Many merchants that have decided to use checks as an alternative to credit or debit cards have done so to accommodate larger payments or recurring payments billed to a customer. Businesses have been drawn to check processing with its simplicity of payments and lower transaction costs. Payment card transactions through a merchant account will cost merchants a transaction fee and a discount fee per transaction. Contrary, many types of echeck payment processing services will only charge a nominal transaction fee to accept payments from a customer’s bank account.
Higher-risk merchants have also gravitated towards utilizing checks as a faster means for approvals, with fewer regulations common in the payment card industry. Financial technologies have allowed payment processors to improve their processing services and expand their businesses with fewer regulations and fees than other payment methods. These changes have allowed businesses to charge exuberant merchant account fees or merchants that a payment processor could not approve to find a viable solution for payment acceptance.
What is Check Processing
Merchants that need a payment processing service that does not involve using credit or debit cards can work with a check processor to accept bank transfers from a customer’s bank account to theirs. Payment processing has evolved since the 1970s when the first ACH transactions were processed to today, where new technologies have created alternative solutions, including Check 21 and Check 22, that allow for the more streamlined acceptance of electronic checks.
The main types of payment processing services include:
- ACH (eCheck)
- Check 21
- Check 22
Accepting checks requires using the customer’s bank routing number and checking account number to debit funds without a physical check present successfully. Payment requests are initiated by the merchant and sent to the customer’s financial institution through either a Check or ACH payment service using a remote capture program. Funding times for merchants can vary from 3-5 business days, depending on the banks and payment processors being used to handle the transactions.
ACH was the first electronic and automated checking service available to merchants that allowed for the debiting of funds from a customer’s bank account. After 2000, laws changed, and new payment processing services called Check 21 were available. These improved the older ACH system by allowing merchants to create copies of checks and process automated transactions without using the Federal Reserve or NACHA.
History of Check Processing
Accepting checks is one of the oldest methods of making payments without physical currency, tracing its roots back to the 1500s shipping industry in Holland when merchants would deposit cash with a cashier instead of holding on to the money and writing notes to the cashiers with instructions on how payments should be made with those funds. The use of printed checks was not until the early 1760s when Lawrence Childs of England printed the first checks with unique check numbers in 1762. The use of checks in the USA did not appear mainstream until the 1860s when writing a check was used to access cash that would otherwise be inaccessible when held in larger investments such as real estate or businesses.
In the early 1970s, the first automated clearinghouse for electronic ACH payments was established by the San Francisco Federal Reserve Bank and soon led to several local and regional clearinghouses forming around the United States. By 1974 a consolidated solution to the numerous clearinghouses led to the introduction of the National Automated Clearing House Association (NACHA). By 1978 the Federal Reserve was operating clearinghouses in New York, Arizona, and Hawai’i.
Advances in worldwide check processing technology have allowed businesses to receive international and domestic funds instantaneously. This previously drawn-out process could take days to be completed. These changes will help revolutionize the payment processing industry again by allowing for another method of faster money transfers without using bank cards.
What is ACH?
The Automated Clearing House, or ACH, is an electronic financial network used for debit and credit transactions throughout the USA. ACH transactions can either be used for credit or debit transactions. Merchants commonly use ACH to send funds, such as paying a vendor or issuing a direct deposit. Using ACH for debits is commonly used by merchants to collect customer payments, such as car loans or mortgage payments. ACH as a payment method is growing in popularity among merchants in most businesses using check processing services.
ACH Network transactions are fully electronic and governed by rules by NACHA and the Federal Reserve. On average, over 60 million automated clearing house transactions worth over $1 Billion are processed daily through the ACH Network. About 60% of all ACH transactions run through the Federal Reserve and their ACH network called the FedACH. The remaining 40% of transactions are handled through the Electronic Payment Network or EPN. The EPN operates as a privately owned automated clearinghouse that works alongside and sometimes with the Fed to clear transactions.
ACH transactions are managed by a payment processor that allows merchants to schedule automated and recurring customer payments through their gateway. The merchant enters customer information into the ACH payment gateway, where the processor manages payment requests and settlements. ACH payments are received from the customer through the merchant acquiring bank and held by the processor before settling the net payments into the merchant’s bank account. The ACH process takes 3-5 business days to clear NACHA and complete the process from customer to merchant.
What is eCheck?
Customers often see the eCheck logo beside the images of the different payment card networks accepted at a merchant location. Unlike Check 21 or Check 22, the eCheck service is handled similarly to the ACH industry. Consumers can create checks through a merchant’s shopping cart, entering all of the banking and required personal information to validate and complete the transactions. Manual checks can also be accepted but converted into an electronic format and sent in the same process as an ACH transaction to the Federal Reserve and handled through NACHA.
What is Check21?
Dubbed the next generation of check payment services, Check 21 is a new take on traditional checks that have been used for hundreds of years. This modernized payment processing service allows businesses and financial institutions to use check images to create substitute checks for use as a replacement, containing all the information available on a physical check. By allowing businesses to accept payments with as little as an image of a check, Check21 has revolutionized the check processing business by opening the door for other such services as remote check depositing available with most banks today.
In the wake of the September 11th attacks and the subsequent shutdown of the airline industry, gridlock followed throughout the financial industry as businesses could not receive payments from physical checks. This massive disturbance created the urgency for changes to be made to the antiquated financial system and paved the way for an alternative payment method that could be used instead of physical checks. In 2003 the Check Clearing for the 21st Century Act was passed by Congress. It became a reality in October of 2004 as a way to help prevent the possibility of any future disruptions to the financial systems of the USA.
The Check Clearing for the 21st Century Act allowed businesses to create a virtual check with information supplied by the consumer, including bank account numbers, bank routing numbers, and signatures. Instead of requiring a payment processor to manage customer transactions, merchants could now create checks on demand for the required amounts and deposit these checks without any 3rd party organizations involved. The Federal Reserve does not handle transactions sent through Check 21. They, therefore, are not subject to any of the NACHA guidelines that can negatively affect higher-risk merchants who tend to have high chargebacks and returns.
What is Check22?
Like its predecessor, Check 21, Check 22 was designed with the same principles of allowing substitute checks to be created and used instead of requiring physical checks. Unlike Check 21, this new generation of substitute checks allows merchants and consumers to create their checks for use. Similar to Check21, consumer information, including bank account numbers, bank routing numbers, and signatures, would be held securely on file and easily accessible when a check is needed to be created by the customer.
Merchants have widely accepted the use of Check22 for various reasons that make the service easier to use. One of the benefits for merchants is that consumers can easily authorize a remote check by responding to a phone call, email or text message to accept the substitute check. This type of rapid authorization has allowed many payments to be made on the spot with practically instantaneous responses.
Merchants have also benefited by knowing that customers have waived their rights to dispute transactions with their bank or financial institutions and must work directly with the merchant to resolve any problems. Consumers that violate any of the terms outlined in the Check 22 agreements risk being charged bank fees and other collection fees stemming from the dispute. This has helped many merchants gain the upper hand while resolving check processing disputes by removing the financial institutions and banks and working directly with the customers.
Differences between Check Programs
All types of check acceptance programs provide a reliable and affordable alternative or addition to accepting payment cards. Depending on the merchant’s needs and how it operates, one type of payment service might be a better solution for the business.
Some of the differences between ACH/eCheck and Check 21/Check 22
Payment Processing FAQs
Merchants interested in learning more about the different services available for accepting checking can find more information below. The Federal Government manages many of the financial services provided.
Government Organizations handling Check Processing:
Start your Business Check Processing Today!
The payment processing professionals at Allied Payments can help a business find the best payment processing solution and quickly set up their services. Most businesses utilizing high risk check processing through Allied Payments have noticed significant savings in their payment processing costs. For more information or to get started check processing, contact one of our helpful representatives and find the best solution for your merchant services needs.