What is a direct deposit: how it works and benefits explained

Imagine cutting down the hours – or even days – spent on payroll each pay period. Around 28% of businesses struggle with manual, inefficient payroll processes, often relying on mailing physical checks. These traditional methods increase operational costs and can cause delays in employee payments.

Direct deposit eliminates the need for physical mail, helping reduce delivery delays and the environmental impact associated with transporting and printing paper checks.¹ It’s clear that a more efficient approach can benefit both businesses and employees.

Direct deposit simplifies your payroll process, reducing administrative burden and ensuring employees are paid accurately and on time. By moving away from cash or paper-based methods, it offers a contactless, secure, and reliable way to send and receive funds.

Key takeaways:

• Direct deposit simplifies payroll and reduces manual workloads.

• It can also be used for paying commissions, reimbursing expenses, distributing benefits, and more.

• Airwallex enables local payouts in 200+ countries – avoiding the need for SWIFT in many cases, which can reduce costs and speed up international payments.

What is a direct deposit?

Direct deposit is a type of payment method. Direct deposit is a type of electronic transfer used for secure payments, allowing funds to move quickly and safely between accounts. It uses an electronic network to securely transfer funds from a payer’s bank account to a payee’s bank account. With direct deposit, funds are automatically credited to the recipient's account without manual intervention. Businesses often use it to pay employees, as it eliminates the need for traditional paper checks, making payroll processing faster and easier.

The specific network used for direct deposit can vary depending on the location of your business and your employees’ banks. For example, when sending funds within the US, a bank typically uses the Automated Clearing House (ACH) network for direct deposit transfers. In the UK, banks use Bacs Direct Credit. For international payments, the SWIFT network can be used; however, utilizing local payment networks may reduce fees and expedite delivery.

When setting up a direct deposit, the employer typically requires employees to provide their routing number and account number, which must be verified for accuracy to ensure successful electronic transfers. Employees may need to complete a direct deposit form, which can usually be obtained online or by visiting their financial institution, such as a bank or credit union. Required fields on the form are generally marked with a red asterisk, and employees should confirm all information before submitting. You designate the pay date, ensuring your employees receive their wages on time. This eliminates risks often associated with paper checks, such as delivery delays, lost or stolen checks, and manual human errors, including misspellings.

Since the funds are transferred and deposited electronically, they’re either credited to the employee’s bank account on payday or within one to two business days, depending on the employer’s payroll processing and the bank’s systems. Direct deposit can be sent to checking, savings, joint accounts, credit union accounts, or even prepaid debit cards, depending on the employee’s preference. This means employees don’t have to wait as long for the money to clear, as funds are deposited directly into the specified account.

Funds are typically available faster than with paper checks, as they are deposited directly for immediate or near-immediate access.

How direct deposit works

Say you manage payroll for a small eCommerce business based in the US. You currently use paper checks to pay your US-based employees on the 1st of each month, but have decided to switch to direct deposit to streamline the process.

To set up direct deposit and enroll your employees, you must first use a secure method to gather the necessary documents and banking details from your employees. Next, you submit the payroll instructions to your bank two to five business days (depending on your bank and payroll provider) before payday. The bank then forwards your instructions to the ACH network.

The ACH network reviews the payment information and starts the process for each employee’s pay to be sent to their respective bank accounts. Recipients of direct deposit can receive payment quickly and securely, as the ACH network ensures efficient electronic transfers. The ACH network processes transactions at specific intervals throughout the day. Once processed, the banks will then receive and carry out the instructions. After the payments have been approved, the banks will make the transfer and directly deposit the funds into your employees’ accounts. Once deposited, the money is available for immediate use by the recipients.

This switch to direct deposit makes things easier for both you and your employees. For your business, it reduces the administrative workload for check preparation and distribution, and saves on printing and mailing costs. For your employees, it provides a faster, secure, and convenient way to receive their pay.

How long does direct deposit take to complete?

When you prepare and submit direct deposits, the process from submission to completion generally takes about one to five business days. The exact time can vary based on factors like the amount being transferred, the banks involved, whether the deposits are domestic or international, and the payment network being used. Direct deposit is a reliable method for ensuring timely payments and reducing risks, such as lost checks or theft.

Taxpayers, government agencies, and the US Treasury generally use direct deposit for federal payments, tax refunds, Social Security, and other federal benefit payments. Recipients of direct deposit are not subject to check clearing wait periods. Electronic payments are the standard for these transactions, providing speed, safety, and convenience, and offering significant advantages for government and federal benefit payments, including enhanced security and efficiency. Other options may be available for those who do not use direct deposit.

Once processed, funds are usually available to your employees within one to two business days after being deposited into their bank accounts, depending on their bank’s processing times.

The difference between direct debit vs. direct deposit

While direct debit and direct deposit are both methods that streamline financial transactions, they serve different purposes.

Direct debit: authorizes someone to take money from you.

Direct deposit: involves you sending money to someone else.

When you use direct debit, you authorize a person or another business to pull money directly from your bank account. Think of it like giving them permission to reach into your account and take the amount owed. ‌While you grant ‌permission to pull the funds, it’s the recipient who initiates the actual debit. Direct debit is often used for recurring payments like utility bills or software subscriptions.

Direct deposit, on the other hand, involves you pushing funds from your business’ bank account to someone else’s bank account. With direct deposit, the payer, such as an employer, initiates the electronic transfer of the paycheck directly into the recipient’s account. Businesses commonly use this method to deposit payroll checks into their employees’ bank accounts, ensuring they’re paid securely and on time.

Example use cases of direct deposits

Direct deposit can be used for a range of financial transactions outside payroll. Here are some examples of what else your business can do with direct deposit.

• Pay vendors and suppliers directly to their bank accounts.

• Disburse employee expense reimbursements quickly and securely.

• Send customer refunds or rebates without issuing paper checks.

• Receive payments into an account online, such as a digital bank or financial app, for added convenience and security.

To set up direct deposit for these use cases, you will need to provide accurate routing numbers and account information to ensure successful transfers.

Pros and cons of direct deposit for payroll

Although direct deposit offers many use cases to improve your payroll and financial efficiency, it’s important to weigh both the pros and cons before deciding if it’s the right choice for your business.

Direct deposit pros

• Streamlines your payroll process and improves administrative efficiency

• Reduces the risk of manual data entry errors

• Eliminates the risk of lost or stolen checks

• Improves employee satisfaction and convenience

• Decreases costs associated with printing and mailing

• Is kept secure through the bank and network’s strong security measures and protocols

Direct deposit cons

• Requires initial setup and integration with current payroll systems in advance

• Making last-minute changes to payment amounts or accounts can be difficult

• May incur bank fees, especially for international payments using networks such as SWIFT

Common problems of direct deposits

While direct deposit is a convenient and efficient payment method to help streamline your financial operations, it does come with challenges to consider.

Complexities and costs for global businesses

Different countries have varying banking systems and processes, which can make setting up direct deposit to pay employees in other regions more challenging. Cross-border transactions often come with foreign currency (FX) conversion fees and international transfer fees, which can quickly add up. Some banks charge fees for direct deposit services, which can add to your operational costs. These fees can vary widely depending on the bank and may include charges for setting up direct deposit, processing each transaction, or maintaining the service.

Administrative upkeep

Although direct deposit reduces the administrative burden of payroll preparation and distribution, maintaining accurate employee records still requires additional upkeep. Traditional methods often involve manual entry and updates within your payroll system, which can be time-consuming and prone to human error, especially with frequent changes such as new hires, terminations, or account updates.

To overcome these challenges and streamline your payroll process, consider partnering with a comprehensive global financial operations platform to reduce the friction points associated with direct deposit.

How Airwallex can help simplify direct deposits

For growing businesses, an Airwallex Business Account could be the ideal solution to help you manage your payroll. You’ll cut time spent on admin tasks, minimize fees, and ensure your employees are paid on time. As an end-to-end financial operations platform, Airwallex combines payment acceptance, expense management software, fund management, and pay out solutions for businesses, all on one platform.

You can pay your employees in 200+ countries using the balances in your multi-currency Wallet, saving on FX fees. For 120+ of these countries, payments will be sent over local payment rails, avoiding the fees usually associated with international payments. The funds are also processed really quickly, with approximately 60% being received instantly.

By transferring these funds directly to their local bank accounts from your dashboard, you can make global payroll fast, efficient, and cost-effective, ensuring smoother and more streamlined financial operations for your business.

Source:

1. https://www.bamboohr.com/resources/assets/ebooks/bamboohr-state-of-hr-2024.pdf