Many of the 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 the lower transaction costs. Payment card transactions through a merchant account will cost merchants both 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 that are common through the payment card industry. Financial technologies have allowed for 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 that were being charged exuberant merchant account fees or merchants that were unable to be approved with a payment processor to find a viable solution for payment acceptance.
What is Check Processing
Merchants that are in need of 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 1970’s when the first ACH transactions were processed to today where new technologies have been created alternative solutions including Check 21 and Check 22 that allows 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 the use of the customer’s bank routing number and checking account number to successfully debit funds without a physical check present. 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.
The use of ACH was the first type of 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 that improved upon the older ACH system by allowing merchants to create copies of checks and process automated transactions without the use of 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 1500’s shipping industry in Holland when merchants would deposit cash with a cashier instead of holding on to the money and write notes to the cashiers with instructions on how payments should be made with those funds. The use of printed checks did not being until the early 1760’s 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 1860’s when writing a check was used as a way of accessing cash that would otherwise inaccessible when held in larger investments such as real estate or businesses.
In the early 1970’s, the first automated clearinghouse for electronic ACH payments was established by the San Francisco Federal Reserve Bank and soon led to a number of 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) and by 1978 the Federal Reserve was operating clearinghouses in New York, Arizona, and Hawai’i.
Advances in check processing technology around the world have now granted businesses the ability to receive international and domestic funds instantaneously, a previously drawn-out process that could take days to be completed. These changes will very well help revolutionize the payment processing industry once again by allowing for another method of faster money transfers without the use of bank cards.
What is ACH?
The Automated Clearing House, known as ACH, is an electronic financial network used for both debit and credit transactions throughout the USA. ACH transactions can either be used for credit or debit transactions. Merchants commonly use ACH as a way to send funds, such as paying a vendor or issuing a direct deposit payment. Using ACH for debits is commonly used by merchants to collect payments from customers, such as car loans or mortgage payments. The use of ACH as a payment method that is growing in popularity among merchants in most businesses using check processing services.
ACH Network transactions are fully electronic and are governed by rules set forth from 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, also known as EPN. The EPN operates as a privately owned automated clearinghouse that works alongside and at times with the Fed to clear transactions.
ACH transactions are managed by a payment processor that allows merchants the ability to schedule automated and recurring customer payments through their gateway. Customer information is entered into the ACH payment gateway by the merchant where payment requests and settlements are managed by the processor. ACH payments are received from the customer through the merchant acquiring bank, held by the processor before settling the net payments into the merchant’s bank account. The ACH process takes between 3-5 business days to clear NACHA and complete the process from customer to merchant.
What is eCheck?
Many times customers will see the eCheck logo next to the images of the different payment card networks accepted at a merchant location. Unlike Check 21 or Check 22, the eCheck service is handled in a very similar manner as the ACH industry. Consumers can create checks through a merchant’s shopping cart, entering in all of the banking and required personal information to be used to validate and complete the transactions. Manual checks can also be accepted but will be 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 as the next generation of check payment services, Check 21 is a new take on traditional checks that have been in use 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 same information that would be available on a physical check. By allowing businesses the ability to accept payments with as little as an image of a check, Check21 has revolutionized the check processing business by opened 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 were unable to 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 in lieu of physical checks. In 2003 the Check Clearing for the 21st Century Act was passed by Congress and 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. Transactions sent through Check 21 are not handled by the Federal Reserve and therefore are not subject to any of the NACHA guidelines that can negatively affect higher risk merchants who have a tendency for 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 both merchants and consumers to create their own 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.
The use of Check22 has been widely accepted by merchants for a variety of reasons that make the service easier to use. One of the benefits for merchants is that consumers can easily authorize the use of 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 for 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 are required to work directly with the merchant to resolve any problems. Consumers that violate any of the terms set forth in the Check 22 agreements risk being charged bank fee 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 needs of the merchant and how it operates, one type of payment services might be a better solution for the business.
Some of the differences between ACH/eCheck and Check 21/Check 22
Payment Processing FAQs
Merchants that are interested in learning more about the different types of services available for accepting checking can find more information below. Many of the financial services provided are managed by the Federal Government.
Government Organizations handling Check Processing:
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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 with 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.