Digital checking payment system
Electronic checks that debit bank accounts.
Learning Objectives
- Define a digital checking payment system.
- Explain how e-checks debit a bank account directly.
- Identify the role of EBPP and services like Dwolla.
- Compare digital checking with card-based and stored value systems.
Explanation
A digital checking payment system lets you pay online by directly debiting your bank account with an electronic cheque, instead of using a credit card.
A digital checking payment system extends the traditional checking account to the online environment by enabling electronic cheques (e-checks) that debit the consumer's bank account directly. This bypasses the credit card network and its associated fees, settling payments through bank-to-bank transfer mechanisms such as the Automated Clearing House (ACH).
Electronic Billing Presentment and Payment (EBPP) systems are a major application of digital checking. EBPP systems enable the online delivery and payment of monthly bills, allowing consumers to view bills electronically and pay them through electronic funds transfers from bank or credit card accounts. In 2007, for the first time, the number of bill payments made online exceeded the number of physical checks written.
There are four EBPP business models: online banking, biller-direct, mobile, and consolidator. In the online banking model, the consumer's bank presents and pays bills. In the biller-direct model, the consumer visits each biller's site. The consolidator model aggregates bills from multiple billers at a single site. The mobile model extends EBPP to smartphones.
Dwolla is an example of a cash-based digital checking network that bypasses the credit card network and connects directly into a bank account. It has its own network that bypasses the ACH, the traditional system for processing financial transactions in the United States. Stripe is another company providing alternative payment infrastructure, focused on simplifying merchant-side credit card processing.
Key Points & Important Terms
Key Points
- •Digital checking extends paper checks to the online environment via e-checks.
- •E-checks debit bank accounts directly, bypassing the credit card network.
- •EBPP systems enable online delivery and payment of monthly bills.
- •Four EBPP models: online banking, biller-direct, consolidator, mobile.
- •In 2007, online bill payments first exceeded physical checks written.
- •Dwolla is a cash-based digital checking network bypassing ACH.
Important Terms
- Digital checking payment system
- An online payment system that debits a consumer's bank account via electronic cheque.
- Electronic cheque (e-check)
- A digital version of a paper check that debits a bank account directly.
- EBPP
- Electronic Billing Presentment and Payment — systems for online delivery and payment of monthly bills.
- ACH
- Automated Clearing House — the traditional US system for processing bank-to-bank financial transactions.
- Dwolla
- A cash-based digital checking network that bypasses the credit card network and connects directly to bank accounts.