How Do Electronic Checks Differ From Traditional Paper Checks?

Understanding This Faster Check Payment Method

Woman checking account on a computer to see if her electronic check is deposited
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You might think of checks as paper documents for payment, but you often make electronic payments out of your checking account without realizing it. Even if you write a check by hand, the check can be converted to an electronic payment at the cash register, resulting in the funds leaving your account faster than you might have expected.

How Electronic Checks Work

An electronic check is an electronic payment from your checking account processed through the Automated Clearing House, or ACH network system. There are two ways this happens.

Manual Check Entry

When you provide your checking account details (your bank account and routing numbers) to a business, it is able to pull funds from your checking account electronically. These numbers show at the bottom of your paper checks. This payment option is often called an e-check, EFT, or something similar. You can provide that information by typing it in online or giving it to a phone representative orally. Utility companies and other service providers often allow you to set up autopay options in this way.

Check Conversion

You might also write a check the old-fashioned way and not even know that it gets converted into an electronic check. Some merchants have check-reading machines at checkout counters that quickly read the information from your check for processing your payment. The numbers on the bottom of your checks are printed in a special font, usually with magnetic ink, making it easy for special devices to get the information they need. Checks also can be converted by service providers such as your utility company when you mail a check for payment.

Electronic check conversion is different from substitute checks. These are used between banks under the Check 21 law, which allows certain high-quality images of checks to be used in place of the actual paper. You may have unknowingly created a substitute check if you have ever used a mobile phone app to take a picture of a paper check to deposit it into your bank account.

Impact of Electronic Checks

Electronic checks allow businesses to process payments quickly. As a consumer, the most important thing to know is that the money will come out of your checking account sooner than you might expect. You need to make sure you have enough money available in your account whenever you write a check. In other words, you can no longer rely on float time—the two- or three-day delay that used to exist between submitting a check to a vendor and having the funds taken out of your account by your bank.

To make sure you always have enough money, balance your account regularly, and set up alerts with your bank so you know when you’re running low on funds.

Electronic checks also save money for businesses. These payments cost less to process than credit cards, and they are also easier because there’s no need to take all of those checks to the bank. What’s more, since businesses get the funds more quickly, their cash flow situation is improved.

Disclosure and Identification

Businesses are supposed to notify you if they’re converting your payment to an electronic check. If you’re in a store, look for a sign near the registers saying they’ll turn your paper check into an electronic check. If you’re mailing in a check to pay a bill, the company probably discloses their electronic check policy somewhere in the fine print of an agreement or on the back of your statement.

If a cashier puts your check into a machine and hands it back to you after you've made a purchase, they’ve used your paper check as an electronic check.

Addressing Errors

Just as you would with a paper check error, you should contact your bank immediately if you find mistakes as a result of an electronic check transaction. You must notify your bank within 60 days of when the error appeared on your statement or you may lose certain rights. Your bank may take up to 45 days to investigate your claim and will notify you of its findings. This is why it's always important to review your bank statements regularly and balance your checking account.

Article Sources

  1. FDIC. "Consumer Assistance & Information—Check 21." Accessed March 26, 2020.

  2. First Data. "Electronic Checks: The Low-Risk, Low-Cost Way to Accept Online Payments." Accessed March 26, 2020.

  3. Office of the Comptroller of the Currency. "Checking Accounts: Understanding Your Rights." Accessed March 26, 2020.

  4. Office of the Comptroller of the Currency. "Answers About Bank Errors." Accessed March 26, 2020.

  5. Office of the Comptroller of the Currency. "Answers about Bank Errors." Accessed March 26, 2020.