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Understanding eChecks and How They Work


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When issuing cross-border payments to international vendors or suppliers, companies are not limited to the manual process of paper checks or expensive wire transfers. E-Checks, a local bank transfer or “global ACH” electronic check payment method is able to issue remittances quickly and accurately. Let’s take a look at the ins and outs of eChecks and how this electronic processing method simplifies your accounts payable workflow.

“E-Checks” have the unfortunate distinction of being a term that is claimed by many sides. It is often ubiquitously used alongside ACH. But because ACH is already a payment method that is well recognized to talk about US bank-to-bank transfers, “eCheck” can carry the more international term for bank-to-bank transfers. For the purpose of this discussion, we’ll use “eCheck” as the focus on cross-border payments.

What is an eCheck?

An eCheck, also called an electronic check, is exactly how it sounds: an electronic version of a paper check. Just like its paper counterpart, the eCheck draws funds from the payer’s bank account, and in a sense, both are processed electronically, albeit with some differences.

Virtually all checks are processed electronically, even paper checks. Most, if not all, merchants have an electronic check scanner that converts paper checks into a digital format, enabling the merchant to retrieve the information needed for an electronic funds transfer.

Electronic check scanning has certainly helped accelerate payment processing of paper checks, but eChecks does one better. The biggest difference between paper checks and electronic checks is their scope: processing paper checks out-of-state or abroad requires additional paperwork (such as a foreign currency draft) or sometimes, it’s not possible at all. With the electronic check payment method, funds can transfer domestically and internationally via local or global bank networks. Payment management software like Tipalti enables companies to take advantage of electronic disbursement methods domestic and abroad.

How do eChecks work for cross-border remittance?

An eCheck transaction involves four essential steps:

1. The payee, the entity that receives the payment, must give the authorization to accept payment electronically. Obtaining authorization relies on the payer, the entity submitting the payment. Permission can be granted in writing (such as filling out an online form on a supplier portal) or issued verbally (such as a confirmation over the phone).

2. Next, the payee’s payment transaction information—the bank routing number, the payee’s bank account number, the type of account, and the transaction amount—is submitted through an online payment processing service, also sometimes referred as a payment processor. This service transmits the transaction data.  An online payment gateway is an entity that facilitates the payment processing service, serving as a middleman between the payer and the payee’s bank. If there are additional fields required for that country (IBAN, SWIFT, etc.), that information must also be part of the payment details collected from the payee. Every country has its own unique requirements.

3. The drafting bank then communicates with the bank in the other country with the transfer details. Unlike wire transfers, these transactions are often run in bulk to minimize the need for manual intervention.

4. The payment processor communicates with the payer and the payee during the eCheck transfer, such as sending a notification to the payee that the funds are on their way. Depending on the locale, the local bank, and when the batch run was executed, it can take three to ten business days for funds to land.

Are eCheck transactions safe and secure?

Thanks to advanced encryption technology and other security features implemented by online payment gateways, payers and payees can rest assured that their account information is safe and secure when transmitting payments electronically. Processing a paper check involves many changes in hands, making the document more susceptible to theft and errors compared to the paperless nature of electronic checks. In some countries, postal difficulties can lead to greater risk as well. Fraud detection, ongoing security monitoring, and activity tracking are just some of the features that come with processing eCheck payments.

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Do eChecks improve the accounts payable workflow?

The quick answer is yes. When companies begin to automate the accounts payable workflow, they’re often shocked with finding out how much of their efforts involved manual processes. Replacing paper checks with electronic payments improves efficiency and cost-saving measures in many aspects of the business:

• A payment management system automates many manual tasks, such as communicating with payees, obtaining payment approvals, and sending the payment. The time and money saved through automation enable the accounts payable to focus on other cost-saving efforts, such as offering early payments as leverage for negotiating invoice prices.

• Electronic payments like eChecks reduce the “float” time, a period between the • issuing check and the transaction hitting the account. Electronic payment transfers help payers have a better sense of when a payment will appear in the company bank account; this can help payers align their cash flow with invoice payments.

• Issuing an eCheck as payment instead of a paper check reduces production costs, such as printing ink, the paper material, postage for mailing, etc.

• E-Checks speed the reconciliation effort, because it does not have to deal manually with “returned” checks that did not arrive at their destination or were never deposited.

• The cost of processing an eCheck is often significantly lower than a paper check and much lower than international wire transfer fees.

When is an eCheck the best payment method for a B2B transaction?

In a sense, all payment methods have the same destination—the supplier’s bank account—but factors like the transfer timing and the processing fees depend on the type of the electronic transaction. Applying the same payment method across all your suppliers—from large vendors to the occasional freelancer and other payees—makes your accounts payable workflow inefficient. You’ll save on transaction processing costs and align your cash flow with invoices when you apply a payment method that’s best suited for the supplier and your business situation.

Issuing an electronic check for an international B2B payment is ideal when the payee is a business or an individual that doesn’t require immediate remittance or where the payment amount is not large enough to warrant a wire transfer or paper check.

The way these checks are processed depends on the bank destination of the payee—if the recipient’s bank account is the U.S., eChecks are electronically transferred through the US-based ACH network; if the recipient’s account is overseas, eChecks payments are processed as international local bank transfers. Each country has its own transfer network and different rules to process the funds.

Do you have a payee who occasionally submits an invoice for services rendered, like the occasional freelancer called in for special projects at your company? Those once-in-a-while transactions make eCheck payment processing handy. When issuing an eCheck, you’ll deliver the payment faster to the freelancer, and in turn, the freelancer has quicker access to the funds compared to getting a paper check in the mail.

Virtually any payee—including suppliers, publishers, and affiliates—with a bank account can accept an electronic check as a B2B payment. The payee would need the assistance of a bank or an ACH processor to take funds via the ACH network.

Want to disburse global eChecks? Here’s why automation makes it safer

Data security is often top of mind when businesses disburse electronic check payments abroad. Transferring funds via an electronic network involves several moving parts, such as ensuring compliance with complex financial regulations, identifying country-specific banking requirements, and securing the transmission of sensitive data. Navigating this complexity while still keeping up with business growth requires the help of automation. Sorting and reconciling eCheck disbursements boils down to data processing, a function that automation handles with ease. Here are three ways automation ensures that cross-border payments are disbursed promptly, accurately, and securely, and, in turn, empowers companies to put their focus on identifying opportunities for global growth.

Automation applies the latest security standards to every electronic funds transfer

Data transmission technology is continually updated with the latest encryption tools to ensure data privacy and protection, but with all the news headlines warning about fraud and identity theft online, it’s natural for companies to continue worry about sending sensitive financial information electronically, especially when the payee’s destination is overseas.

Automation ensures that financial data transmission of cross-border payments complies with the latest security standards around the world. Without automation, companies would have to rely on manual efforts to stay up-to-date and remain compliant with financial regulations, which would slow down payment workflows as operations scale. But automation technology in cloud-based financial software ensures that the latest encryption and security standards are being applied to data transmissions, empowering companies to follow best practices in data encryption on a global scale without additional manpower.

Automation accurately identifies electronic format requirements

In the United States, money electronically transfers bank to bank via the Automated Clearing House (ACH) network. Each country has their ACH-like network for electronically transferring money. So when a payee’s account is overseas, eChecks are processed as international local bank transfers. Each country has its transfer network and different banking rules.

Automation of data makes the cross-border payment process more secure because it eliminates costly downtime by quickly and accurately pulling the necessary data in the format that’s compatible with the payee’s bank account. So let’s say that you need to disburse an electronic check to a payee in India, a country that has multiple local bank transfer networks. The automation feature in a cloud-based financial software can automatically detect the correct India-based local bank transfer for the payment. If this task were performed manually, then payment distribution would be delayed because there needs to be time to accurately identify the necessary data and ensure the security of data information transfer.

Automation ensures compliance with international regulations

Disbursing remittances on a global scale involves more than the transaction amounts and bank account numbers. Disbursements must also comply with international regulations that combat fraud. Getting tangled up in manually sorting out suspicious activity affects the ability to quickly scale operations with confidence, but moving forward without reconciling red flags puts companies at risk for hefty fines and stiff penalties.

Consider this: companies are obligated to follow the guidelines set by the Office of Foreign Assets Control (OFAC), a regulatory agency that enforces economic and trade sections against specific foreign countries, banks or individuals based on US foreign policy. Automation tools like a built-in OFAC sanction screening effortlessly verify names and addresses of payees against the OFAC database. Essentially, automation mitigates the risk of fraud because it can analyze several data points quickly and accurately, alerting companies of suspicious activity like duplicate payments or multiple accounts.

Companies seeking to operate on a global scale must integrate their operations into existing country-specific financial regulations and banking processes. In other words, companies must ensure that their accounts payable processes can navigate the complexity of global regulations. Manually auditing and reconciling disbursements increases the risk for suspicious activity to go undetected, but automation gives peace of mind. Payment software like Tipalti transforms manual tasks—which are prone to risks and inefficiencies—into automated, streamlined processes that are nimble and secure. From processing transactions with the latest security standards to identifying the optimal disbursement method specific to a payee’s location, automation does all that and more. Simply put, automation doesn’t let complex financial systems get in the way of business growth; automation makes accounts payable process streamlined and secure, empowering global businesses to truly operate without borders.  

How Tipalti can help

When more businesses automating their account payable workflow, access to multiple payment methods is among the most immediate benefits. Payment management software like Tipalti makes it possible for businesses to expand their remittance options with electronic fund transfers like eChecks, enabling companies to cater to the payment preference of their payees, improve the cash management, and more.

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