The Facts About Electronic Checks
What is an electronic check?
An electronic check&ndsh;also known as an echeck, electronic check conversion, or Back Office Conversion (BOC)–is an electronic version of a paper check. Electronic checks allow merchants to convert paper check payments made by customers to electronic payments that are processed through the Automated Clearing House (ACH) Network. Simply put, it’s a fast, efficient, and secure way to process check payments.
Because of the many benefits and increased security methods that electronic checks offer, this method of payment is quickly growing in popularity. In 2007, electronic check conversion increased by 30%, with more than 3.1 billion paper checks converted to echecks through in-store transactions. Familiarizing yourself with how electronic checks work, the benefits and security features they offer, and how you can get started with electronic check conversion will save you time and money and help you provide greater protection for your business and your customers.
How electronic checks work
Electronic check conversion is a simple method of processing payments, and the changes to how you do business are minimal. One of this method's greatest advantages is that you can electronically submit checks instead of having to physically take them to the bank, saving you time and increasing employee efficiency.
When you receive a paper check payment from your customer, you will run the check through an electronic scanner system supplied by your merchant service provider. This virtual terminal captures the customer's banking information and payment amount written on the check. The information is transferred electronically via the Federal Reserve Bank's ACH Network, which takes the funds from your customer's account and deposits them to yours.
Once the echeck has been processed and approved, the virtual terminal will instantly print a receipt for the customer to sign and keep. Employees should mark the paper check as "void" and return it to the customer. Your merchant transactions will be available online for viewing with customized detailed reporting, which may vary in features depending on the merchant service provider you choose.
Reaping the benefits
Using electronic check conversion to process your customers' payments holds many benefits over paper checks:
Reduced processing costs. In general, the cost to process an echeck is substantially less than that of paper check processing or credit card transactions; echecks require less manpower to process and eliminate incidental costs such as deposit and transaction fees that accompany paper checks. With echecks, you can save up to 60% in processing fees.
Funds received sooner. Businesses that use electronic check conversion have funds deposited almost twice as fast as those using the traditional check processing method, with billing companies often receiving payments within one day.
Increased sales. If your business didn't accept paper checks in the past, you can expand the payment options available to your customers and increase sales by offering echecks. If you are converting from accepting paper checks to echecks, you can still expand your customer base by being able to accept international and out-of-state checks without the worry of fraud; echecks require account validation and customer authentication processes that identify bad checks within seconds.
Simple, safe, smart. Electronic check conversion is easy to set up and relies on the ACH Network for processing, the same reliable and trusted funds transfer system that handles Direct Deposit and Direct Payment. Plus, echecks are a smart choice for the environment, helping to reduce more than 67.4 million gallons of fuel used and 3.6 million tons of greenhouse gas emissions created by transporting paper checks.
Fewer errors and reduced fraud. Echecks are processed using an automated system, which cuts down the number of people who must handle the check, reducing the potential for error and fraud. Merchant service providers also maintain, monitor, and check files against negative account databases that store information about individuals or companies that have past records of fraud to help decrease fraudulent activity.
Increase security with electronic checks
Electronic check conversion leverages the latest information protection features such as encryption and message authentication. Because of this, many retail merchants, merchant service providers, and financial institutions consider it to be one of the most secure payment methods in the electronic payment processing industry.
Authentication. Merchants must verify that the person providing the checking account information has the authority to use that checking account. There are a number of authentication services and products available to merchants, including:
Digital signatures. Digital signatures (or digital certificates) are a way of encrypting information that gives the receiver a more reliable indication that the information was sent by the claimed sender. They are used by programs on the Internet to confirm the identity of a customer to concerned third parties, serving a similar purpose as a handwritten signature. Digital signatures cannot be easily tampered with or imitated and are easily transportable, thereby making them a reliable method for verifying identity when implemented correctly. Digital signatures are often used to implement electronic signatures, a broader term that refers to any electronic data that carries the intent of a signature.
Public key cryptography. Public key cryptography is an encryption/decryption security method that uses one key to encrypt a sent message and another to decrypt it. With electronic check conversion, the private key is a secret mathematical calculation used to create the digital signature on the echeck, and the public key is the corresponding key given to anyone who needs to verify that the sender signed the echeck and that the electronic transfer has not been tampered with. Public key cryptography is another way to ensure authenticity of the electronic transfer of funds.
Duplicate detection. Duplicate prevention and detection is another way to reduce fraudulent activities. Financial institutions have software and operational controls in place to prevent duplication of the scanned electronic representations of customer checks.
Encryption.The ACH Network automatically encrypts messages using 128-bit encryption and a secure sockets layer (SSL).
What is the ACH Network?
The Automated Clearing House (ACH) Network is a funds distribution system that moves funds electronically from one entity to another. This highly reliable and efficient nationwide electronic network is governed by the rules established by the National Automated Clearing House Association (NACHA) and the Federal Reserve (Fed). The ACH payment system also handles debit card transactions; direct deposits of payroll, Social Security, and other government benefits; direct debit payments; and business-to-business payments.
Tips and tactics to get started
Here is some useful advice to help make the implementation of electronic check conversion at your business run smoothly:
Choose a processing company that is well established in the market. While a competitive pricing package may also be of importance, having a processor that is reliable with a good reputation is essential.
Notify your customers that your business will begin using electronic check conversion to process payments. Federal rules require you to post a notification about this change in practice as well as to give your customers a takeaway copy of the notification. You must also provide customers a telephone number to request more information about electronic check conversion.
Look for a processor that enables you to easily align your current business processes with your new electronic processing system; ensure that you can easily export customer data and smoothly integrate the electronic payment processing system with your business management software.