Benefits of Direct Deposit: A Guide for Employers

The concept of giving and receiving money in return for work carried out has been around for thousands of years. In fact, some of the earliest records of ancient civilizations include wage data scribbled on sheets of papyrus. Over the past several decades, approaches and methods of paying employees have evolved significantly. In this article, we’ll explore how new thinking and technological advances are further changing the “state of pay” to the benefit of all parties.

Paper checks were the dominant method for paying employees for much of the 20th century. But the drawback of paper checks is that employers have to cut and manually distribute them, while employees need to go into a bank to deposit them. This all changed in the 1970s and 1980s with the advent of direct bank deposits and the invention of the ATM machine.

The direct deposit method was enabled by changes to banking laws and technology that allowed for money to be transferred directly from one financial institution to another. (Before this, all transfers went by check through a central clearinghouse, a process that took several days).

Direct deposits made it possible for employers to deposit their employees’ pay directly into their personal bank accounts in a matter of minutes. It eliminated the cost and administrative burden involved in printing, signing, and handing out checks.

As technology and thinking continue to evolve, new ways for allowing organizations to pay their employees even more quickly and conveniently are moving into the mainstream.

In 2018, ADP Research Institute® (ADPRI) surveyed both employers and employees about their changing attitudes toward pay. They found that people’s financial needs don’t necessarily match how they get paid. Many businesses still adhere to a very fixed pay schedule, where everyone is paid on the same day – regardless of their role or personal circumstances. Hourly wage earners, who make up a significant portion of the U.S. workforce, are typically paid weekly or bi-weekly.

The research revealed other notable findings, for example:

• Many people who don’t have significant savings have challenges meeting short-term unexpected financial needs.
• Employees care greatly about their money being secure and having access to their pay quickly.
• People also want to be able to see the details and easily access information about their pay.

Today, people’s financial needs don’t necessarily match how they get paid. Many businesses still adhere to a very fixed pay schedule, where everyone is paid on the same day – regardless of their role or personal circumstances.

Hourly wage earners, who make up a significant portion of the U.S. workforce, are typically paid weekly or bi-weekly. Approximately 80.5 million workers aged 16 and older in the United States are paid at hourly rates, representing 55.7% of all wage and salary workers. Among those paid by the hour, 81,000 workers earned exactly the prevailing federal minimum wage of $7.25 per hour.

Modern human capital management trends and thinking have ushered in a move towards greater employee customization and personalization when it comes to pay. Forward-looking businesses recognize the wisdom of offering their people a more flexible pay schedule.

However, for now, direct deposit remains the preferred means of paying employees for most businesses. While this may suit some employees, it’s not always a satisfactory arrangement for everyone on the payroll. So, what if there was a way for the traditional direct deposit method to co-exist with more creative and flexible payment arrangements?

Let’s take a closer look at the direct deposit method, understand its pros and cons for both employers and employees, and then explore the ways that businesses can use technology to operationalize “hybrid” payment structures.

Direct Deposit vs. Paper Checks: A Comparison

Let’s take a moment to compare and contrast direct deposit and paper checks as it relates to payroll.

Paper checks allow workers to have more privacy and control over their paychecks and keep their banking information private from their employers. Some employees won’t feel comfortable sharing this type of information.

Cost is also a factor. Opening a basic bank account can cost around $25 to $100, depending on the bank and account type. Giving employees the option to cash a paper check will avoid them needing to pay the fees associated with opening a bank account.

However, direct deposit is generally regarded as a better option than paper checks for the following reasons:

Safety

Direct deposit eliminates the risk of employees losing checks or having them stolen. They also needn’t carry large amounts of cash around after cashing a check.

Convenience

Because direct deposit supports automatic payments, employees don’t need to go to the bank to deposit or cash a check.

Lower Environmental Impact

Direct deposit eliminates the need for paper checks, envelopes, and other items associated with traditional payroll methods.

Benefits of Direct Deposit for Employers

Let’s begin by recapping the benefits of the direct deposit approach for employers:

Increased Payroll Efficiency

The direct deposit method saves payroll staff time (and the business money) on processing paper paychecks.

On-Time Payments

Direct bank deposits ensure that people receive their pay on the day it’s due – delays associated with physically distributing and cashing checks are eliminated.

Improved Payroll Security

Digital payment of wages can help a business securely process wages and gives them the ability to pay employees remotely, even over holidays or during disasters.

Benefits of Direct Deposit for Employees

Many employees prefer the direct deposit method as it comes with convenience and safety benefits; for example, they:

• Don’t have to go somewhere to cash their checks
• Don’t have to be in the office to get paid
• Never need to ask for lost or stolen checks to be re-issued
• Are able to control where their money goes

What Are the Potential Drawbacks of Direct Deposit?

There are some downsides to the direct deposit method for people that want and need faster, more convenient, and more regular access to their earned wages. What’s more, it’s not practical for the underbanked or unbanked sector of the population.

Additionally, lower-income workers and people living paycheck-to-paycheck can face emergencies, like car breakdowns or healthcare issues that can stretch finances until their next payday. To bridge the gap, they can be forced to borrow from family and friends or take short-term payday loans that come with high interest payments and fees that make them very expensive.

How Direct Deposit Works

Direct deposit is a way of transferring money electronically into an employee’s bank account. All direct deposits go through the Automated Clearing House (ACH), the network financial institutions use to transfer payments around the country.

To make a deposit, your payroll team will instruct your company’s bank to send your employee a payment. Your bank submits the information to ACH, which processes the transaction. The money is taken out of your bank account and transferred to your employee’s bank. The employee’s bank credits their account, and after a certain amount of time, the money is available for your employee to spend.

Setting Up Direct Deposit for Your Employees

You can set up direct deposit by asking your employees to fill out a direct deposit form. You’ll also need to obtain the following to abide by regulations and minimize your payroll risk:

• The routing number for the employee’s bank. This is a sequence of nine digits that identifies their bank.
• Their bank account number.
• Their Social Security number.
• A voided check.

The Best of Both Worlds

In recent years, more employers have started offering novel pay delivery options that utilize a pay card or debit card. With this approach, employees get their wages loaded on their card. They can use the card to pay bills online, transfer money to family or other third parties, and make ATM withdrawals.

The best pay card providers make it easy for people on the go to manage their funds from their smartphones. So, it’s as easy for people to manage their pay as it is to send a text message!

Earned Wage Access (EWA) – the concept of giving people access to money that they’ve already earned when they need it– is growing in popularity and can be enabled via the pay card approach. EWA allows employees to receive payments for the hours they’ve worked and tips they’re owed as and when they like – before their normal payday. They can access their pay as they need it – sometimes it might be part of their pay; other times, it might be all of it.

The best pay card providers also enrich their services with features to help people manage their finances better with tools that help them save and budget better. For example, employees can structure their pay so that a portion automatically goes into their savings, where they can even set up specific savings goals. These services can also allow people to track their spending to see if they’re meeting their budgets.

Employers are beginning to see the value in giving people greater choice as to when and how they’re paid. If people prefer direct deposits (or even paper checks), that’s OK, and they should still be able to get them. However, the growing sector of the workforce who prefer pay cards, digital accounts, and on-demand pay should also be recognized and supported.

Ultimately, this will create a more equitable, employee-centric pay ecosystem.

The Payactiv Option for Direct Deposit

Payactiv is on a mission to assist employees and employers to realize the benefits of on-demand pay and EWA while still enjoying the convenience of direct deposit.

Why it’s Good for Employees

If you’re an employee, you can look forward to the following benefits by using our pay card:

Get Paid In Real-Time

Get fast access to your money when you deposit to your Payactiv Visa® Card, use everywhere Visa® debit cards are accepted, pay bills directly from the app, and locate surcharge-free withdrawals at over 37,000 in-network MoneyPass® ATMs. With direct deposit:

• Get paid up to 2 days early¹
• Get government payments up to 4 days early
• Access wages earned anytime

Easily Send Money to a Friend

Splitting the check for lunch? You can send and receive money between you and other Payactiv Visa Card* cardholders.

• Add a phone number
• Receive and send funds
• Money moves in seconds

Spend Safely with Smart Guidance

Our mobile banking technology does the work, so you stay on track with spending and saving goals.

• Track spending habits at a glance
• Know what’s safe to spend
• Be alerted of low balances
• Auto transfer from earned wages

Grow your Savings for Rainy days and Big Dreams

• Automated insights on what’s possible to save
• See your savings grow with each paycheck
• Get financial advice for near- and long-term planning
• 1-1 phone service with trained financial coaches

Peace of Mind – Included

• FDIC insured through CBKC, member of FDIC
• Protected by Visa’s Zero Liability Protection²
• Lock lost or stolen cards
• 24/7/365 bilingual support
• Contactless payments with Tap-to-pay and through Apple Pay or Google Pay
• No cost to activate. No monthly maintenance fees or inactivity fees

Why it’s Good for Employers

Easily Issue Off-cycle Payments

Electronically disburse bonuses, expense reimbursements, and termination pay to employees’ pay cards. Payactiv provides a 2-day cash float.

Stand Out with On-Demand Pay

Today’s workforce prefers to work for employers that support their financial wellness. Our EWA program is free with direct deposit to Payactiv Visa Cards.

Easy Implementation

We work with you to ensure a successful plan and launch of our program.

Marketing Material

We prepare and provide customized materials to promote the program to your employees.

Compliant

We are payroll compliant in all 50 states, and use industry best practices.

Dedicated Account Manager

We offer tools and training to get the most value out of the program and a dedicated Account Manager.

Always-on Customer Support

We provide 24/7/365 customer support in English and Spanish by toll-free phone and online live chat.

Safe and Secure

Our data is encrypted, SOC 2 compliant, and we have ISO 27001 controls in place. We don’t store sensitive employee data.

Get in Touch

At Payactiv, we believe that a future of pay that’s faster, digital, convenient, and connected is already here. And your employees want and welcome this new reality. Now’s your chance to give them what they need.Learn more about how Payactiv can help your business and your employees, or book your demo now.

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