How Electronic Check (E-Check) Payment Processing Works

Quick Look

• If you receive your paycheck via direct deposit, then you probably already use e-checks. 
• E-checks work like paper checks, but you authorize, send, and receive them electronically.
• Thanks to the efficiency of the ACH network, e-checks are fast and usually free to the consumer. 
• E-checks are much safer and more secure than paper checks.
• But there’s one major drawback for some users: You can’t float e-checks. 

The best thing about “Star Trek” is its ability to turn a critical mirror to the best and worst humanity has to offer. Remember that time on “Lower Decks” when Mariner poked fun of the 20th century’s “paper with no intrinsic value”? 

She was talking about money in general, but I don’t feel like I’m going out on a limb to say most of us are already there with paper checks (though you get bonus points if you remember how to fill one out).

These days, we tend to use electronic checks instead. But have you ever stopped to wonder how they work or why they’re called electronic checks in the first place?    

What Is an Electronic Check?

An electronic check, or e-check, is a form of electronic payment in which money is taken directly from one bank account and put into another. Only instead of telling the bank you want to do that with an otherwise worthless piece of paper featuring Garfield or golf carts, you do it electronically using the Automated Clearing House, more commonly known as the ACH. 

In fact, people often refer to e-checks as ACH payments or ACH transfers, though e-checks aren’t the only form of payment that relies on the ACH network. 

You probably use e-checks all the time without thinking about it. Many of us use them to pay bills online or receive our paychecks via direct deposit. 

How E-Checks Work

It’s important to note that e-check isn’t just another name for the same process you use to pay online with credit or debit cards. That’s a separate network altogether, which is where most people go wrong in their understanding of e-check payment processing.

E-Check Payment Processing

An e-check transaction works similarly to an old-fashioned (too soon?) paper check. But the transaction happens entirely online. Behind the scenes, an e-check goes through several steps before finalization. 

1. Submit Payment Details

To exchange funds via e-check, one of you must get the other’s bank account details, including the name on the account, checking account number, and bank routing number, which you can find if you log into online banking — or on your paper checks if you have them. No judgment — it’s not your fault your apartment complex is still operating in the 20th century.

Generally, the business entity is responsible for gathering the details and processing the e-payment, whether they’re the sender or receiver. So they’re usually responsible for payment method availability. That’s because they have access to a payment processing gateway of some kind. Technically, you may have that access via your bank if someone’s willing to take an e-check that way.

What an e-check transaction looks like depends on what you’re trying to do.

• Pay Your Bills. The merchant or service provider will probably have a place for you to enter the details after logging into your account on their online portal. They may also provide a way to do it over the phone. 
• Pay an On-Site Service Provider. If it’s an on-site service provider, such as a plumber, they may email you an invoice with a link to an online payment gateway. 
• Pay an Individual. If you’re paying an individual, such as a friend, your bank’s e-check service may let you do so without ever having possession of their actual banking information by using the recipient’s name or email address. But it may not. Note that this is different from a wire transfer or even using a service like Zelle or Venmo.
• Get Your Paycheck. Fill out a generic direct deposit form and provide a voided check or provide a direct deposit form from your bank (if you don’t have checks).

2. Authorize the Payment

During the Paleolithic period, banks relied on the paper check itself to provide both the banking information and the authorization to remove money from your bank account. You bought official checks with funny little numbers at the bottom, filled out the amount (twice in case your handwriting was awful and to prevent fraud), and signed it to indicate your authorization. 

They still need that authorization, but they have to get it without your signature now. That may sound less secure, but it’s really not. Once, my partner accidentally used one of my checks to make a large payment by mistake, signing his own name to the check, and the bank didn’t even notice. So much for having my signature on file.

For e-check authorizations, you may not think much of it or even realize it’s happening. How it happens depends on how you’re trying to pay.

• Online. You probably have to give affirmative consent, though it may be subtle. For example, you might have to check a little box next to something that starts, “By checking this box, I agree to…”
• Over the Phone. They may request a verbal authorization and record it for posterity (and legal purposes). It could be very formal: “Do you authorize me to deduct a one-time payment…” Or they could just accept you telling them you want to pay and giving them your account details as authorization. Generally, the bigger the company, the more high-powered the lawyers, and the more high-powered the lawyers, the more formal the authorization.

While authorizing the transaction, you can often opt to create a recurring payment. That’s handy if you pay the same bills every month. But only do it if you trust the business you’re paying. 

Before the transaction can go through, the payment gateway verifies the recipient through a process called “authentication.” If you’re receiving a payment, they’re just making sure the account you’re using exists, and that it has enough money to cover the payment. In some cases, they may also be ensuring you’re a real person and that you are who you say you are. This step (hopefully) helps prevent fraud and criminal activity. 

There’s no one way authentication works. It depends on the risk factor for the transaction type and the service they choose. Done well, you never notice it’s happening, though you may wonder why they’re asking you seemingly unrelated questions.

3. Submit the ACH Transaction 

Next, someone has to start the transaction’s journey through the Automated Clearing House, or ACH. While that may sound like the Publishers Clearinghouse, ACH checks are much smaller and there are no balloons.

The ACH is a network of financial institutions that processes electronic funds transfers. If you pay someone through your bank, it starts the process after you set up the transaction.

Otherwise, the merchant or your employer transfers your payment to the system for processing, often using a third-party payment processing gateway, such as Authorize.net. At that point, they can choose how fast the money moves, from same-day to two-day processing. The faster, the more expensive the transaction, though it’s still the cheapest all-around option other than cash.

The ACH processes that payment along with all the other payments submitted during that period — which is several million at a time — in a single batch. The batch-processing is how it accomplishes the task so inexpensively. In 2021, the ACH processed over 79 million payments per day on average, according to the ACH’s oversight body, Nacha.

The ACH operates 23.25 hours per day five days per week and processes several batches per day. It doesn’t process any payments on the weekends, when the Federal Reserve is closed. 

As it processes your payment, it tells the paying bank what money to remove from which account and the receiving bank how much money to add to which account and from whom. If any real money needs to change hands between institutions, that’s handled by the ACH operators separately. You get your deposit after it’s processed, either way.  

You can think of the ACH as a semi-sentient spreadsheet. It doesn’t touch the money. It just keeps track of where the money should be.

4. Completing the Transaction 

It’s crucial to understand that you can’t float an e-check. For the uninitiated, check-floating is how many people used to pay bills “on time.” If payday was a few too many days after a bill was due, you’d go ahead and send the check anyway, knowing that by the time the check processed and cleared, you’d (probably) get paid and the funds would (again, probably) be in your account. 

With e-checks, you must have the funds available right away or the e-check won’t go through as expected. You’ll either receive an overdraft or the bank will reject the transaction during the authentication process.

That’s the bad news. The good news is that unlike a paper check, the longest it can take from the initiation of the transfer to the funds arriving in the destination account is two days. And authentication means the recipient can consider you paid immediately, even if they don’t have the money yet.

So if you need a payment to post now, pay directly through the vendor rather than through your bank. They still won’t get the money now, but if you have it in the bank, they’ll consider you paid on time.

That also means that if you’re the one expecting the payment, it will hit your account within two days of the time the ACH ran that batch, which is within hours of when the payor sent the transaction to them. Sometimes, it’s even faster. So if you’re a freelancer looking for payment before beginning a project, your client can conceivably pay you immediately by choosing the same-day option.

There are some special circumstances surrounding weekends and holidays. The ACH can ensure direct-deposited paychecks hit your account on Friday, even if your employer submits it Friday morning, though they have to select the same-day option for that. (So if you don’t get it until Monday, it’s probably not the ACH that screwed up.) The same is true of any holiday during which the Federal Reserve is closed. They must pay you before the holiday, or you won’t get it until after.

E-Checks vs. Paper Checks

There’s a lot — I mean a lot — of snail mail, hands, and fuel involved in paper check cashing. For example, let’s say you’re paying your electricity bill. 

You write the check, put it in an envelope, and put a stamp on the envelope. Then, a postal worker picks it up, another postal worker sorts it, and the post office sends it wherever it needs to go, which may involve planes, trains, or automobiles (yup, they still use trains) and the people who operate those.

When your envelope finally arrives at Acme Energy, someone in the mailroom sorts your letter into the accounts receivable pile and takes it to that department. Then, someone in that department opens it and logs the payment (correctly, you hope). Then, they arrange for it to go to the bank for cashing.

That’s where it gets weird. Acme Energy’s bank mails the original paper check to a non-electronic clearinghouse, not the ACH, though the Federal Reserve runs a non-electronic one too. Then, someone there arranges for the money to be moved from your account to Acme Energy’s bank, who then gives it to Acme Energy.

After that, the clearinghouse, wait for it, mails the paper check back to your bank. 

Seriously. It’s part of the authentication process for paper checks. In fact, back in the day, the bank would send you all your paper checks at the end of the month to balance your books. I know this because I remember being peeved my grandmother wouldn’t let me play banker with the returned checks I found in a box, some decades-old, when I was little. These days, they just upload pictures to your account.

No wonder it takes so much longer for a paper check to clear. And no wonder it tends to cost so much more than an e-check. 

The 2022 Payments Cost Benchmarking Survey conducted by the Association for Finance Professionals says paper checks have a median cost of around $2 but as much as $4, depending on whether the organization is sending or receiving them. You pay for that cost indirectly through higher rates for products and services.

And that doesn’t include the amount you paid for cute checks with designs that speak to your inner hunter or bodybuilder or baker and the stamps you bought to send it.

E-check transactions are largely free. They’re always free to receive, and most banks give you at least a few e-check transactions free every month. 

If you set up the e-check transaction through the merchant instead of directly through the bank, it doesn’t count toward your total check limit (if you even have a limit). Plus, e-checks are far more secure than paper checks, which are prone to misplacement, mail loss, and theft.

E-Checks vs. Debit & Credit Cards 

Debit and credit card transactions work at least a bit like e-checks, but they’re more expensive transactions for a reason. Credit and debit card transactions have a few extra steps and happen in real time. 

You swipe or tap the card, and the system transmits it to the processing network, which evaluates the transaction. It checks it for potential fraud (for example, if you’re using your card in two states at once). The processor then sends it to the issuing bank, which sends it to the credit card company. Then, and only then, does the payment clear. 

It doesn’t take long thanks to technology. But you can see why it would be expensive having to maintain so many systems that can process real-time transactions no matter when you want to buy something, even if you’re a third-shift nurse taking a coffee break at 4am. 

According to the Association for Finance Professionals survey, median credit card transaction fees range from 2% to 2.49% of the received amount, but they can get as high as 3.5%. 

If you’re selling widgets for $20 apiece, credit card processors can work their magic pretty inexpensively. But when you get into bills of $100 or more, you’re talking about fees that look more like the cost of paper checks at $2 or more, depending on the transaction rate. 

That makes them expensive for merchants, who have to charge more for their services or wares to make the money back. 

That’s why some small local merchants offer discounts if you pay in cash. (OK, sometimes it’s also because they’re a service- or salvage-based business and don’t want to pay taxes on a sale they think Uncle Sam can’t prove they made.)

That said, for most applications, e-checks can’t replace the convenience of credit cards you can swipe at the register, and you certainly can’t beat the cashlike speed. 

E-Checks vs. Wire Transfers 

Wire transfers are another type of electronic funds transfer. But they’re handled through a wire system in lieu of the ACH. They can happen in minutes or take a couple of days, depending on the options you select. 

But calling them expensive is an understatement.

The benchmark survey put the median cost at $10 to $15, but you could easily pay closer to $50 or more, depending on what you need. The wire is really only worth it in emergency situations or for really big transfers, like the down payment on a house you’re buying. You shouldn’t use it at all unless you know the person you’re wiring money to well.

Pros & Cons of E-Checks

Every transaction method has some advantages and disadvantages. While they’re the overall best method in terms of expense and speed, e-checks are no different.

Pros of E-Checks

Anyone who pays bills has to use some kind of electronic payment eventually, including e-checks. That’s why it’s good that it has a lot of advantages, including:

1. Relative Affordability. Many financial institutions allow customers to send e-checks for free when paying their bills. Although a paper check may only cost a couple of cents for the customer and a couple of dollars for the vendor, if the vendor spends less on transactions overall, its products and services can be cheaper. 
2. More Reliable Than Paper Checks. E-checks don’t get lost, not in the mail, your purse, or in your desk. And the writing can’t wear off or get smudged — or wash off when your city-provided mailbox gets waterlogged during a storm.  
3. More Secure Than Paper Checks. When you have paper checks, there’s a possibility they can fall into the wrong hands. Unfortunately, that opens the door to fraud. That’s far less likely to happen with an e-check. Anyone can steal mail, even if you have to break a lock. It takes at least some special skill to hack. Plus, by law, there are added protections for electronic funds transfers.
4. More Convenient Than a Paper Check. No one really enjoys writing a bunch of paper checks and making a trip to the post office to pay bills. E-checks streamline this chore. 
5. Allow Automated Bill-Paying. Merchants who accept e-checks let you set it up to pay the bill every month, ensuring you don’t forget. With paper checks, you have to remember to write and send your payment 12 times per year (times the number of bills you have).

Cons of E-Checks

E-checks have a lot going for them. They’re convenient and help automate bill-paying. But there are also some drawbacks. 

1. No Check-Floating. Check-floating is an old-school scheme in which you write a check you don’t have the funds to cover knowing they’ll (probably) be there when the check gets to your bank. The processing for e-checks starts during the processor’s authentication period. So you must have the necessary funds in your account when you send it. It’s not the worst thing, but if you’re used to floating checks, it can be a rude awakening.
2. No Physical Checkbook. A physical checkbook can make it easier to balance your bank account. It’s possible to do so digitally. Or you can ask the bank for an old-school check register and use it like you always would. But that’s not as intuitive, and you have to remember to add automatic payments each month, anyway. 
3. Not Always a Free Way to Pay Bills. Although it’s often free to send e-checks, that’s not always the case. Confirm neither your bank nor the vendor charges for it. 
4. There’s a (Really Small) Learning Curve. Change isn’t always easy. Fortunately, when it comes to e-checks, the bar’s pretty low. The biggest hurdle is that it looks somewhat different on every website. If you’re paying a bill, the company’s customer service representatives can walk you through how it works on that system. Or you can call your bank for assistance on its system.
5. Not Ideal for In-Person Payment. In-home service providers like electricians and plumbers may have an e-check option through their payment gateway. But you can’t just use an e-check at the supermarket. Somebody needs to make that happen, though. (Lookin’ at you, Apple.)

Should You Use E-Checks?

E-checks are some of the easiest payment instruments to use. But they work best for receiving your own paycheck or paying bills. They’re also not great for those without consistent funds in their accounts, like servers at restaurants that still let employees walk out with cash. It does you no good to set up autopay if all your money is sitting in your apron when the payment tries to go through.

But if you get paid to your account regularly and your bank doesn’t charge for them, use them to automate your bill-paying and take some stress out of budgeting.

For paying in person, cash and credit are still co-captains. You can mention it to vendors like your hairstylist or electrician, but you know what they say about leading a horse to water. If you’re just looking to stop carrying a wallet, they may be more interested in ideas like Zelle or Venmo. Those also use the ACH network and are arguably a type of e-check with an extra step, kind of like money orders and certified checks are types of paper checks with an extra step. 

You can also start taking advantage of digital wallets like Apple Pay and Google Pay at retailers that accept them.

But if you like the good old pen-and-paper approach or get easily annoyed by online forms, then e-checks might not be the right fit for you. And that’s OK so long as utilities and retailers keep accepting paper checks.

E-Check FAQs

We’re all so used to e-checks these days, you might not think much about how they work. But there are a lot of important details to know about them.

Are E-Checks Safe?

When making an online transaction, it’s normal to be concerned about the risks involved. Most financial institutions consider e-checks a safer option than paper checks. But there’s some level of risk involved in all bank transactions. 

It’s important to ensure you trust the people you’re giving your banking information to and to avoid scams like phishing (emails or websites set up to look like real vendors) or identity thieves. Those are probably riskier than the e-checks themselves, and they can cause problems whether you use e-checks or not.

How Much Do E-Checks Cost?

In general, e-checks are cheaper than paper checks. Many financial institutions offer e-checks as a free service, often referred to as bill pay. Your service providers may also offer it for free and call it autopay.

Before sending an e-check, check on the cost. If your bank charges you for them, it may be time to find a different bank. 

How Long Does It Take for an E-Check to Clear?

The exact amount of time it takes for an e-check to clear varies based on the provider you work with and the individual check. But in general, it can take as little as a few hours to 48 hours for the recipient to get their funds. 

Some organizations may say it takes between three and seven business days. And in terms of getting you the money, that might be true. They may take a few days to process it on their end or they may not be using an e-check. Or they may just be parroting outdated ACH info.

But according to Nacha, which is (adorably) the name of the governing body of the ACH network, the modern ACH only takes up to 48 hours. Because it’s nacha momma’s payment network anymore. (I’ll see myself out.)

Can You Cancel an E-Check?

Yes, it’s possible to cancel an e-check. But you must do so before it clears the bank. If it’s still listed as processing, that’s a good sign, but it’s no guarantee. Contact your bank for assistance. And note that even if you try to stop payment, it can still go through if the stop-payment doesn’t catch it in time. The customer service rep you speak to can’t see the transaction in real time. 

The bank may also refuse to stop payment in some circumstances. For example, banks don’t like to be used to commit theft of service. So unless you’re alleging some kind of fraud or another reasonable issue, such as accidentally double-paying, they may ask you to deal with it another way, such as through a refund from the original vendor.

Can You Use E-Checks for Recurring Payments?

Yes, many merchants and financial institutions allow you to set up a recurring payment with e-checks. 

Final Word

Electronic checks offer a way to streamline your bill payments and access your paycheck faster. In fact, if you get your paycheck through direct deposit, financial institutions like Chime and Axos give you early access to some of your funds, though you may need to open the right type of account. 

If that’s not reason enough, think of it this way. Someday, you’re going to have to explain paper checks to your grandkids. And I know what you’re thinking: “It’s no different from paper money.”

But it is. At least the government prints paper money on special paper with special ink and advanced anti-counterfeiting technology. You’re buying checks on regular paper with ink similar to what’s in your laser jet from a place called Crazy Cheque Outlet — and giving them and goodness knows who works for them your bank account number, for crying out loud.