Electronic check conversions use information found on your check to carry out a single electronic funds transfer, much like a debit card transaction. These offer advantages to businesses, such as faster processing, and to you by improving your access to goods and services. Electronic checks also carry a few disadvantages, such as the potential for fraud.
Advantage – Faster Processing
Faster processing times provide a key advantage for business owners. Paper checks must go through numerous steps before the money moves from the customer's account to the merchant's, which can take several days. An electronic check often processes in half that time, which means the business gets its money faster. This allows businesses to more easily manage their bills and creates a more stable financial situation for the business.
Advantage – Fee and Labor Reduction
Businesses that employ electronic checks spend less money on check processing fees, which lets them devote more financial resources to core operations. Electronic checks also require less hands-on labor by employees and management, which allows the business to either reduce its overall labor force or devote that employee time to customer service, inventory management and other mission critical efforts. It also reduces the need to raise product or service costs to offset the labor costs and fees associated with paper checks.
Advantage – Customer Payment Options
Some customers do not possess a debit or credit card. This limits purchasing options, especially from online vendors. Business that accept electronic checks provide you with access to goods or services that might otherwise remain unavailable to you. For example, if you want to start a website, you need to buy a domain name and purchase web hosting services. If domain registrars and hosting services only accept credit or debit card payments and you can only provide a check, you cannot start your website. If they accept electronic checks, however, you get the chance to start your website without needing to get a credit or debit card.
Disadvantage – Fraud Potential
As computers process electronic checks, hackers can potentially get access to your banking information. Some fraudulent businesses also offer electronic checks as a means to get you to hand them your banking information. The Federal Trade Commission suggests you not provide electronic check information to businesses you do not know and trust, whether online or over the phone. Legitimate merchants typically provide you with transparent information about how they process electronic checks.
Disadvantage – Errors and Reduced Float
The computer-driven nature of electronic checks also makes them subject to computer errors. For example, a glitch in the processing might lead to a double withdrawal on your account or an incorrect withdrawal amount. Electronic checks also limit the amount of "float," the time between writing a check and when the business cashes it. If you write a check to cover your cable bill with the expectation that the check will not be cashed for a week, but the cable company performs an electronic check conversion three days later, you can find your account overdrawn.