Digital Checks 101: Your Complete Guide to Understanding and Using Digital Checks

Businesses are moving away from traditional payment methods to eCheck and digital checks. According to the Association for Finance Professionals, 92% of the respondents to the Digital Payment Survey cited increased efficiency as the reason. 85% of the participants also attributed the switch to low cost. The surge is showing a growing inclination for automated transactions.

But what is eCheck, and how does it differ from its digital counterparts? In this comprehensive blog, we will walk you through the history of these documents, the growing trends, and how PostGrid Check API can help.

Key Takeaways

• eChecks are the electronic version of a traditional paper check, while a digital check is the digital representation of the physical piece.
• eChecks use the ACH network for processing payments. On the other hand, you can process digital checks via the ACH network, Check 21, and other online methods.
• Both methods are highly cost-effective compared to credit cards and other payment methods. It makes them suitable for businesses handling large volumes regularly.
• Key regulations such as the E-Sign Act, UCC, and Check 21 govern them. They ensure that they are treated like paper checks and are compliant with banking standards.
• You can use eCheck for recurring payments, such as subscriptions and memberships. It will allow your business to manage the periodic collection process.
• PostGrid Check API can create them with bank-level encryption, digital signatures, and fraud detection mechanisms. These features will prevent tampering and theft.

Aside from being an electronic version of the traditional paper checks, these documents can be a scanned copy of a physical document. Unlike the eCheck, they can be processed through multiple systems, including ACH and Check 21. The latter is the new law passed to enable the electronic processing of paper checks.

How Do Digital Checks Work?

Creation and Signature

You can follow the same steps as eCheck or upload a copy of a physical piece through our Check API platform. Afterwards, the payer must sign the check digitally. It will serve as a legally binding agreement that authorizes the money transfer from the payer’s account to the recipient’s account. It is similar to signing a traditional paper check.

Sending the Check

You can save the documents you have created using the PostGrid Check API and send the PDF file or encrypted file attachment through email. You can also upload it to a secure portal or a mobile application for the recipient to view and deposit it.

Verification After Depositing

After the recipient presents the document to the bank, either in person or through an online portal, the institute will verify their identity. It will check the routing number, account number, and the digital signature.

Clearance and Confirmation

The bank will process the document using Check 21 or ACH to move the money. Both the payer and payee will receive confirmation through a digital receipt in their email. They will also receive it on the dashboard of the platform they used to issue the check.

Read More: Digital Checks Vs Wire Transfers

Cost-Effectiveness

They have low transaction and processing fees. You can also avail yourself of discounts on bulk issuance. Moreover, since both these documents are digital, there is no need for purchasing check stock, printing physical pieces, buying a checkbook, and paying postage. Additionally, the automated nature of the digital checks reduces the administrative cost involved in managing physical pieces and reconciling them.

Faster Payment Processing and Clearing

Printing and mailing paper checks manually can take days and even weeks to clear. Since eCheck is an online payment method dependent on the ACH network, you can avail of quick batch processing. The recipient will receive money in their account in one to three business days.

When you make an electronic payment with digital checks, it will take one to two business days to transfer the funds to the payee. Even if you deposit it physically, the process is relatively faster than traditional check handling. It is because the process involves electronic imaging through systems like Check 21.

Increased Flexibility and Convenience

You can integrate them into your billing and accounting software and automate the payment collection process. Customers will have the freedom to pay directly from their bank account without the need for a credit card. Additionally, you can email a digital check. The recipient can deposit it through online means without having to visit the bank. This makes it one of the preferred payment methods for long-distance transactions.

eCheck

The clearing time for these pieces depends on the ACH network and the following factors affecting the clearing times:

1. If you submit the document after the cut-off time, which is typically 5:00 p.m. EST, it will be processed the next day.
2. Different banks have different internal policies, which may affect the clearing time.

Digital Check

A typical clearing time looks as follows.

1. One to two business days: If the check is deposited electronically via a mobile app or online banking.
2. Two to five business days: In case the individual physically deposits the checks in the bank.

Influences on the clearing time are as follows:

1. The varying clearing times are a result of the deposit type, which can be through a mobile application, an ATM, or in person. The physical method necessitates that banks manually process and verify the document.
2. When the checks are large in size, there is a possibility that they will be subject to further verification, which will cause delays.
3. Banks can carry out even more checks on these pieces to ascertain their genuineness. It has the potential to cause the clearing to be slow.

ACH Network Encryption

During the eCheck processing, the ACH network encrypts sensitive information like bank account numbers, routing numbers, and payment amounts to prevent unauthorized access. It ensures that only the payer and the network bank have the details. It employs rigorous prevention protocols that need to verify that you’re authorized to make the payment request. This ensures that the money is credited and debited using the correct accounts.

Fraud Prevention and Monitoring

The ACH network processes eChecks with built-in security fraud deterrent techniques. In case any document appears suspicious, the system will flag it as potentially fraudulent and reject the payment before it clears.

Digital Signature

You’ll need to verify that you are authorized to make the payment. This is why digital checks demand a digital signature. It is tamper-proof and encrypted, ensuring that the fraudster can not alter the payer’s approval.

Read More: Digital Signature on Digital Checks

Multi-Factor Authentication (MFA)

Certain platforms won’t accept eCheck payments until you verify your identity through multiple modes. MFA involves the person logging in and the system sending a code to the phone number or email to verify the person’s authorization to make the payment.

Check Image Security

When processing a digital check through Check 21, the image is digitally transmitted and stored. This reduces the risk associated with manual handling of traditional paper checks, such as tampering, theft, or loss. Additionally, the image is encrypted, which further strengthens the transaction’s integrity.

Audit Trail and Transaction Tracking

You can track digital checks and maintain an audit log that will help you record every action, from creation to deposit. This allows the payer and the payee to verify the transaction and gives a sense of security.

Additionally, transaction monitoring systems automatically flag suspicious or high-risk payments. It detects patterns consistent with fraudulent activity, such as duplicate eCheck transactions or unusual payment amounts. You’ll need to verify the transaction to process it further.

What Is the Legal Validity and Compliance Requirement for eChecks and Digital Checks in the U.S.?

Legal Validity

Courts accept payments made through electronic and digital checks as valid proof for contract law and dispute resolution, according to these laws.

E-Sign Act

It allows the use of electronic signatures and records in place of paper documents. The payer electronically signs the documents, which makes them legally binding just like traditional paper checks.

Uniform Commercial Code (UCC)

It regulates commercial transactions, including eChecks and digital checks, and applies to the banking and settlement process. Take, for instance, UCC Article 3, which governs the transfer and negotiation of all types of checks. The documents must meet the legal requirements of the UCC for payment authorization, transmission, and clearing.

Check 21 Act

Digital checks are subject to this act. It ensures that banks and financial institutions treat electronic images of checks as legally equivalent to paper checks. It demands that the images be securely transmitted and electronically verified to meet the same legal requirements as a physical check. It also offers a legal recourse for both parties in case an issue arises. The payer can request a chargeback or cancellation of transactions in case the payment was unauthorized or had errors.

Compliance Requirements

National Automated Clearing House Association (NACHA)

It only accepts eCheck payments and digital checks that ensure that the payer has given explicit consent to the payee to withdraw money from their bank account. The authorization must be verifiable and present in an electronic form such as an electronic signature, password, or PIN. This regulation also provides the process for dispute resolution in case the payment is unauthorized or returned. It protects both parties through legal provisions.

Data Protection Regulations

PCI-DSS, GLBA, HIPAA, and such regulatory bodies mandate that these documents should process and store banking information and transaction details in a secure and encrypted manner. This is necessary to prevent unauthorized access.

Fraud Prevention and Anti-Money Laundering Laws

It requires businesses and financial institutions to keep an eye on and report any suspicious activity during digital check and eCheck payment processing. Just like their physical counterpart, the transaction must comply with Know Your Customer(KYC).  It confirms the identity of the involved parties before transferring funds.

Too Complicated for Small Businesses

You can easily integrate the platform for creating and issuing these documents into your existing accounting software. Take, for instance, that you can quickly connect the PostGrid Check API with QuickBooks and other software. It will automate the creation of these documents, and you can save them in a PDF format. They are ideal for businesses of all sizes, as they eliminate the need for paper handling, reduce transaction costs, and speed up the payment process.

Cannot Be Used for International Transactions

While the ACH network is primarily domestic, you can use digital checks for cross-border payments. You can create and email a digital check to the recipient anywhere in the world as long as your payment processor and financial network support it.

Only Suitable for Businesses and Not Individuals

You can use eChecks to pay bills, make online purchases, or transfer funds between personal bank accounts. You can use digital checks for personal use to send money to family or friends, or deposit checks without needing to visit a bank. Check-making platforms also allow you to use your smartphones or computers for document creation and deposit.

Find an eCheck and Digital Check Creating Platform, and a Payment Processor

Look for a solution that will integrate with your existing accounting software and help you create and save eCheck and digital checks. PostGrid Check API can help you accomplish this. Afterwards, find payment processing solutions that allow businesses to accept these digital payment methods. Some famous examples include PayPal, Stripe, and Square.

Set up Payment Gateways

You need a payment gateway to securely transmit the payer’s bank account information on the eCheck to the ACH network. You will need to set up a merchant account that will facilitate the transfer of funds.

Monitor, Track, and Optimize Payments

Keep an eye on the status of your payment with real-time notifications. You will get periodic updates on whether the bank has cleared or rejected the payment. This visibility will help you make strategic financial decisions, such as allocating budget to high-priority clients. It will also help in real-time reconciliation of deposits and customer invoices.

Assess the Ease of Use and Customer Support

It should have a simple, easy-to-use interface. Look for a clean dashboard and user-friendly controls, as they can help reduce the learning curve. Ensure they have responsive customer support that you can reach out to through phone, email, or chat. Check if the service is only available during business hours or if it is 24/7 support. They should also offer comprehensive documentation and tutorials to help your team get up to speed quickly.

Inquire About the Fees

Ask whether they charge a flat fee per transaction or percentage-based fees. The former is more predictable and affordable if you issue a high volume of eChecks and digital checks. Make sure to inquire about the hidden fees, such as setup fees, monthly fees, or chargeback fees. They will increase the total cost of using the solution.

Evaluate the Reporting Feature

Look for a solution that provides transaction reports, which you can download or integrate with the in-house system for easy reconciliation. Ask whether they allow customizing reports according to the business’s needs. Take, for instance, that you should be able to filter the transaction based on date and type.

Check If They Allow Customization of Check Fields

It should allow you to customize various fields such as the payer’s name, payment amount, check number, due date, and payment memo. If you want to maintain a consistent brand image, look for a solution that also lets you add a company logo and branding elements.

Evaluate User Role and Access Control

Look for a solution that gives you control over who can create and authorize these documents. It should let you limit access to sensitive information, such as bank account details or payment history. This will ensure that only authorized personnel can view or edit the data.