What is Electronic Clearing Service (ECS) in Banking and How does it Work?

What is Electronic Clearing Service (ECS)?

Electronic Clearing Service (ECS) is a method of electronically transferring funds between bank accounts. ECS in banking is generally used by large organisations for repetitive bulk transactions, such as bank transfer of salaries, dividends, interest payments, loan repayments, and pensions to name a few.

Typically, the ECS transactions take place between a single user account (payer) and a large number of destination accounts (payees). However, the Electronic Clearing System can also be used to settle utility bills and other regular payments, such as equated monthly installments (EMIs) for loans and systematic investment plans (SIPs).

What are the Types of ECS?

Electronic Clearing Service is classified into two types – ECS credit and ECS debit:

1. ECS Credit

When a bank makes a credit to another bank account, say to pay a salary or dividends, it is known as ECS credit. In this case, a single bank account is debited and the money is credited to multiple other accounts.

Advantages of ECS Credit

• If you subscribe to this mandate, you will always receive your payments on a fixed date, thereby eliminating unpredictability
• Those who use the ECS credit mandate can save on administrative charges, such as cost of printing, cost of dispatch, cost of buying papers, etc.
• Subscribers of this facility can eliminate their need for visiting banks, thereby helping you save time and effort
• You can avoid administrative delays and processing bottlenecks, problems that are often associated with paper instruments

How Does ECS Credit System Work?

ECS Credit is typically used by institutions or organisations that have to make repetitive bank transfers to a large number of beneficiaries. However, note that an ECS subscriber must first register themselves with an approved clearing house, such as the National Automated Clearing House (NACH) and obtain approval or consent of the beneficiaries, who will receive payments through an ECS mandate. To register with a clearing house, the ECS user must first provide it with the account particulars of the beneficiaries. Usually a due date is fixed on which the clearing house debits the ECS subscriber’s bank account and transfers the amount to the various beneficiary accounts.

2. ECS Debit

ECS Debit is typically used by utility service providers, among others, to collect payments from a large number of customers, generally on a recurring basis. Once an ECS Debit mandate is set up, the payee can receive payments on a fixed date automatically. It is also convenient for the payers, which in this case, are mostly customers because they don’t have to manually make payments.

However, in order to use this facility, a user must provide their consent and authorise the payee to debit their accounts on a specified date on a periodic basis. Once the ECS mandate or authorisation is provided, the payee can use the ECS system to transfer money from the customer’s account to their own bank accounts.

Advantages of ECS Debit

• ECS debit can help an user eliminate the hassle of actively tracking due dates or payment deadlines. Once set up, transactions happen automatically on or before the due date, thereby also helping the user avoid late payment fees or other forms of penalty
• It eliminates the need for maintaining physically tracking or delivering paper instruments, such as cheques, which saves both money and time
• ECS debit systems are highly secure and the transactions are always encrypted. This minimises chances of fraud
• For the recipient, it eliminates the need for tracking each payment individually as the system ensures that money is collected and transferred to the beneficiary account on a single date

How Does ECS Debit System Work?

The ECS user (typically a business or merchant) must obtain a formal consent and bank account particulars of their customers, which is known as an ECS mandate. Once the mandate is received, the ECS user submits a formal request for transfer of funds from the payer’s bank account through a clearing house. The ECS user i.e. the merchant must submit the customer’s bank account details, formal consent, amount to be debited, and other relevant details. The bank then processes the request and debits the money from the payer’s bank account. The money is then credited to the ECS user’s bank account through the clearing system and both the parties are notified about the transaction.

How Does ECS Work?

When an ECS mandate is issued by a payer, which could be a customer, the mandate i.e. their consent, along with their account details, are passed on to a clearing house. The clearing house is expected to debit the said amount on a specified date from the payer’s bank account and credit it to the beneficiary account. The transfer of funds happens electronically in bulk.

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Types of Electronic Clearing Service (ECS) Based on Location

ECS can be broadly categorised into three types based on location:

1. Local ECS

The RBI operates 81 local ECS centres throughout India

2. Regional ECS

The RBI operates regional ECS at 9 locations across the country

3. National ECS

It is a central unit located in Mumbai, India

ECS Charges That You Should Know About

The Reserve Bank of India (RBI) has regulated that a sponsor bank must pay the transaction fees. The destination banks are mandated to provide free Electronic Clearing Service facility to the beneficiary accounts. Therefore, one will not be charged any additional fees as a recipient.

What are the Advantages of ECS?

1. For Financial Institutions

1. Paperwork has been reduced significantly as a result of ECS.
2. Once the Electronic Clearing Service is activated, all banks need to do is match key details, such as name and account number and then credit the amount.
3. The process is aborted if the customer’s details do not match.
4. Every transaction gets recorded..

2. For Customers

1. The sum is transferred within 3-4 working days.
2. There is no need to visit a bank physically and sign monthly cheques or issue other paper instruments to pay the dues.
3. The possibility of fraud has been greatly reduced since ECS systems use encrypted data.

3. For Organisations and Institutions

1. Businesses and large institutions often need to make recurring payments to a large group of people. The Electronic Clearing Service (ECS) ensures that the transfer is completed in a timely and seamless manner.
2. Organisations can save big on printing, delivery charges, and other costs associated with paper-based payment systems.

How to Stop ECS Debits?

If you want to stop Electronic Clearing Service (ECS) payments, you must first notify the financial institution. Based on the format prescribed by the merchant or their bank, you will have to submit a written application, along with supporting documents, if required. You must inform your own bank about your decision as well so that your account is no longer debited through ECS.

How to Avail of the ECS Mandate?

To set up an ECS mandate, contact your bank and complete the following steps:

1. The bank will give an ECS mandate form that must be completed. By filling up the form, formal consent to the bank to debit a fixed amount from your account periodically on a specified date and transfer it to the beneficiary account.
2. The Electronic Clearing System (ECS) mandate form will have relevant information, such as bank account, name of the payee and the payer, the date and frequency at which the debit must happen, etc.
3. You can also set a maximum limit beyond which your account cannot be debited for a particular ECS mandate.
4. After each transaction, the bank will send you an SMS to notify you about the transaction details.

Things to Consider While Using ECS

1. Maintain sufficient balance in your bank account before setting up an ECS mandate to avoid penalties.
2. Make sure to check your bank statement to ensure that there is no inconsistency between the actual bill and the payment debited.
3. You can set up a limit for your ECS debit. Any request for fund transfer exceeding this limit will be automatically rejected.

What is the Difference between NACH and ECS?

Final Word

Electronic Clearing Service (ECS) allows automatic and direct transfer of funds from one account to multiple other accounts – an extremely convenient and efficient way to collect recurring payments in bulk.

ECS can be used for any type of bulk payment, such as interest, pension, dividend, salary, or recurring monthly bills. In addition, by using Electronic Clearing Service, an user can set up auto-pay for insurance premiums, loan repayments, or mutual fund SIPs.

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