Eight Benefits of Direct Deposit for Employers and Employees

Gone are the days where employees expect a paper check on payday. For most of the workforce, electronic payments are now a preferred delivery option. Why use direct deposit? By sending wages to an employee's bank account, companies can implement a safe and secure payment method that gets workers their earnings quickly. Understanding the benefits of this option in more depth can help you determine if the process is right for you and your staff.

What Is Direct Deposit?

Using an electronic form of funds transfer, employers can transfer monetary wages directly into the employee's checking or savings account. Employers and employees often choose this payment method because of its convenience, security, and efficiency — benefits that are especially appreciated as individuals and businesses continue to expand the use of electronic payments.

What Are the Pros and Cons of Using Direct Deposit?

Rather than tracking down an employee to hand them a physical check, sending money to their bank account can provide a more efficient and satisfactory means of payment. As electronic payment networks improve and become a more accepted means of funds transfer, more employees have come to expect a direct deposit option from their employers. Direct deposit offers multiple advantages for your business and your employees, along with some disadvantages to be aware of as well. Before adding a new form of payroll distribution, you should evaluate the pros and cons of direct deposit for your business.

Benefits of Direct Deposit for Employers

There are many reasons to consider offering direct deposit, including the need to deliver wages to remote workers or those working in non-centralized locations. Direct deposit offers a number of benefits over paper checks that both employers and employees can appreciate. Employers should consider the following advantages of direct deposit:

• Reduces the time spent on certain payroll-related tasks: One of the more immediate benefits of direct deposit is that it can reduce the time you spend preparing payroll. Writing, signing, and folding the checks, stuffing them into envelopes, and delivering the checks to employees can be labor-intensive. The time saved can become significant, especially when multiplied by the number of pay cycles in a year.
• Saves money by not writing, printing, and mailing checks: You can further reduce payroll costs as checks and envelopes are no longer required. Direct deposit can also help a business save money by:
  • Reducing costs associated with reissuing lost or stolen checks, stopping payment charges that may be levied by a bank, and investigating when a check has gone missing.
  • Realizing savings in absenteeism since some employees may need to take extended breaks to deposit or cash their checks when bank hours coincide with work hours.
• Helps ensure employees are paid on time: When holidays or payroll staff vacation time falls during payroll crunch time, your company may have difficulty processing checks on time. This could result in a late pay, or an extra cost associated with the additional resources needed to process payroll before the check date. With advancements in electronic payment technology like same-day ACH, your business can have more control over your funds.
• Environmental responsibility: Having a paperless payroll system is environmentally friendly because it reduces a company's carbon footprint. The green impact can be further expanded by offering online pay statements that can be available 24/7.
• Increases safety and security: Why is direct deposit safe? Paying employees electronically avoids the risk of stolen checks and forged signatures, which are a common source of identity theft and fraud. The use of electronic deposits can increase the protection of both the employee's personal information and the employer's account information.

Please note, employers that use a bank to facilitate their direct deposit may still need to print non-negotiable check stubs for their employees.

Benefits of Direct Deposit for Employees

Aside from a general preference for electronic payments, the benefits of direct deposit for employees are far-reaching and can even have a positive impact on their overall health and wellness. Your employees will be pleased that:

• They don't have to be in the office to get paid: If an employee works remotely, is out of town, or takes a sick day, they can be assured the deposit will be made. They won't have to wait to receive the check in the mail, deposit it in the bank, and wait for it to clear. Wages can be made immediately accessible on the check date.
• They don't need to worry about asking to re-issue lost or stolen checks: With no paper check, direct deposit eliminates wages being stolen or lost. It also removes the risk of a check getting damaged or delayed in the mail.
• They can control where their money goes: Having control over where the paycheck goes is another way direct deposit provides flexibility and convenience for employees. They can direct funds to go toward a savings account, emergency funds, or other financial goal.

Potential Disadvantages of Direct Deposit

In some cases, direct deposit might not meet the needs of your employees. Before making a total pivot away from paper checks, consider the following potential disadvantages of direct deposit.

• Some employees prefer paper checks: Privacy concerns can make employees reluctant to share bank account information with their employers. If a portion of your workforce seems unwilling to supply the required information for direct deposit, you may want to provide an option for paper checks rather than making electronic delivery mandatory.
• Data management needs: Managing direct deposit should make running payroll easier, not more of a challenge. Before you switch to electronic payments, make sure you have the infrastructure to manage and store the essential information. Direct deposit may also require a stricter timeline for payroll processing. If your employees seem lax about submitting time cards or other data needed to process pay, it could be difficult to catch them up through electronic payments.
• Added costs: Banks may charge fees for processing direct deposit payments. Depending on existing banking relationships, it may not make sense for smaller companies with fewer employees to add the cost of direct deposit. However, any direct deposit processing fees should be weighed against the cost of issuing paper checks to determine which method provides the most savings.
• Data security risks: Companies using direct deposit need to implement enhanced security measures to avoid information theft. Before you begin transmitting payments electronically, take time to evaluate your current data security and determine if you can safely handle the new process.

Split-To-Save Option for Direct Deposit

If your company offers direct deposit of paychecks, one way to help your employees establish a saving habit is to offer a split-to-save feature. Under a split direct deposit, employees can direct a fixed portion or a percentage of their paycheck each pay period into a designated account.

ACH vs. Direct Deposit

The Automated Clearing House (ACH) is a payment system used to transfer funds electronically between bank accounts. While ACH can be used to process direct deposit, that's not the system's entire capability. Across the country, businesses use ACH every day to fulfill a wide range of electronic banking transactions in addition to the direct deposit of paychecks. Companies use ACH to both deposit and withdrawal funds from bank accounts. Individuals may also transmit funds for online payments using ACH.

Direct Deposit vs. Check

Direct deposit involves electronic transmission of funds while the receipt of a paper check does not provide employees with an immediate payment. Employees must endorse and deposit a physical check in their bank account, and they will not have access to the related funds until the check clears.

Paycard vs. Direct Deposit

The paycard, or payroll card, offers an alternative to direct deposit and is similar to a debit card. On paydays, an employer loads workers' cards with their wages for that pay period. Employees can use the paycard as they would a debit card to withdraw cash from an ATM or a bank, use it with merchants to make purchases, or pay their bills.

Paycards can make direct deposit available to everyone in a company, even those without bank accounts. They may also be a preferred option for employees who wish to avoid fees at check-cashing stores.

Similar to direct deposit, the use of paycards reduces the printing and delivery of paper checks, which can save time and money. Additionally, many paycard programs offer employees an online portal, so they can manage all aspects of the program from the safety of their home. But do your research before deciding on a paycard program. You'll want to work with a trusted vendor who best meets the needs of your company and your employees.

Ready To Implement Direct Deposit for Your Employees?

Direct deposit is an effective way for employees to receive their earned wages safely and securely, without interruptions. As employees and businesses become increasingly reliant on electronic payments, the demand for direct deposit payroll continues to grow. If you need help setting up direct deposits, Paychex has the experience and knowledge to guide you through the process.