What Is an Electronic Check & How Does It Work?

An electronic check holds computerized data.
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Electronic checks, or e-checks, have become a popular form of payment because they reduce the time and money it takes to process monetary transactions. Checking account holders don't have to worry about acquiring and filling out paper checks, and merchants receive funds much quicker. Payment information is converted to digital data for processing.


What It Is

Electronic checks are alternatives to paper checks and cash. In simple terms, an electronic check is a digital form of a paper check. The same numbers you commonly see on the bottom of paper checks are converted to digital information to authorize the transfer of funds from one account to another.

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How it Works

Check with your bank to learn about the details of how to set up an e-check. Small independent banks may require prior written authorization from you to process electronic checks. Otherwise, electronic checks work like standard paper checks, only without the paper. For example, suppose you see something on television that you want to purchase and you call the merchant. If it accepts electronic checks it will ask you for the routing number, which is a set of digits typically at the bottom left side of paper checks. This number is unique to your bank. The merchant will then ask you for your account number, which is a set of digits typically found on the right-center bottom of a paper check. The merchant will then ask you to verbally acknowledge that you are giving it permission to debit your account for the specific amount of your purchase.


Online and In-store

E-checks are a common way to pay for merchandise purchased online. Many websites give shoppers the option during checkout. Electronic checks can also be used to send money to family or friends through an online funds transfer service like PayPal. Some retailers also convert paper checks to e-checks during the checkout process. The customer hands the cashier a paper check that the cashier then inserts into a reader. The routing number, account number and payment amount are converted to a digital format and then sent electronically through the Federal Reserve's processing system. The paper check is then voided and returned to the customer.


Electronic Transfers

E-checks share similar characteristics with debit cards and electronic funds transfers, or EFTs. Money is moved from one place to another without a paper trail. For example, an EFT can be used to move your personal funds from your checking account to your savings account, or vice versa, over the phone. Debit cards need to be swiped through a reader and may require a personal identification number to authorize a funds transfer. When you use an e-check, you authorize funds to be transferred from your account to one belonging to someone else. In all three types of transactions, money is moved through a secured computer network.