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.
What is direct deposit?
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.
What is a paycard?
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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Pros and cons of direct deposit and paycards for employees and employers
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.
Direct deposit pros and cons
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.
- Efficiency: Because this is an electronic transfer, funds deposited to employees' accounts are available almost immediately. Direct deposit also saves time and enhances productivity on both ends. Employees don't have to interrupt their workday to run to the bank to deposit their check, while employers don't waste time printing and sending out checks.
- Decreased risk of theft and fraud: Since it's electronic, direct deposit reduces the risk of theft and fraud, whereas a paycard can be lost or stolen.
- Low fees for employees: Employees do not have to pay fees to have their check electronically deposited into their account or to access their funds.
- Paperless method: Direct deposit is a paperless payroll distribution process, allowing an employer to electronically transfer funds whether an employee is sick, on vacation or working remotely.
- Flexibility: Direct deposit is a more flexible option, as it allows an employee to divide their paycheck into several accounts. For instance, they might want half of their paycheck to be deposited into their checking account, while the other half goes into their savings account.
High fees for employers: With direct deposit, employers pay a setup fee in addition to a transaction fee each time they deposit wages into an employee's account. The payroll software or service provider may also charge a fee.
Lower accessibility: Direct deposit requires the employee to have a savings or checking account. Some employees might not even have a bank account, making this payment option completely inaccessible to them.
- Overdraft: If an employee makes a purchase that exceeds the funds in their account, they can get hit with a hefty overdraft fee.
Paycard pros and cons
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.
Paperless method: Like direct deposit, paycards allow for a seamless, paperless transfer of wages – no checks required.
Low risk of debt or financial liability: When it comes to theft and fraud, paycards are governed by the same rules as debit cards.
- Convenience: Paycards, similar to direct deposits, are convenient for both employers and employees. Employees do not need to cash checks or wait for funds to appear in their bank accounts, while employers do not need to send out paper checks to their workers, but simply load employees' wages onto their cards.
Fees for both employers and employees: With paycards, both employees and their employers pay fees. For instance, some paycards charge a fee for ATM withdrawals or a point-of-sale fee each time the card is swiped. Some even charge fees to check your balance or if you don't use your card within a set period of time (an inactivity fee). However, these fees tend to be lower than those associated with direct deposit and other payment methods.
- Frozen cards: One serious disadvantage of using a paycard is that some service companies (hotels, rental cars, airlines, etc.) place a temporary hold or "freeze" on a card for days or even weeks. If this is an employee's only means of payment (i.e., they do not have a bank account to withdraw from), they'll be out of luck when it comes to making any sort of payments.
Direct deposit and paycard fees
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.
Direct deposit and paycard theft and fraud
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.