Quick overview of electronic check services.

In the nearly two years that the blog has been up, I think I have only written one or two articles about electronic check acceptance services. These lesser known services are often excellent additional methods businesses can accept from their customers.

What is an electronic check service?
Electronic check services serve several purposes. They can convert a paper check into an electronic transaction (Check Conversion), they can verify the check writer against a database of check writers to see if there is a high risk of them writing a bad check (Check Verification), they can guarantee the value of the check to the business accepting it (Check Guarantee), and they can electronically draft funds from a checking account (Bank drafting, ACH).

The most common types of check services available for businesses in the US are check conversion, check verification, check guarantee, ACH, bank drafting, eChecks, and a few combined services.

What do they all do?

• Check Conversion – Check conversion is the process of converting a paper check into an electronic transaction similar to a credit card transaction. To convert a check, the check must be physically run through a check imager or a magnetic check scanning device. The check is then deposited into a business’s bank account a few days later. Check conversion is normally accompanied with a check guarantee service, so that there is a less likely chance of the bank account having insufficient funds.
• Check Verification – Check verification services compare the check writer with a national list of check writers. If that customer has a history of writing bad checks, you can avoid accepting a check from them. This service does not electronically deposit a check, but it can greatly reduce the chance of accepting a check from someone known to write bad checks. Checks are also normally scanned through a magnetic check reader.
• Check Guarantee – Check guarantee is similar to verification except the check processing company also guarantees the value of the check to the business. In the event that the check is returned insufficient, the business still gets the full value of the check, and the check processing company takes further action against the check writer.
• ACH / Bank Drafting – Bank drafting and ACH (Automated Clearing House) are electronic systems where a routing number and checking account number are manually entered into a software system. The business can then debit their customer’s checking account electronically, and can setup recurring payments for that same checking account.
• eChecks – Using a system similar to bank drafting, an echeck is a check processing service that is integrated with a website allowing a business to accept checks from their customers online.

Benefits of check services

• Reduce the chance of accepting bad checks.
• Reduce or eliminate trips to the bank to deposit checks.
• Integrate with a website to offer an additional payment method.
• Reduce the time to have funds from checks deposited into a bank account.

Who can benefit:

The businesses that are going to benefit the most from check services are those that already accept a large quantity of checks, or if bad checks are common. Online businesses can benefit by providing another simple and convenient method of payment from their customers. Rental and other businesses that need recurring billing options, can greatly benefit from an ACH or bank drafting system.

Nearly any business can benefit, but they should be accepting enough checks to justify the cost of the check service. If you only accept one or two checks per month, then a check service probably isn’t a cost-effective choice. If you accept hundreds of checks per month, and you don’t have an electronic check service, you should really look into it, because it could save a lot of time, and hassle.

The cost:

Check service costs are very different depending on the actual service that is being used. Different services have completely different fee structures. Some charge a processing and transaction fee like credit cards, and others charge a flat rate per transaction.

Example costs:

• Check Conversion and Check Guarantee: 1.7% and $.25 per transaction + $10 per month..
• Check Verification: $.25 – $.50 per check + $10 per month.
• ACH and Bank Drafting: $.50 – $1.00 per check + $30 – $50 per month.
• eCheck: $1.75 – 2.00% and $.20 – $.50 per transaction + monthly fee.

Almost every check service that I seen has a monthly fee, and the majority have a monthly minimum in addition to the monthly fee. There may be a few other fees, but nothing like a merchant account contract. ACH and bank drafting will definitely have other fees such as ACH reject, chargeback fees, and a few other specific fees. Contract terms for check services are generally for one year.

Before you sign-up:
As with any service, do your homework before you sign up for a check service. Make sure that you accept enough checks to justify the cost, and research different companies to find the best service for you. If you are a new business, you may want to hold off until you know that you accept enough checks for a check service to make sense.

Also, most check services require additional equipment to process a check. This can be as cheap as a hundred dollars and can be up to a thousand dollars. Some check services themselves are also very expensive, and some have very lengthy contracts. Telecheck for example, is one of the best check conversion and guarantee services available, but is very expensive, and can only be used with the Telecheck Eclipse terminal, which costs $600+.

If you already accept credit cards through a credit card terminal, there is a good chance that you can process checks through your terminal with an additional check scanner.

Finally, find out if you have to process credit cards through the same company that is providing your check service. It is common for check services only to be available to merchant account customers. While this isn’t necessarily a bad thing, it is something that business owners should be aware of.

Look at all of you options before making your decision to ensure that you get the best system for your business.

Conclusion:
There is a check service available for just about every type of business. If you take a lot of checks or you take a lot of bad checks then a check service can be a great way to make accepting checks easier.

The only exception with check services are high risk companies. Especially businesses like check cashing services, payday loans, etc., these business types are extremely high risk for check acceptance, so it will probably be very difficult or impossible to setup a check service for a business of this type.

Related Resources:
Wikipedia – ACH
Federalreserve.gov – Check Conversion
Allbusiness – Are Check Guarantee Services Worth the Money?
eCheck.org: What is eCheck?