30-Second Summary:

  • Using direct deposit for payments to employees and vendors is a convenient, paperless solution to payroll.

  • The U.S. federal government uses direct deposit for many benefits, bringing the process into the mainstream.

  • Employees and vendors now expect direct deposit for payments.

  • Businesses accrue costs with direct deposit transactions.

  • Not all of the costs associated with direct deposit are financial in nature.

Direct deposit, or electronic funds transfer (EFT), is a convenient, secure way for employees and vendors to receive payment. It allows businesses to make deposits directly into a bank account instead of issuing checks. Forbes reports that nearly 94% of U.S. workers now receive their paychecks via direct deposit.

Direct deposit as a payment option for vendors and employees is a time-saver, eliminates lost and delayed checks, and is reliable.

Advantages of Direct Deposit

The IRS issues tax refunds by direct deposit to taxpayers who request it, and the federal government requires 100% compliance for receipt of Social Security payments via electronic transfer. This federal mandate has brought direct deposit into the mainstream, and many businesses are now opting to give refunds, rebates, and other incentive payments through direct deposit. Whether posting to debit cards (such as Mastercard or Visa) or directly into a checking account or savings account, the paperless transfer of money is widely popular.

There are a lot of advantages to both the payees and payers for establishing ACH (automated clearing house) direct deposit.

  • It’s Easy. Filling out a direct deposit form and the required direct deposit information is handled by the recipient and is readily accessible by the business.
  • It’s Safe. No more lost or misplaced paychecks and the risk of fraud is minimal. There are also state and federal laws to protect employers and employees who use direct deposits.
  • It’s Convenient. Payees who rely on mobile apps or online banking for depositing checks no longer have to wait for checks to clear top have access to their money.
  • It’s a Timesaver. Payroll and the financial department can simply press a button to schedule and run payroll.

The Downside and Hidden Costs of Direct Deposit

 Like every automated process, however, the direct deposit process has some drawbacks. There are real costs associated with using a direct deposit as a business owner, and only some of those costs are monetary. Ease the transition for your financial team by understanding the issues and hidden costs of direct deposit.

  • Access to Bank Account When using direct deposit, the business owner, financial department, and IT staff could have access to confidential bank account information, account numbers, and routing numbers of vendors and employees. Specific security policies should be in place to protect you, your employees, and the vendors.
  • Bank Fees. Some banks and credit unions charge an implementation fee to set up direct deposit payments. These fees can reach up to $150. In addition, each transaction typically requires a fee of nearly $2, as well as a per-check fee. The National Federation of Independent Business, Inc. provides additional information regarding fees and charges.
  • Payroll is calendar-driven, but when you are cutting paper checks your staff can work into the wee hours, if needed, to complete the process. When using electronic payments, however, the processing is time-critical. To adhere to the strict deadlines imposed by financial institutions you need to run payroll according to their calendar. This may require you to run payroll up to two business days earlier than if you were using a different process.
  • One-Offs. Not all of your staff or vendors will opt to enroll in an automatic payment program. Make sure you have a process in place to manage any outliers.
  • Legal requirements. There are state and federal requirements in place to protect employees and employers using electronic payments. Laws include guidelines on participation, explanation of valid accounts, deposits must be made to institutions that indicate “Member FDIC,” etc. See the U.S. Electronic Fund Transfer Act (EFTA) or your state’s department of labor for more information.

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