typically 3-5 business days), the transaction funds appear in your business’ bank account, much like credit card proceeds.
How Do eChecks Work?
Processing an eCheck involves four well-defined steps. Although it seems a bit laborious, the process should take only a few minutes.
1) Request transaction authorization: The customer must authorize the business to conduct the transaction. If the customer is present, they’ll provide a digital signature.. Alternatively, the customer can authorize the transaction via a phone conversation, or complete an online form posted on an eCommerce merchant’s website.
2) Set up the payment: After receiving the customer’s authorization, the merchant uses online payment processing software to enter the customer’s payment details. If this will be a recurring payment, the merchant will also enter those applicable details.
3) Finalize the transaction: After the merchant confirms the payment information, they’ll click “Save” or “Submit” to begin the eCheck transaction process.
4) Wait for the funds deposit: Like other ACH transactions, the payment is deducted from the customer’s bank account, and the online software electronically sends a receipt to the customer. The funds are deposited in the business’ bank account. Typically, the eCheck payment processing time is 3-5 business days.
How Much Are the eCheck Payment Processing Fees?
ACH merchant account providers vary widely in their fee structures. Some eCheck providers assess a higher transaction fee while charging a reduced monthly service fee. Other providers use the exact opposite approach.
On average, an eCheck fee varies from $0.30 to $1.50 for a typical eCheck transaction. This turns out to be much cheaper than card processing fees which typically range from 1.5% to 3.5% of the transaction amount. Since eChecks are processed via the ACH network, merchants don’t need to pay the interchange fees associated with card networks.
As such, eCheck payment processing is more cost-effective for small businesses than card payment processing.
eCheck Payment Processing: Pros and Cons
Now that we’ve covered the basics, let’s take a look at the pros and cons of eCheck payment processing. Armed with this knowledge, you can decide whether it’s the right payment option for your small business.
Pros of eCheck payment processing
Here are some of the most notable benefits of eCheck payment processing.
Secure form of payment
Physical checks are inherently flawed. They contain the customer’s bank account information on them which could be easily stolen, rendering this payment method particularly unsafe.
In as recent as 2023, a USPS employee (and two other co-conspirators) from North Carolina were indicted on charges of stealing checks worth over $24 million from the mail, and selling them through Telegram.
Here’s some good news: eChecks and other electronic payment/ACH payment types are way more secure than traditional paper checks. In other words, using eChecks means ambitious identity thieves won’t have the opportunity to pilfer paper documents from the mail.
In addition, eCheck payment processing has several embedded authentication steps that act as added layers of security. These extra precautions benefit both parties in an eCheck transaction.
Electronic checks, or eChecks, are a viable form of payment for all checking account customers. In addition, eCheck payment processing offers several additional benefits.
Low rates
As mentioned earlier, it costs around $0.30 to $1.50 per transaction, to process eChecks. This is significantly cheaper than processing credit and debit cards. Card transactions are processed through card networks and involve interchange fees, assessment fees, and payment processor mark-ups.
In contrast, eChecks use the ACH network, so small business owners can avoid paying those hefty fees. As such, businesses on a budget may appreciate eChecks’ low processing costs. Companies that do bulk payment processing will also enjoy the savings.
Support mail and phone orders
Computer-based virtual terminals enable easy processing of mail and phone orders. Here, the eCheck payment method captures an often-overlooked market segment: customers who prefer to pay via traditional methods.
Good for recurring transactions
Recurring transactions provide a business with multiple payments over months or years. Companies often use eChecks for these cost-effective revenue streams and steady cash flow.
Reduced chargebacks
Even though customers can file chargebacks on eChecks, the process is much harder and stricter compared to credit card transactions. Since there’s a long-standing legal framework around checks, customers must file chargebacks through their bank which is likely to be a complicated, time-consuming process. Also, customers have just 60 days to initiate the process (versus 120-180 days for card-related disputes) which dramatically reduces the chances of chargebacks.
Cons of eCheck payment processing
eCheck payment processing has four significant disadvantages.
Can be cumbersome
Let’s say you own a retail store, and a customer wants to pay for their purchase with an eCheck. As a merchant, you may find the process a bit confusing, as it differs considerably from the credit and debit card transactions you encounter every day.
To speed the transaction along, you let your payment processor manage the details, and the customer goes on their merry way. If a discrepancy arises later, however, you have virtually no leverage in the situation. You must follow the payment processor’s instructions for settlement of the dispute.
May be subject to long wait times
Let’s assume the transaction goes smoothly, and the customer is happy with their purchase. You must still wait 3-5 business days for the eCheck funds to appear in your business’ bank account. In contrast, card transactions are typically processed in 1-3 business days.
If your store operates on a tight margin, and you depend on your sales proceeds to fund other aspects of your business, that can negatively impact your operations.
May require additional resources and effort
If you’re planning to start accepting eChecks at your small business, you may need to invest in additional software or upgrade your existing systems. You’ll also need to ensure legal compliance since eChecks are a regulated payment method. Finally, you’ll need to train your staff and educate your customers on its usage. All of these will require money, time, and effort.
eChecks may bounce
Finally, realize that just like paper checks, eCheck payments can bounce if the customer has insufficient funds in their bank account. The money is not immediately deducted from the customer’s bank account, and there’s no guarantee the funds will be available when the transaction does hit the account. Like a bounced paper check, a dishonored eCheck can trigger penalties and/or fees against the customer.
Is eCheck Payment Processing Right for Your Business?
Certain types of businesses may find that eCheck payment processing is a good payment option. Typically, these companies accept high-dollar payments, so the businesses appreciate eChecks’ low processing fees. On the flip side, eChecks present headaches for other types of businesses, making this payment option a less attractive choice.
Businesses that can benefit from eCheck payments
Mortgage lenders, landlords, auto finance companies, and other businesses that accept larger payments appreciate eChecks’ reduced processing fees.
eChecks are also widely accepted for recurring payments. For example, a landlord may ask tenants to complete a recurring rent payment form with their account information. Every month, on the same day of the month, the landlord will automatically deduct the rent payment from the tenant’s checking account.
In addition, fitness centers, cable companies, mobile phone providers, and other membership-based businesses rely on monthly eCheck payments’ income. Once the payment contract is in place, the business can generally expect to have a steady stream of income with little (if any) customer involvement.
Businesses that should avoid eCheck payments
So-called “high-risk” businesses may have trouble finding a payment processor that will handle their eCheck processing needs. High-risk companies include cannabis or CBD product retailers, casinos or gambling services, cigarette and vape shops, pawnshops, telemarketing services, travel services, nutrition-related ventures, etc. Many adult-oriented businesses present a definite “red flag” warning.
Although some payment processors and financial institutions will accept high-risk clients, that acceptance comes with a rather stiff cost. High-risk businesses will likely have to pay increased processing rates, potentially making eChecks more trouble than they’re worth.
The Payment Depot Advantage for Small Businesses
The major difference between eCheck payment processing and credit card processing is the time required to clear the funds. Consider that eChecks and paper checks are essentially the same form of payment, so they’re both subject to similar regulations. Both forms of payment can take 3-5 business days (or more) to clear following the transaction’s completion.
In contrast, let’s say a customer pays for their purchase with a credit card. Those funds are applied to the customer’s account almost immediately, and you’ll likely receive the proceeds in your bank account soon thereafter. In fact, if you’re a Payment Depot customer, credit card purchase funds will be deposited the day following the transaction’s completion.*
For this reason, credit card processing is a more workable option for small- and medium-sized businesses (even though eCheck payment processing might be cheaper). Many companies run on strict budgets, and the current economic climate has stretched operating funds even further.
By accepting credit card payments rather than eChecks, you’ll receive your funds with minimal delays. This will help you to gain more flexibility in other aspects of your business. Contact us today to learn how Payment Depot can help you save hundreds of dollars in credit card processing costs every month.
*Does not apply to payments made after the daily cutoff time, holidays, and weekends and other dates where banks are closed.
FAQs about eCheck Payment Processing
Q: What is an eCheck?
An eCheck is a digital form of the traditional paper check. It stands for electronic check and represents a type of electronic funds transfer (EFT) that doesn’t involve a card issuer. This method of payment drives funds rapidly between banks using the payer’s bank routing and checking account numbers.
Q: How does eCheck payment processing work?
Processing an eCheck involves four primary steps. They start with the customer authorizing the transaction, which could be either in-person, over a phone conversation, or through the completion of an online payment form. Following this, the merchant uses online payment processing software to provide the customer’s payment information. The transaction is finalized after the merchant confirms the payment information. Lastly, similar to other ACH transactions, the payment is deducted from the customer’s bank account, and the funds get deposited into the business’ bank account.
Q: How long does eCheck payment processing take?
Typically, the eCheck payment processing time would take at least four days, but this can vary. The funds will be deducted from the customer’s bank account after this period and deposited into the business’ bank account.
Q: What are the advantages of eCheck payment processing?
eChecks are secured, with embedded authentication steps for added security. They are also budget-friendly with low processing costs, making them an excellent choice, especially for businesses that do bulk payment processing. eChecks are also viable for recurring transactions, providing steady cash flow. The chargeback process for eChecks is also stricter and more challenging compared to credit card transactions, reducing the chances of chargebacks.
Q: What are the disadvantages of eCheck payment processing?
eCheck payment processing can be confusing, especially for retailers used to debit and credit card transactions. The funds from eCheck transactions also take longer to reflect in the business account, which can impact the operations of businesses operating on tight margins. Additionally, eCheck payments can bounce if the customer’s account lacks sufficient funds, triggering penalties and/or fees.
Q: Are there businesses more suited for eCheck payment processing?
High-dollar companies, including mortgage lenders, landlords, auto finance companies, etc., typically prefer eChecks for their low processing fees. In addition, businesses that accept recurring payments, such as fitness centers, cable companies, and mobile phone providers, also utilize eChecks for steady income.
Q: What is the difference between eCheck payment processing and credit card processing?
One significant difference between eCheck payment and credit card processing is the time required for the funds to clear. eChecks, like paper checks, take around four or more business days to clear after the transaction’s completion. In contrast, credit card purchase funds are applied almost immediately, making credit card processing more suitable for small- and medium-sized businesses.
