Technology has revolutionized the way people pay each other. Instead of handing over cash or swiping a credit card, there are now electronic options. For 82 percent of working U.S. employees, this extends to the way they get paid, with most paychecks now being directly deposited into bank accounts. Setting up direct deposit is now easier than ever, whether you’re supplying the information to your employer or you’re the business paying your employees.
What Is Direct Deposit?
Direct deposit refers to the process of putting money into a person’s bank account electronically. Although there are now many ways to move money from one account to another, financial institutions define direct deposit as money deposited by a corporation, government agency or retirement benefits administrator. They do not include personal payment transfers under this definition, although the technology operates in a similar manner. It also doesn’t include payment services like PayPal or Venmo.
In the U.S., direct deposit operates using an electronic network known as the Automated Clearing House. The Automated Clearing House network goes beyond employer payroll deposits, serving as the backbone of the many credit and debit card transactions that take place every day. Each year, the network moves more than $41 trillion electronically, for a total of more than 24 billion transactions. The network is limited to the U.S., but other countries have their own widespread electronic payment systems.
How Does Direct Deposit Work?
Direct deposit starts with the setup. The payer gathers payee information, including bank account and routing numbers, then submits that information. The payer must also notify the bank of how much to pay and when. Generally, this is done through software that communicates payroll information for a business in batches. On the designated date, the financial institution submits the request to make the payment to the Automated Clearing House, allowing at least two days for the payment to go through.
The Federal Reserve sends the information to the payee’s bank based on the data submitted by the payer’s bank. Although the bank has its own established policies, it usually will ensure the funds are in the payee’s account on the designated date. Holidays and weekends can slow things down, which means most payers need to put policies in place to ensure extra time to process things.
Direct Deposit for Paychecks
When you start a new job, one of the first orders of business is to set up how you’ll get paid. Chances are, your employer will provide a direct deposit authorization form. For this, you’ll need your account number and routing number, which can be found on a personal check or deposit slip for your account. On the bottom of these documents, you’ll see the routing number listed first, followed by the account number. The final series of numbers will be the check number if you’re getting the information from a personal check, and those numbers won’t apply. In some cases, you’ll be asked to provide a copy of a check or deposit slip so that your employer can verify that the numbers you’ve provided are correct. If you provide a check, write “void” in large capital letters across the front of it so that it can’t be cashed if it becomes lost at some point.
If you’re one of a growing number of consumers that doesn’t have a checking account, you can get your savings account number and routing number from your bank. Things might get a little more complicated if your employer requires a voided check. You’ll need to explain the situation to your employer and double-check the numbers you provide to make sure there are no errors.
Direct Deposit for Businesses
For businesses hiring workers, the question becomes how to set up direct deposit for employees. Your financial institution should be able to help you with this, but you may find it easier to use software that manages everything for you. Solutions like Intuit Payroll walk you through setting up direct deposit for your business, letting you input parameters and issue virtual paychecks on a recurring basis. However, these services charge a fee, so be sure you build that into your budget before you go that route.
Whether you use software, a third-party provider or manage things manually, you’ll need to contact your financial institution to set things up on their end. The bank will work with you to get things set up and let you review the final file before paychecks are issued. Once you have that set up, you’ll need to have each employee complete a direct deposit form so that you can start making payments. If there is an employee or contractor without a bank account, you may have to come up with an alternate way to pay, such as a paper check or payment card.
Benefits of Direct Deposit
On the business side, the top benefit of direct deposit is that it saves money. According to the National Automated Clearing House Association, paper checks cost, on average, $1.22 per check to process. When you multiply that by the number of employees and pay periods you have each year, that can quickly add up. By going virtual, you’ll also cut back on the amount of paper you generate on an annual basis, benefiting the environment.
From an employee’s perspective, direct deposit offers a level of convenience paper-based checks never could. Instead of driving to the bank and waiting in line, they can just check their bank account on payday and make sure the money is there. Some banks also now offer free checking contingent on the account holder having paychecks deposited directly, since that generally provides somewhat steady cash flow.
Challenges of Direct Deposit
Although you’ll save money with direct deposit, there are also fees attached to it. You’ll pay a setup fee, usually ranging between $50 and $149, in addition to transaction fees. However, these fees usually save businesses significantly when compared to paper checks, so it’s important to look into the fees before making a move if cost is a factor.
Direct deposit can also be problematic for employees who don’t have bank accounts. If an employer mandates they be paid through direct deposit, an employee can be put in a difficult position. Direct deposit can also be a problem if an employee wants an advance on his paycheck. A direct deposit advance is possible, but not easy to find, which means some employees may seek out costly alternatives like payday loans.
Security is also a concern for any electronic transaction, including direct deposit. In fact, cybercriminals have begun using phishing to access the accounts of employees being paid through direct deposit. The employee receives an email notification directing them to log in to a site using their username and password. That information is then used to log in and redirect the funds to a different bank account. The employee is never alerted to the change and doesn’t even realize anything has happened until her paycheck doesn’t appear in her account.
To safeguard against this type of cybertheft, businesses should alert employees to these dangers, advising them to never log into a site after clicking on a link to it. Employers should also check the security policies of any third-party payroll providers they use, since employee data such as bank accounts and Social Security numbers may be crossing their systems on a regular basis.
International Direct Deposit
As workforces become increasingly global, businesses are finding that they have a need to pay workers outside of the U.S. These may be contractors or employees on the payroll, but either way, payment options are available. Unfortunately, the Automated Clearing House network is limited to the U.S., so you’ll have to set up a separate payment method for anyone you pay outside of the U.S. This is where a good payroll system can make a big difference since you can set things up to happen without your regular intervention.
There are multiple payment solutions, each having their own fees and limitations, so it’s important to research them all. If your employees are in Mexico or Brazil, for instance, Bitwage offers the lowest rates. For businesses with a payroll that exceeds $20,000 per month, though, services like Transpay or Payoneer will likely offer bigger cost savings than others. These services are designed to handle the batch payments that are an integral part of payroll processing.
Direct Deposit Failures
The best thing about direct deposit is that it usually works without fail. Employees don’t have to worry about a paycheck getting lost in the mail or misplacing it before they can deposit it. However, when direct deposits fail, they can be tricky to get back on track. The employer may be able to issue a paper check to get the employee paid right away, but they’ll also need to do what it takes to make sure payment happens reliably the next time. They’ll likely want to troubleshoot what caused the error in the first place and try to avoid it happening again.
If you’re a business owner dealing with a wayward direct deposit, start with your payroll processing software. Most direct deposit errors happen as a result of a miskeyed date. The system may also have been down at the time the deposit was supposed to go through, although that would probably affect more than just one of your deposits. If everything looks correct in your processing software, contact your bank to see if it was something on their end. Lastly, it could have been the employee’s bank, but the employee may need to make the call necessary to straighten that out.
Insufficient Account Funds
Just as employers needed to ensure they had enough money in the bank to cover all the payroll checks they wrote each pay period, they’ll need to monitor their bank balance before direct deposits go through. If the payer account runs out of money before payroll can be completely paid, direct deposits won’t go through. Although this isn’t the same as handing an employee a paper check that they deposit and it bounces, it can wreak havoc on your company payroll. It also creates an issue for the employees who were relying on that paycheck to be in their account that day, since they may have bills set to automatically pay. If they still write checks, those checks may bounce due to insufficient funds. If this happens more than once, an employee may begin to consider other employment options.
On the flip side, sometimes a business may find that the direct deposit that was supposed to go into an employee’s account didn’t go through. Often this can be because the employee provided the wrong account information initially. However, if the employee has been paid successfully previously through the same payroll system, it could be instead that the employee made a change to his account, making the initial deposit invalid. In those cases, it’s usually a matter of checking with the employee to see what the issue is.
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- CBN Waco
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- Finder.com: Alternatives to direct deposit advances
- Hubstaff: Best Ways To Pay Remote Employees
- LocalSYR: Cybercriminals targeting direct deposit accounts, FBI says
- Dominion Systems: TIPS TO TROUBLESHOOT YOUR EMPLOYEE'S MISSING DIRECT DEPOSIT PAYMENT
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Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.