Traditionally, if you kept your money in a checking account, you would write a paper check any time you wanted to pay for something. The check recipient could then present it to their bank to be processed and credited in their account. It often took a week or so before the process was complete. Electronic checks work in the same general manner, but much faster. Both types have certain advantages and disadvantages.
Paper Check Basics
A paper check is literally a piece of paper that contains the account holder’s information, including name, address, and often phone and driver’s license numbers. The check is also printed with the bank’s name, address and phone number, and across the bottom is a series of numbers that includes the routing number, which sends the check to the proper bank, and the account number, which makes sure that the money comes from the right account. The check is either filled out by hand or machine to show the name of the recipient, the date of issue, the exact amount of the check, both numerically and in words, the signature of the account holder and an optional memo line where the signer can indicate what the purpose of the check. This check is given to the payee, who then endorses it on the back and deposits it into his bank.
Electronic Check Basics
An electronic check can be created in several ways. Many merchants, especially some of the large discount stores, will take your paper check and run it through a reader where your account information and the amount of purchase are immediately transmitted to your bank electronically. The funds are removed or flagged for removal right away, and the paper check is returned to you before you leave the checkout counter. Businesses that accept electronic checks don’t necessarily need to receive a physical check, but can create one using the customer’s bank information, as long as the customer gives permission over the phone, by fax or via the Internet.
Paper Check Pros and Cons
People who rely on paper checks must keep track of their bank accounts, always keeping a record of each check and a running total of the account balance. If you make a mistake, such as forgetting to write down a check, it is easy to think you have more money than you really do and end up writing more checks than you can afford. This catches up with you when all of your checks come through and may cause large overdraft fees. Some people don’t mind keeping track and they like issuing checks in their own handwriting, because there is no question about unauthorized withdrawals. Most banks no longer return these checks to customers, but they do maintain electronic images of each check. One negative aspect of paper checks, besides the length of time they take to process, is that there is no way to know who handles the checks, and it is possible for account information to fall into the wrong hands.
Electronic Check Pros and Cons
Electronic checks are processed much faster than paper checks. This is good, except for those people that count on writing a check a few days before the money is actually in their accounts. Since electronic checks require that the money actually be in the account at the time the check is issued, it is far better for merchants since the number of bad checks is drastically reduced. Electronic checks are also much cheaper to process, since there are no printing, mailing or handling costs. Since many businesses can accept electronic checks over the phone, it is easier for customers to make payments on time, benefiting both the customer and the business. Electronic deposit is also more secure than paper, since recipients don’t need to worry about lost or stolen checks.
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- Federal Trade Commission: Facts for Consumers: Electronic Check Conversion
- U.S. Department of the Treasury Financial Management Service: U.S. Treasury to "Retire" Paper Check
- Federal Trade Commission: Facts for Consumers: Electronic Banking
- Federal Trade Commission: Facts for Consumers: Check 21