An important part of any business is how employees receive wages. When there are several options, it’s up to the employer to decide which one they will offer. Two popular paperless payment methods are direct deposit and paycards, the latter of which is also known as payroll cards. There are pros and cons to both payroll cards and direct deposits, and key details about both methods will help you determine whether payroll cards or direct deposit is right for your business and employees.
Let’s start with the basics.
Direct deposit is an electronic transfer payment made directly from an employer’s bank account to an employee’s savings or checking account for net wages earned. Direct deposit payments are governed by the National Automated Clearing House Association, a nonprofit that oversees the ACH network and other areas of electronic payments.
A paycard is a prepaid card offered by an employer to pay an employee’s net wages. Paycards function like a debit card, with the employer submitting wages via routing number and account number. [Read related article: What Is a Paycard?]
Cardholders can withdraw cash and make a balance inquiry, though these requests can incur fees if used too often or not often enough. Paycards are regulated by state laws, so you might have an additional factors to consider depending on your state. This can be a positive, as some states are making efforts to reduce fees that affect employees.
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There are various reasons an employee or employer might favor one method over the other. Direct deposit requires the employee to have a savings or checking account to deposit funds, while a paycard is simply a prepaid, reloadable card that requires no bank account. However, direct deposit allows an employee to divide their paycheck into several accounts, whereas with paycards, a net wage is transferred each pay period. This can limit the flexibility of distributing one’s wages, though some people find it convenient to host all wages in one easily accessible place.
For employers, direct deposit and paycards both provide the benefit of a paperless payroll distribution process. Both payment methods also allow an employer to electronically transfer funds if an employee is sick, on vacation or working remotely.
Regardless of how you decide to pay your employees, you still need to know how payroll works in terms of the time it takes to process and what information, such as pay rate and hours worked, is needed.
Direct deposit is the norm for U.S. workers. Many employees opt in, allowing their employers to deposit their net wages into their checking or savings account, or perhaps both.
A paycard is a prepaid, reloadable card that requires no bank account. A net wage is transferred to an employee’s card each pay period. While it’s not as common as direct deposit, it’s growing more popular each year.
An additional benefit of direct deposit and paycards is that you don’t have to pay for checks, ink and printing. However, this is a trade-off for other fees. Direct deposit employers pay a setup fee and a transaction fee for each time they deposit wages into an employee’s account. The payroll software or service provider may also charge a fee.
Paycard fees mostly affect employees. For example, some paycards charge a fee for ATM withdrawals, a point-of-sale fee each time the card is swiped, fees to check your balance, or inactivity fees.
Paycard fees are becoming more transparent, though. On April 1, 2019, the Consumer Financial Protection Bureau issued a rule that paycard providers must disclose these fees to cardholders.
If an employee requires a payroll advance, you should be able to still pay them using direct deposit or a paycard. However, depending on the cost structure of your payroll service, you may have to pay an additional fee for the extra processing.
Paycards have the same security rules as debit cards. If you report a stolen or lost paycard within two days, the Electronic Fund Transfer Act limits your liability to $50. The maximum loss increases to $500 if you report it more than two business days after noticing its loss but within 60 days after you receive your statement.
A cardholder is not liable if a stolen card number is used and a crime is reported within 60 days of the balance statement. One serious disadvantage of using a paycard is that service companies such as hotels, rental cars and airlines can place a temporary hold or “freeze” on a paycard for days or weeks.
From the employer side, however, paycards and direct deposit are relatively secure ways to pay employees – especially for those without a bank account, in the case of paycards.
Employees tend to prefer direct deposit, but as a business owner or employer, you might want to ask your employees about their preferred payment method. Ask them what benefits (convenience, low fees, etc.) matter the most to them. As part of this conversation, be open about your findings. Gathering this data and input from employees will hopefully make your choice an obvious and easy one for all parties involved.
Kayla Harrison contributed to the reporting and writing in this article.