You might think of checks as paper documents for payment, but you often make electronic payments out of your checking account with. 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 Automatic Clearing House, or ACH network system.
There are two ways this happens.
Manual entry: when you provide your checking account details (your bank account and routing numbers) to a business, they are 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 similar. You can provide that information by typing it in online or giving it to a phone representative orally.
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 can also be converted by service providers like your utility company when you mail a check for payment.
Electronic check conversion is different from substitute checks, which are used between banks under the Check 21 law. The Check 21 law allows certain high-quality images of checks to be used in place of the actual instrument. 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
Fast payments: 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, and you can no longer rely on ‘float’ time, or 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’ve always got enough money, balance your account regularly (at least until you’re confident that you won’t overspend), and set up alerts with your bank so you know when you’re running low on funds.
Low cost for business: electronic checks save money for businesses. These payments cost less to process than credit cards cost (the cost to the business is often less than $1 for an E-check). They are also easier – 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.
What to Do When There Is an Error
Mistakes happen. Contact your bank immediately if you find errors 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 (you might be responsible for the loss after that time). Your bank may take up to 45 days to investigate your claim and will notify you of their findings.
Other Ways to Pay
Payments are increasingly electronic–even if you use your checkbook, your payment might be converted. This can cause confusion when you don’t see the payment with the check number you expected. Since it’s all electronic anyway, evaluate other ways to pay, such as debit and credit cards or online bill payment options.