Payroll Card vs Direct Deposit
payroll card vs direct deposit

Payroll Card vs Direct Deposit

Choosing the Right Payment Method for Your Employees

It doesn’t take much business experience to know that getting your compensation strategy right is crucial for recruiting and retaining top talent. But paying employees isn’t only about a question of how much. You also need to know how to pay them.

What makes things more complicated is this: almost a quarter of American households are unbanked or underbanked. Either they don’t have a bank account or, if they do, still rely on non-traditional financial services like pay day loans or check-cashing services. This could be down to something as simple as lack of traditional banks close to home, looking to avoid high fees or just not having enough funds to meet minimum balance requirements.

This makes finding payment methods that work for all your employees challenging. The good news is, you have options. In some cases direct deposit will work well but for those employees who don’t find this convenient or accessible, payroll cards offer a useful alternative.

Advantages of Direct Deposit

In technical jargon, direct deposit is an ‘electronic funds transfer’ and though it doesn’t work for everyone, it’s by far the most popular method of paying workers. 93% of employees get paid this way, according to the 2019 "Getting Paid in America” Survey. When you consider the advantages, this is unsurprising:

  • Instant Funds for (Most) Employees
  • If employees have an accessible bank account, they can get their pay instantly. No more queuing up at the bank then being forced to wait for the funds to clear. This is especially useful for paying employees who are remote, on vacation or just busy.

  • No Printing Cost
  • Direct deposit saves employers the time and cost of printing (or worse, handwriting) individualized pay checks each pay period. (There may still be state laws mandating physical pay stubs—see below for more.)

  • Data Security
  • When you go paperless, there’s less sensitive information out there that could end up in the wrong hands.

  • Reduced Chance of Fraud
  • Checks and payroll cards can be lost or stolen, whereas with direct debit you know immediately that an employee’s pay has ended up in the right hands.

  • No Employee Fees
  • Employees want to be to use as much of their pay as possible, and direct deposit should mean they avoid wasting big chunks of their wages on fees.

Disadvantages of Direct Deposit

Though it’s very much the norm, direct deposit isn’t all upside for employers:

  • Banking Costs for Employers
  • Setting up direct deposit is unlikely to be free and you may also face transaction costs every pay period.

  • Discriminates Against the Unbanked and Underbanked
  • If direct deposit is the only method of payment you offer, you’ll be excluding those who don’t use bank accounts. It’s not as simple as asking them to set up an account—it may just not be possible, or cost-effective, at least in the short-term.

  • Hurts Employees in Overdraft
  • Direct deposit might not cost employees, but they still face fees just for using a bank account. If they are in overdraft, a whole chunk of their salary could automatically be taken pay fees.

  • Not All States Allow Mandatory Direct Deposit
  • You can’t require an employee to use direct deposit at a specific bank, or charge employees fees. Many states go even further, giving employees the right to opt out of their employer’s direct deposit program.

Why Payroll Cards Make a Viable Alternative

Payroll cards give employers a way to keep things electronic, while catering to all employees, not just those who have a conventional banking setup. Employees are given a card with a PIN which is automatically reloaded each pay period. Employees can withdraw money or make purchases just like they would with a traditional debit card.

There’s a few reasons employers might consider this a viable option:

  • Accessible for Unbanked and Underbanked Employees
  • Payroll cards put salaries in the hands of all employees, no matter their banking setup. New employees won’t be forced to create new accounts in order to be paid. Unlike with paper checks, unbanked employees aren’t forced to pay fees to cash-checking services.

  • No Fees for Employees
  • Just like direct deposit, employees should be able to access their funds without cost.

  • Paperless Possibilities
  • Payroll cards offer companies an alternative way to cut down on the time and cost spent printing checks.

  • Multiple Uses
  • All benefits and reimbursements can be transferred to the same card, keeping things simple for you and your employees.

  • Employee Protection
  • Payroll cards are essentially debit cards, and they receive the same protection from the Federal Deposit Insurance Corporation (FDIC) against fraud or loss.

Employers Need to Be Aware of the Risks

Payroll cards do come with some drawbacks:

  • They Can’t Be the Only Option
  • Legally, Employers must offer an alternative to payroll cards—likely paper checks or direct deposit.

  • Potential Costs
  • Employers can face fees to set up and maintain payroll card program. And while they aren’t allowed to pass these fees on to employees, ATMs fees and transaction costs can still eat into salaries.

  • The Inconvenience of Lost Cards
  • The FDIC do offer protections, but we all know that in reality it’s rarely that simple. If a card is lost or stolen, employees might not realize immediately. When they do, they could end up low on cash while waiting for cards to be replaced and funds reimbursed.

  • Beware of Local Regulation
  • Before implementing a payroll card program, employers should look out for any state or local legislation regulating or limiting the use of payroll cards.

Don’t Forget Paystubs

Taking all the pros and cons into account, you’ll likely come to conclusion that there’s no right answer to the payroll card vs direct deposit debate. At the end of the day, to cater to all employees, you should offer both. But remember, even if you’re attempting to go paperless, check the legislation in your state. Many states require employers to offer pay stubs, and some specify these must be printed.

How Paycor Helps

Finding the best way to pay employees isn’t easy, but partnering with the right payroll provider can help. Paycor offers multiple payment methods, including direct deposit, payroll cards and paper checks. What’s more, we automate the creation of pay stubs to comply with the labor law wherever you are. Our intuitive and easy-to-use software simplifies the entire payroll process and with dedicated support from HR experts, you can be sure you’re always compliant with ever-changing regulations.

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