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Pros and Cons of Direct Deposit

Man holding piggy bank to demonstrate the pros and cons of direct deposit.To process payroll for employees, employers have several options beside paychecks. One option is direct deposit, in which an employee’s pay is electronically transferred from the employer’s account to the employee’s account.

Employees may prefer the convenience and advantages of direct deposit, with quick access to cash, fewer trips to the bank, and the option to deposit funds in several accounts. For employers, direct deposit also has advantages. Direct deposit can offer a paperless way for employers to pay their employees from anywhere. With the advent of employee self-serve software, employers can give employees direct access to their direct deposit information, payroll history, and pay stubs.

What Needs to Be In Place for Direct Deposit?

However, directly depositing compensation does require some work on the part of both parties, and the pros and cons should be fully considered. Some employees may embrace the idea, but others may prefer a paper check to handle on payday. Can employers make direct deposit mandatory? Some employees may consider it a hassle or worry about security of their financial data. If you do make direct deposit mandatory, be sure to follow your state’s laws. Also, to be part of the employer’s direct deposit program, employees must first enroll and authorize the transaction, providing their account numbers and bank routing numbers in a timely manner.

Once the employee opts for direct deposit and completes the paperwork, the transaction does not happen automatically. The employer must have some means to transmit the payment information to their own bank and to the employee’s banking institution. Options available to the employer may depend on the type of payroll processing they use and the requirements of their bank. Banks may offer customers a web form or other means to transmit the payroll data.

Employers using payroll software programs may have a NACHA file available, a text file containing specific information for directly depositing funds, which payroll customers upload to their bank according to the bank’s specifications. From there, the amounts are electronically transferred to the employees’ banking accounts, again, according to the bank’s procedures. This process will repeat with each payroll run.

Employees will probably ask: when do direct deposits post? Let them know that direct deposit should be deposited to their bank accounts the same pay date that they’d normally expect a paper check.

Finally, some banks may charge set-up and transaction fees for direct deposit service, which may be costly. Employers should inquire about these costs before offering this payroll option to employees.

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