Electronic Check Processing

It is an electronic version of a paper check. Like the paper check, the electronic check is a legally binding promise to pay. On screen, it looks just like a paper check and is filled out the same way. It includes all details like date, payee name, amount, signature, memo line, and endorsements. It is embedded in a secure electronic file in which the user defines data regarding the purpose of the check.

Electronic checks are signed, co-signed, endorsed, deposited, cleared, and settled like paper checks. The current check law governs payments made through the electronic check processing system.

Electronic checks can be used in almost all situations where a paper check is used today. They can also be used to authorize payments through other payment systems that are not check based. For example, an electronic check can be used to authorize a wire transfer payment, or ACH debit and credit transactions.

The paying or depositing bank can validate the signatures on electronic checks by automatically verifying them. Smaller businesses using paper filing systems can print electronic check records and include them in the current filing procedure.

Electronic check processing fits in with the current business practices. This eliminates the need for expensive and time-consuming process re-engineering. It also improves existing bank accounts with new e-commerce features. Electronic checks can be linked with unlimited information and can be directly exchanged between parties.

Electronic checks capture the crucial features and end user benefits of paper checks in an all-electronic form.

The payment system for paper checks is very forgiving of errors. Checks get processed, cleared, and settled even when many kinds of errors occur. Dates could be omitted, amounts could be encoded incorrectly, or the processing equipment may fail to read the check. In these cases, checks are passed, sometimes after repair with a new MICR encoding strip.

Electronic check processing does not accommodate errors. In fact, this payment system prevents erroneous payments completely. Before processing, electronic checks must be totally and precisely created and digitally signed by an authorized party. The use of strong digital signatures and automated software edits makes this compulsory.

Electronic checks deliver clear benefits over paper checks to all parties involved. They are faster, with fewer errors and reduced costs. They significantly reduce the operating costs and losses related to check payments. They eliminate most of the manual steps required for processing paper checks and allow information to flow freely between the payer and payee. Customer identification and state of the art security systems reduce the costs associated with fraudulent checks. Since the system is fully automated, electronic checks are protected against alteration and forgery. Reconciliation is also easier due to payer assigned check numbers. All this will save payers and payees a lot of expenses.

Electronic checks can have unlimited information attached and sent with the payment. Since it is in electronic form, it can be easily transferred to existing systems without manual re-entry.

Electronic checks work much in the same way as paper checks. The electronic checkbook is an electronic token device that contains encryption tools, public and private key pairs, certificates, utilities to unlock software, and utilities to perform other functions. It can also contain instructions to maintain a secure log of transactions.

Whenever a payment needs to be made, a blank check is brought up onto the payer’s screen. The date, payee, memo fields, and amount are all filled in. To sign the electronic check, the payer inserts his electronic checkbook into the reader (it is a separate device that is plugged in) and enters the pin to unlock his checkbook. The electronic check serial number is filled in by the electronic checkbook. The electronic checkbook then reads the entire check, attaches the digital signature, logs the information from the electronic check, and returns the signed check.

Every electronic check issued can be retained by the originator for records and remains a “perfect copy.” Since only one copy of an electronic check will be paid by the bank, copies can be kept with anyone and even resent.

Usually, electronic checks are received by email and are opened just like any other email message. Digital signatures on electronic checks can be validated at any time by online check verification to authenticate the source and to confirm that it has not been tampered with. Electronic check processing works the same way as paper check processing.

The Automated Clearing House network is a highly reliable, batch oriented funds transfer system and provides for inter bank clearing of electronic payments for participating depository financial institutions.

ACH processing payments include direct deposit of government benefits, direct payment of consumer bills, business-to-business payments, e-commerce payments, tax payments, and electronic checks.

The clearing house takes ACH files received from member banks and sorts them according to originating bank and the paying bank. The accounts are then totaled and the accounts of member banks are credited or debited accordingly. ACH operations are done batch wise. It can take up to 72 hours before the money is actually transmitted. A return notification is sent if there are insufficient funds in the account.

New rules and guidelines have been established that require merchants to have an authentication system in place to identify their customers electronically. Additionally, merchants must have systems to verify routing numbers, carry out annual security audits, and have a security encryption system.

Internet initiated ACH payments have grown phenomenally in recent years. Electronic check processing and executing ACH payments are cheaper and faster than processing paper checks. Business-to-business and business-to-consumer e-commerce activities are increasingly becoming dependent on the ACH system, thus forcing it to mature.

Electronic check processing uses the following technologies:

Financial Service Markup Language (FSML)

The latest version of the language was developed to implement electronic checks and other secure financial documents. FSML defines a method to structure documents. This is in the form of tagged content.

FSML has been kept simple because financial applications might require the extra safety of a secure hardware. The smart card is the secure hardware that electronic checks use to contain the signer’s keys, to sign and endorse electronic checks, and to provide automatic check numbering and registration.

Digital Signatures

They are mathematical calculations that provide a unique ability to identify the creator of the signature and the specific document that was signed. They also provide tamper proofing and authentication.

Private Key

The secret mathematical key is used to create a digital signature. For every private key, there is one corresponding public key. For each private key, there is a certificate that can be used to reveal the respective public key to any party that needs to validate a signature. The payee software uses the private decryption key to decrypt electronic checks mailed by the payer. An email registration process is used to encrypt electronic checks before transmission to payee.

Public Key

It is used along with a respective private key and is made widely available to anyone who needs it. For electronic checks, each payee uses public keys for verifying digital signatures and for encrypting mail.

Electronic checks follow strict banking and government business standards and practices for ensuring the security of the system. Frauds are prevented by a combination of state of the art technology and well-established business practices. Electronic check processing uses various technology tools, data encryption, digital signatures, certificates, secure email, and smart card technology to ensure that the security of the system is maintained.

Public key cryptography is only as secure as the security of each individual’s private key. If someone other than the owner of the private key has a copy of the key and knows its personal identification number, the entire cryptography falls apart. Cryptographic tokens are used in conjunction with public key cryptography to solve this security hole. These tokens provide a safe means of generating and storing public and private key pairs, and performing actual signing operations. In this way, private keys are never exposed to attack by hackers, viruses, or even users who are casual about security issues.

Electronic check processing substantially reduces the costs associated with paper checks. The profit margins for banks should improve when more electronic checks are used. Manual errors with paper checks lead to expensive research to trace these errors. All this additional cost can be eliminated when electronic checks are used.

Electronic check processing significantly streamlines the payment process. This would be expected to save 2-5 days on an average compared to the traditional payment process.

A variety of new services can be offered to customers that leverage on the electronic nature of electronic checks. Electronic checks also provide banks an additional payment choice to offer to their customers.

Lots of data entry and re-keying of data will also be eliminated. This will not only reduce costs, but also free time for bank staff. This time can be used in many more productive ways.

With electronic checks, banks can provide better customer service and quicker problem resolution. When a question arises regarding a paper check, finding out the exact details is a laborious and time consuming process. Customer service turnaround times can be improved with electronic checks. The audit trail of electronic checks is simple to follow and there is no need to wait for statements. Customer issues can be resolved immediately.

Debit cards are used by individuals to make payments at the point-of-sale in a retail outlet or to withdraw cash from ATMs. Electronic checks can also be used for retail point-of-sale payments and secure business payments over the Internet. When an issuing bank authorizes a debit card transaction, it temporarily assumes the obligation of providing good funds. It is due to this risk that banks set daily limits on the amount that can be charged on a debit card. Since electronic checks are the liability of the customer and not the bank, they are not subject to similar restrictions.

Credit cards are popular modes of payment on the Internet. Apart from being secure and providing easy means of protection, they also have the obvious advantage of making the purchase on credit. Even though there are so many payment options, people still use checks for most transactions. Some reasons are that they provide better discipline and avoid increasing debt. Therefore, electronic check processing is a good payment option for the merchant to offer.

Debit cards and other e-payment options can only be used to make payments. Unlike these, electronic checks can be used by individuals and businesses to receive payments as well.

Customers are provided with an increased number of cost effective electronic payment options. Electronic check processing provides end-to-end security even in insecure environments like the Internet.

More information can be accessed through an electronic check. For example, in the payer’s bank account statement, the payee’s name will be there in addition to check number, amount, and date.

Payment can be made to anyone provided they have a bank account. Experts are working on improving the system to accommodate payments to persons not having bank accounts.

The same payment instrument can be used to make payments and receive payments.
There is no need for an intermediary. Electronic checks are designed for direct exchange between transacting parties. Transaction information can also be exchanged with the payment.

There is no need to learn new terminology or processes. Electronic checks are modeled after paper checks and are therefore familiar.

It is built on the familiar legal and payment infrastructure. Banks and customers both understand the risks of the system and accept them. Users can be assured that the foundation is on a stable system!