Electronic Check (E-Check): Definition and How It Works

What Is an Electronic Check (E-Check)?

An electronic check, or e-check, is a form of payment made via the Internet, or another data network, designed to perform the same function as a conventional paper check. Since the check is in an electronic format, it can be processed in fewer steps.

Additionally, it has more security features than standard paper checks including authentication, public key cryptography, digital signatures, and encryption, among others.

How an Electronic Check (E-Check) Works

An electronic check is part of the larger electronic banking field and part of a subset of transactions referred to as electronic fund transfers (EFTs). This includes not only electronic checks but also other computerized banking functions such as ATM withdrawals and deposits, debit card transactions, and remote check depositing features. The transactions require the use of various computer and networking technologies to gain access to the relevant account data to perform the requested actions.

Electronic checks were developed in response to the transactions that arose in the world of electronic commerce. Electronic checks can be used to make a payment for any transaction that a paper check can cover and are governed by the same laws that apply to paper checks. This was the first form of Internet-based payment used by the U.S. Treasury for making large online payments.

Benefits of Electronic Checks

Generally, the costs associated with issuing an electronic check are notably lower than those associated with paper checks. Not only is there no requirement for a physical paper check, which costs money to produce, but also electronic checks do not require physical postage in cases of payments being made to entities outside the direct reach of the entity issuing the funds.

It is estimated that printing and issuing a paper check will cost your business anywhere between $4 and $20. However, the average fee per eCheck transaction ranges from $0.30 to $1.50.

Further, there are multiple levels of authentication to help ensure funds are routed properly.

Direct Deposit System

One of the more frequently used versions of the electronic check is the direct deposit system offered by many employers. It is an electronic method of sending an employee’s wages directly into the employee’s bank account. Additionally, taxpayers who are owed a refund on federal tax returns can elect to receive a directly deposited electronic check from the Internal Revenue Service (IRS) instead of having a physical paper check sent through the mail.

The Bottom Line

E-checks are considered the digital version of traditional paper checks. E-checks are facilitated by the Automated Clearing House (ACH) network, an electronic network used by U.S. financial institutions. Funds are electronically withdrawn from the payer’s checking account, transferred over the ACH network, and deposited into the recipient's checking account. 

E-Checks are a safer alternative than paper checks, and also faster to clear and cheaper to issue.