You might think of checks as paper documents for payments, but you often make electronic payments out of your checking account with no paper required. Sometimes you pay electronically without even 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), a business or service provider can pull funds from your checking account electronically.
Your checking account information appears at the bottom of your paper checks, and you can also get those details online. This payment method is often called an e-check, EFT, or something similar. To provide that information, you often type it in online or give it to a phone representative verbally.
Utility companies, insurers, local governments, and other service providers often allow you to set up autopay options directly from your checking account.
You might also write a check the old-fashioned way and be surprised that it gets converted into an electronic check. When merchants have check-reading machines at checkout counters, they 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, often 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. Substitute checks are used between banks under the Check 21 law, which allows certain high-quality images of checks to replace traditional paper checks. 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 may come out of your checking account sooner than you 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 pass between submitting a check to a vendor and seeing the funds move out of your account.
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. Check your balance with an app or text message before writing a check.
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 improves.
Disclosure and Identification
Businesses are supposed to notify you if they plan to convert 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 make a purchase, they’ve likely used your paper check as an electronic check.
Just as you would with a paper check error, you should contact your bank immediately if you find mistakes that arise out 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 crucial to review your bank statements regularly and balance your checking account.