When it comes to paying your employees, are you better off using direct deposit or the increasingly popular paycard?
Direct deposit vs. paycards
Let's begin with a brief explanation of the differences between direct deposit and paycards – also known as payroll cards. 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. Direct deposit payments are governed by the National Automated Clearing House Association (NACHA), a not for profit that oversees the ACH network and other areas of electronic payments. Paycards are regulated by state laws.
Pros and Cons of direct deposit and paycards for employees and employers
There are distinct pros and cons with each payment method, and employees and employers have their own reasons for favoring one form over the other. Direct deposit requires the employee to have a savings or checking account in order to deposit funds. A paycard is just a prepaid, reloadable card that requires no bank account. Direct deposit allows your employees to divide their paycheck into several accounts, whereas with paycards, a net wage is transferred each pay period.
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For employers, direct deposit and paycards both provide a paperless payroll distribution process. And both 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. Your payroll software or service provider may also charge a fee.
With paycards, employers pay fees as well, but there can be lots of fees that gobble up employees' paychecks. 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).
Theft and fraud
When it comes to theft and fraud, paycards are governed by the same rules as debit cards. If a card is stolen, the Electronic Fund Transfer Act limits your liability to $50 – if you report the theft within two days of discovering the loss. The maximum loss jumps to $500 though 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 your 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.
- There are no fees employees pay 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 workday 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. As reported earlier by Business News Daily, a study earlier this year 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. As an employer, you can't require your employees to be paid solely by direct deposit or paycard.
If you're considering making the switch from paper checks to electronic payments, there are a few things to consider first. 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 and what, if any fees, you may be charged. It's also wise to check with your payroll provider to see if they charge fees, too.
If you're considering using paycards, talk with multiple providers and ask them to spell out the terms and conditions and all of the fees that you and your employees will pay. 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 with them about your findings, including fees. Gathering all of this data and getting input from employees will make your choice an easy one.