How to Start Accepting Digital Checks

A growing number of businesses are resorting to electronic funds transfer methods. One of the most popular ones in the digital payment world is eCheck. In 2023, this Automated Clearing House (ACH) money transfer method accounted for 31.5 billion transactions, as per a study by the National Automated Clearing House Association (NACHA). This is because it requires minimal effort to send funds, the cost is lower, and it improves the flow of cash. In this blog, we will take you through the process of accepting eChecks online, the associated costs, and how you can ensure their security and compliance with the laws. You will also know how the PostGrid Check API can come in handy in the creation and integration of these documents in the payment strategy.

Key Takeaways

• eChecks are the new way of sending money that allows paying faster and helps in maintaining cash flow. They are affordable and are highly reliable in all forms of transactions.
• To begin accepting eChecks, you must have a payment processor and a merchant account. You also need to incorporate a payment gateway and have the payer provide authorization.
• You have to integrate data protection mechanisms such as encryption, role-based access control (RBAC), and fraud prevention tools to facilitate a secure transaction.
• In the future, eCheck payments will be even faster and safer for businesses and customers due to blockchain technology, artificial intelligence, and machine learning.
• The PostGrid Check API will enable you to automate the creation of batches of customized and secure eChecks, therefore saving time.

Faster Processing

Since there is no manual intervention, you can expect faster access to funds. It will offer a predictable cash flow. It will reduce the delays that can affect the ability to pay vendors or employees or manage operational costs.

Suitable for Recurring Payments

You can easily set up automated recurring payments for services like memberships or utilities. The customer only has to authorize the payment once. After that, the processor will automatically debit money at regular intervals without needing the payer to take action each time.

Increased Transparency

eChecks are fully digitized and trackable through the payment gateway and ACH network. This enhances visibility into payment statuses and enables easier reconciliation between the accounting systems and the received payments.

Read More: Everything You Need to Know About eChecks

Find a Payment Processor

It acts as the intermediary between your business and the ACH network. It is responsible for managing the technical aspects of processing payments securely. Some of the famous eCheck payment processors are PayPal, Stripe, and Square.

Set Up a Merchant Account

You will have to contact your bank and request a merchant account that allows accepting eChecks. You will need to provide your business’s legal name, address, and tax identification number. You will also have to give details about your bank account for receiving the payments.

They will also ask you for an estimate of your monthly transaction volume. It will include the number of documents you expect to process. After approval, you will get access to the merchant account, and you can start sending funds to your business account.

Integrate Payment Gateway Into Your Website or POS System

To begin integration, you will have to get the API key and documentation from your payment processor. You can proceed by installing the plugins or integrating the API into your website or POS system. You can customize the checkout page to allow customers to select eCheck as a payment option and collect payment details.

Seek Authorization

Collect and verify the customer’s bank account details, such as account number and routing number. The payer must authorize this information to prevent fraud and ensure the legitimacy of the payment. You can take explicit consent by asking them to fill out a form or provide an electronic signature.

Send Confirmation After eCheck Processing

After the payment processor authorizes the transaction, it will debit the funds from the customer’s bank account and transfer them to your merchant account. Make sure you notify the customers that the payment is complete. This will demonstrate that you prioritize transparency, and it will strengthen customers’ trust.

Merchant Services

It includes a payment gateway that allows the electronic transfer of funds between the payer’s bank and the business’s bank. The payment gateway verifies and processes the transaction through the ACH network. This helps firms accept eChecks directly from customer bank accounts. Without this, companies would not be able to receive payments electronically in a secure and standardized manner.

It also offers chargeback management tools that work with the merchant account to provide records and evidence of the payment to help resolve disputes.

When choosing the right merchant service provider, you must look for compatibility with your existing systems. You must also inquire about the fee and their adherence to industry standards.

We also recommend asking about the fraud prevention features that they offer. It can be two-factor authentication and end-to-end encryption. It will protect your business from fraudulent payments and unauthorized transactions.

Merchant Account

It is a type of bank account that allows businesses to accept and manage payments. Unlike a regular business account, which you can use for deposits and withdrawals, this account facilitates payments, including eCheck deposits.

Once the payment gateway authorizes the payment and processes it, the transfer of funds takes place. The merchant account acts as the intermediary by securely holding the funds before sending them into the business’s operating account.

It also verifies the payer’s account information and confirms whether there are sufficient funds available for the transaction. In case an eCheck returns, the system sends a notification to the merchant account and reverses the amount.

Transaction Fees

Merchant service providers charge this fee for handling eChecks. You might have to pay a flat fee or a percentage of the transaction amount. It is typically 0.5% to 1% of the total amount. It is lower than a credit card fee, but it might accumulate quickly if you process a high volume of payments. Make sure you compare processors and choose the one that offers the best pricing structure for your business’s transaction volume.

Chargeback Fee

If a customer disputes a transaction, claiming the payment was unauthorized or there was an error, you will have to pay a chargeback fee. The fee may be anywhere between $25 and $50. This can lead to significant financial loss. If you want to contest it, you will have to provide proof of transaction authorization.

Integration and Maintenance Costs

You have to integrate the processing system with the payment gateways, accounting, and CRM system. The fee typically ranges between $100 and $500 for initial setup up and the monthly maintenance can be anywhere between $10 and $50. This can vary slightly based on the business’s requirements and the provider’s pricing structure. It might seem like a hefty investment at first, but it will pay off in efficiency and reduced manual labor.

It means that the eCheck has been rejected and returned by the payer’s bank due to one of the following reasons.

1. The payer does not have a sufficient amount in their bank to cover the check amount.
2. The payer’s account is closed.
3. The routing number or the account number is incorrect.
4. The payer has requested the bank to stop processing the payment before it is completed.
5. The bank did not accept the check online because it was not properly authorized, or there were discrepancies in the signature or agreement.

The bank will issue a return code, and both the payer and payee may have to pay certain fees. The payer will have to pay the Non-Sufficient Funds (NSF) fee. Depending on the bank, it ranges from $25 to $50. If the process involves a merchant services provider or payment processor, they might also charge a returned fee. It ranges between $5 and $20.

To minimize the chances of an eCheck bouncing, the business must take the following preventive measures.

1. Ensure the account number and routing number provided are correct before processing the eCheck.
2. Make sure you have explicit authorization from the payer to process the eCheck.
3. Ensure that the payer is aware of the amount and payment details.

Impact of a Bounced eCheck on the Business

Cash Flow Disruption

If the bank does not accept check payment online due to insufficient funds, the business will not receive payment on time. It can create a delay in the payment cycle. Companies may find themselves unable to cover suppliers’ costs, employees’ wages, and other operational expenses.

If there is a heavy reliance on eCheck payments, this can cause unpredictable cash flow. Planning for future expenses might become challenging, and the business will have to resort to short-term financing to cover the gap.

Chargebacks or Disputes

If a payer disputes the payment due to fraud, error, or lack of authorization, the business may face a chargeback. The payment processor will return the money to the payer, and the company will lose the funds altogether. They will ask the organization to pay a chargeback fee, which ranges from $25 to $50 per bounced check.

A high chargeback rate can sour your relationship with the payment processors and merchant service providers. They might place the business in the high-risk category. It will lead to higher fees, account freezes, or even account termination in severe cases.

Additional Administrative Work

There will be constant communication between the business and the customer to find a resolution. In case there is a reattempt at the payment, the organization will have to reprocess the transaction manually.

It may involve updating financial records, notifying accounting departments, and adjusting payment schedules. They will take away valuable time and effort from other business activities. They will also increase the overall cost of handling payment errors.

Why Does It Matter?

Protect Sensitive Customer Data

eCheck has confidential information, such as bank account number, routing number, payee name, and transaction amount. If this information lands in the hands of a fraudster,  it can lead to identity theft and account takeover.

Maintaining Legal Compliance

Businesses in heavily regulated industries such as healthcare, finance, and insurance must adhere to certain standards when they accept check payments online. It is important for data protection and ensuring privacy. Violating these can lead to a penalty and a lawsuit.

Maintaining Customer Trust

Consumers trust the business with their personal and financial information. A security breach or demonstration of non-compliance will damage your reputation. The customers might look for alternate payment options.

Security Techniques to Implement

Data Encryption

Implement SSL/TLS encryption for secure transmission of sensitive information when you accept checks online. Only a person who has the decryption key should be able to intercept the details. It will protect the business from cyberattacks and associated financial losses and damage to the reputation.

RBAC

Give only the necessary access to employees based on their roles and responsibilities. Only authorized people should be able to process confidential information. This will prevent the possibility of internal check fraud.

Tokenisation

It involves replacing the personal information with a random token that holds no value outside the payment system. The actual data is inside a secure cloud token vault. Even if the fraudsters gain access to the payment database, they won’t be able to carry out any criminal activity, as the tokens are meaningless. It will minimize the possibility of financial damage and operational disruptions.

Fraud Detection Mechanism

It will ensure you can identify and flag any suspicious activity when you are accepting checks for payment electronically. The system should look for inconsistencies in bank account details and unusual payment patterns. It should also allow you to keep an eye on high-risk geographical locations with high fraud rates. The early detection can prevent invalid payments.

Real-Time Monitoring

It will allow you to detect and respond to potential threats promptly. You will be able to identify suspicious patterns such as unusually high-value transactions or multiple returned eChecks. It will allow you to stay one step ahead of fraudsters.

Authentication and Authorization

It will ensure that only verified individuals can accept the eCheck payment. It will also ensure that the involved parties approve the transaction. You can enforce electronic signatures, passwords, PINs, and multi-factor authentication protocols. This will reduce the likelihood of account takeover and identity theft.

Compliance Considerations to Keep in Mind

NACHA Rules

It governs the ACH network by laying down rules and guidelines for ensuring secure and compliant transactions. Businesses accepting eChecks must adhere to the standards, including proper authorization from the payer and correct formatting of ACH files. They must also follow the dispute resolution procedures. Non-compliance could result in penalties, fines, or suspension of services.

PCI DSS, HIPAA, and GLBA Standards

PCI DSS applies to any business that processes, stores, or transmits payment data. It demands that companies ensure that their financial transaction systems are secure and that information is encrypted. They must also limit access to authorized personnel. HIPAA enforces the same compliance rules on businesses linked with the healthcare industry that transmit Protected Health Information (PHI).

GLBA is for companies in the financial industry. It requires them to have a detailed security program to protect consumer privacy and ensure the confidentiality and security of sensitive financial information. It also requires them to disclose the privacy policies to the customers for transparency.

Verify Customer Information

Check the customer’s bank account number and routing number. You must also use a bank account validation service to check the validity of the provided details. It will reduce the possibility of processing delays and payment failures. It will also prevent fraudulent activities and ensure that the creation of eCheck is taking place from a legitimate account.

Maintain Clear Communication With Customers

Make sure that the customers understand the eCheck process. It will minimize the possibility of disputes, chargebacks, or misunderstandings. It will also help build customer trust since they will have complete visibility of the payment processing.

Set Up a Payment Return Process

Create a process that can track and handle returned eChecks. It should include prompt communication with customers about the returned payment. You must also give them the chance to resubmit the payment. It should also include whether you are charging an NSF fee. It will ensure that you can address these issues quickly, without impacting customer satisfaction.

Regularly Audit and Update the Payment System

Perform periodic audits of your payment system, security measures, and compliance standards. You can either dedicate an internal team or hire third-party auditors to conduct this process. It will help quickly identify any vulnerabilities and ensure that your processing system meets your business needs and adheres to all relevant standards.

Payment Success Rate

It will track the percentage of eChecks that the system successfully processes and clears versus the ones the payment processor returns. A low value indicates that there is some issue with the payment gateway, consistent errors, or fraud attempts. You must perform an immediate investigation and make necessary improvements.

Return Rate

It will tell you the percentage of eChecks that the system returns due to insufficient funds, incorrect account information, or authorization issues. It will help you identify specific patterns. Take, for instance, you notice frequent returns from a particular customer or geographical location. It might indicate the prevalence of fraudulent activity. You must ensure better verification during the authorization process or switch to alternative payment methods for such customers.

Customer Dispute Rate

It tells about the percentage of eCheck transactions that the customer disputes. It can be due to fraud, unauthorized charges, or misunderstandings about the payment process. A higher value can lead to multiple chargebacks and significant financial losses. You must ensure that the customer understands the billing process. Additionally, there should be a strong authorization process with a fraud detection system.

Payment Value Per Transaction

It tells the average value of eCheck payments processed. It helps understand the financial impact of this payment method on your business. You can use this insight to draw a comparison with the customer opting for credit or debit card payment. If you notice high-value transactions processing, you must focus on improving the security for larger payments. You can also offer incentives such as discounts to encourage larger payments through this mode.

Incorrect Account or Routing Number

It will cause a delay in payment processing because the team will have to correct and restart the transaction manually. Since they will have to follow up with the customer to get the correct details, it will increase the workload. It will also slow down the operation. You must implement a real-time validation solution that will check the details. Many payment processors come with built-in verification tools. When customers see that your system is swift in catching errors, it will lead to a better experience and faster payment processing.

Integration Issues

It happens when the payment system, eCheck processing software, and back-end system fail to coordinate with one another. It will disrupt the cash flow, leading to payment delays and failures, and will frustrate the customers. You must choose a reliable payment gateway specifically designed to process these documents.

It should integrate with your existing eCommerce platform, CRM, and accounting systems. Additionally, keep your payment gateway, CRM, and accounting software up-to-date with the latest patches and security updates. It will ensure compatibility with new versions of eCheck processing tools.

Unable to Understand the Process

Lack of comprehension may lead to customers abandoning their payments midway. Your business will lose sales. You must provide step-by-step guides, video tutorials, or FAQ sections to explain how to pay using eChecks. With clear instructions and customer support methods, you can reduce confusion and help customers complete their payments successfully.

Blockchain Technology

It is decentralized, which makes it secure. It records every transaction into the public ledger, making it almost impossible to tamper with the payment data. It will reduce the risk of fraud and unauthorized access to confidential information. This technology will prove instrumental in speeding up processing capabilities and reducing waiting times. Additionally, it will eliminate intermediaries and reduce the cost of eCheck processing by lowering transaction fees.

Artificial Intelligence and Machine Learning in Fraud Prevention

These algorithms can analyze multiple transaction data to identify patterns and anomalies that might signal fraudulent activity. For example, a customer attempts a large eCheck payment from a new location or device. The system will flag this ongoing payment for additional verification.

Additionally, conventional fraud detection solutions sometimes generate false positives. They block the legitimate transfer of funds and cause unnecessary delays. AI and ML systems reduce these false alarms and ensure smooth processing of verified transactions without unnecessary hurdles.

Processing Automation

Manually entering data into an eCheck leaves significant room for errors, such as incorrect account numbers and transposed routing numbers. This can lead to payment failure and financial losses. Automation through a Check API, like the one offered by PostGrid, will allow you to auto-populate the relevant field without human intervention. It will ensure that the system processes the payment without any mistakes. It will also speed up the authorization and lead to quicker fund availability.

Integration With Real-Time Payment Systems  (RTPS)

The present eCheck payment processing system through the ACH network creates a delay of one or two days. However, the development of RTPS can lead to the instant settlement of transactions. It will help businesses provide customers with quicker confirmations and faster order fulfillment. It will improve the overall customer experience. Additionally, it will open doors for sending the eChecks in situations where speed is critical, such as payroll,  utility, and high-value transfer of funds.