Guide to Electronic Check Processing

What is Electronic Check Processing?
Electronic check processing means that you can convert a paper check received from a customer into an electronic transfer (sometimes called an e-check) that takes funds from your customer's account and places them into your account. (You may have seen transactions of this type on your checking statement.) This transfer takes place via the Federal Reserve Bank’s Automated Clearing House (ACH) system. It's a faster, less-expensive way to get your money.


What is the ACH Network?
Put very simply, the ACH network moves money from one entity to another—electronically. The Automated Clearing House (ACH) Network is a highly reliable and efficient nationwide batch-oriented electronic funds transfer system which provide for the interbank clearing of electronic payments for participating depository financial institutions. The Federal Reserve and Electronic Payments Network act as ACH Operators, central clearing facilities through which financial institutions transmit or receive ACH entries. The process is governed by NACHA, The National Automated Clearing House Association (nacha.org), operating rules and business processes.


ACH Transaction Types:

Direct Deposit of payroll, Social Security and other government benefits, and tax refunds

Direct Payment of consumer bills such as loans, utility bills and insurance premiums

Business-to-business payments

Electronic Checks (E-checks)

E-commerce payments

Federal, state and local tax payments.

If you're getting your paychecks directly deposited into your bank account, you're already using the ACH network. You can leverage this system for your business so that you never need to go to the bank again—you can process checks electronically from your computer.

Action Steps
The best contacts and resources to help you get it done

Understading The Electronic Check Processing System

Electronic check processing is the means by which you can take a paper check and submit it for payment electronically instead of taking it to the bank. Your bank may offer you this capability if you purchase a check scanner from them. The scanner takes an image of the check and submits that image to the bank electronically. The bank then processes that check just as if you had handed over the physical check itself. An easier way to process checks electronically is to use a software program or a web-based payment processing service. When using a web-based system or ASP, you don't need to install any software or buy any hardware. You simply key in check information and submit the transaction. Whenever people switch to a new technology, it is very important that they feel comfortable with the technology. When this new system involves money-it becomes even more important for both the business itself and its customers.

I recommend: NACHA.org , the organization that oversees all ACH transactions, to learn more about the system behind electronic check transactions. 

Electronic Payments.org is another great soruce to learn about how electronic check transactions can benefit both you and your customers.

Implementing Electronic Check Processing in Your Business

Implementing electronic check processing involves choosing a processor and changing your businesses processes to conform to rules for electronic check processing: 1. Notify: You must notify your customers that their paper checks will be processed electronically. You can do this in writing on your invoices, or by posting a sign at your place of business. 2. Collect and Convert: The paper check is converted to a one-time ACH-based electronic payment, with the customer's bank routing number and account number captured. You then make a copy of the check for your file, stamp the original check "VOID" and discard it. 3. Process: An ACH file for the check is created and presented to your bank-this is typically done by the payment processing company; the payments are processed through the ACH network, the customer's account is debited, and your account is credited. The payment is documented on a customer's bank statement with the check number, amount, and the billing company name

I recommend: PaySimple--they make the process easy with a user-friendly web-based system and a wealth of free marketing and informational materials you can use to implement systems and educate customers.  Do a web search for "check processing services" to find a list of companies that provide these services. 

To learn more about the business processes you must follow when processing checks electronically, see "Introduction to Check Conversion."

Tips & Tactics
Helpful advice for making the most of this Guide

• Choose an electronic check processing system that does not require you to purchase expensive hardware or software upfront
• Look for a flat rate on electronic check transactions-you should never have to pay a percentage of the transaction to the processor.
• Pay attention to both monthly fees, transaction fees, and monthly minimums to select an electronic check processing system that makes the most financial sense for your business
• Choose an electronic check processing system that securely stores customer information so that you will be able to eliminate duplicate data entry when your customers submit multiple payments.
• Choose an electronic check processing system that can easily export customer data so that you can automate your entire a/r system by integrating payment processing with your main business management software.
• Look for a system that enables you to both process electronic checks and to do direct-debit transactions. (This means collecting from customer bank accounts without having a paper check-such as check by phone transactions, online bill pay, or recurring monthly charges deducted automatically from customer accounts.) You should be charged the same flat transaction amount for direct-debits that you are charged for electronic check transactions.
• Security is important when transferring funds electronically-make certain that the electronic check processing system you use has powerful security and encryption tools in place such as a 1024-bit Digital Certificate, 128-bit encryption, and a SSL (Secured Socket Layer) compliant with CISP -- Cardholder Information Security Platform.