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 of the most popular payment methods are direct deposit and paycards, also known as payroll cards. Here are some details about both methods that will help you determine which is right for you and your business.
Direct deposit vs. paycards
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. A paycard is a prepaid card offered by an employer to pay an employee's net wages. [Related article: What is a Paycard?]
According to The Balance, direct deposit payments are governed by the National Automated Clearing House Association (NACHA), a nonprofit that oversees the ACH network and other areas of electronic payments. Paycards are regulated by state laws.
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Pros and cons of direct deposit and paycards for employees and employers
There are various reasons why 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. A paycard is simply a prepaid, reloadable card that requires no bank account. Direct deposit allows an employee to divide their paycheck into several accounts, whereas with paycards, a net wage is transferred each pay period.
For employers, direct deposit and paycards both provide a paperless payroll distribution process. Both payment methods also allow an employer to electronically transfer funds whether an employee is sick, on vacation or works remotely.
Watch out for fees
Using both payment methods eliminates paying for checks, ink and printing costs. However, there are fees involved, no matter which method you use. 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.
With paycards, both employees and their employers pay fees. For instance, some paycards charge a fee for ATM withdrawals, 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).
Though fees are involved with each payment method, DCR Strategies, a financial services company that provides prepaid cards, reports in their article "Direct Deposit vs. Payroll Prepaid Cards" that paycards have cheaper fees and are more transparent about them.
"Banking fees range from $218 to $314 annually for keeping a checking account," the company explains. "By comparison, prepaid card fees range from $76 to $261 annually when cardholders use direct deposit to their prepaid card. Without direct deposit, the fees range from $184 to $380."
Theft and fraud
When it comes to theft and fraud, paycards are governed by the same rules as debit cards. According to Debt.org, 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 some service companies (hotels, rental cars, airlines, etc.) place a temporary hold or "freeze" on a card for days or weeks.
The benefits of direct deposit for employees
Direct deposit is the norm for most U.S. workers. Many have opted in, allowing their employers to deposit their net wages into their checking or savings account, or perhaps both.
For employees, some of the benefits of participating in a direct deposit program include the following:
- Because it is an electronic transfer, funds deposited to their accounts are available almost immediately.
- Direct deposit bypasses the risk of theft and fraud, unlike a lost or stolen paycard.
- Employees do not have to pay fees to have their check electronically deposited into their account or to access their funds.
- It saves time and enhances productivity. Employees don't have to interrupt their work day to run to the bank to deposit their check.
Direct deposit still dominates
According to NACHA, 82 percent of U.S. workers are paid using direct deposit, but paycards are growing in popularity. A 2017 study by Aite Group reported $42 billion in gross dollar volume was loaded onto 5.9 million active payroll cards. Those numbers are projected to climb to $60 billion on 8.4 million paycards by 2022.
If you're considering making the switch from paper checks to electronic payments, there are a few things to consider. One, check with your state to see what laws apply to direct deposit and paycards. Next, check with your bank and find out what the regulations are. It's also wise to check with both your bank and payroll provider to see what fees, if any, they may charge.
If you're considering using paycards, talk with multiple providers and ask them to spell out the terms and conditions, including fees. Finally, ask your employees about which method they would prefer. Ask them what features (convenience, low fees, etc.) matter the most to them and be open about your findings. Gathering this data and getting input from employees will make your choice an easy one.
Additional reporting by Nicole-Meade Franklin.