Direct Deposit vs Paper Paycheck: Which Is Right for Your Business?

Nowadays, there are various modes through which employees can be paid in modern companies. Direct deposit vs paper paycheck stand out as the most popular options. Any business person must understand the differences between the methods. Each method has its differences, strengths, and weaknesses for any business operation.

Paying employees can be said to be a strategic business undertaking. It is also a crucial area of investment. It shapes operational effectiveness, employee engagement, and profitability. As much as 94% of employees now receive their paychecks via electronic methods. Nevertheless, paper checks remain useful in the operations of several companies.

This article breaks down the basics of direct deposit vs. paper paycheck. So you can easily determine which one will serve you and your employees better.

What Is a Direct Deposit?

Direct deposit is an electronic method of payment. Money is transferred from the employer’s account to the employee’s bank account. This banking transaction is conducted through the ACH or Automated Clearing House. Here, a large number of banking electronic payments are conducted in a safe and efficient way.

The payroll department incorporates the employees’ banking details in an electronic payroll system. During the payment, the system electronically transfers the net pay to their bank accounts. This means no instances of employees cashing or depositing a check.

Using direct deposit eliminates the need for numerous papers. This is very useful for record-keeping and reconciliation. Many current payroll software allow direct deposit features. They can be programmed to make payments based on your business calendar.

Also, employees have the opportunity to divide their checks among multiple accounts. For example, an employee may contribute 80 percent of his earnings to a checking account. Twenty percent can go to a savings account as an automatic savings mechanism. This feature saves the employees more effort. They can manage their finances without the need to visit the bank on payday.

The Paper Paycheck Process 

Paper paychecks are still one of the methods that businesses still use. A paper paycheck is a written voucher. It instructs a bank to draw a certain amount of money from the employer’s account upon presentation.

The steps adopted for the paper paycheck method are almost the same as those for direct deposit. They calculate each employee’s gross amount, deductions, and net amount. Then, the payroll department issues a physical check. This details the amount of the payment and the employee information. The checks also have a signature from an authorized representative of the company.

There are different ways through which businesses can come up with paper paychecks. There are two ways. One is writing the checks and issuing them using the business checkbook. This option is ideal for small-scale businesses only. Some others have taken to self-printing. Here, they are able to generate the checks on specific check stock using office printers. The third approach is where the business hires the services of a payroll service provider. The service provider prints and mails the checks to the employees.

Employees go through several procedures to access their money. They will take the check to a bank or any check cashing service. Many may be concerned about their ability to access their money. This may depend on the policies of the concerned bank. They may be able to cash the check only after several days.

Direct Deposit vs Paper Paycheck Delivery Methods

The following is a direct deposit vs paper paycheck comparison:

Convenience 

Direct deposit offers convenience for both sides. These funds can be transferred on their own as soon as the pay stub is due. It doesn't have to be physically transported. This automation cuts the time that would be spent on administration. It also eliminates any possibility that the mail could take a long time to deliver.

Paper checks are significantly more time-consuming and labor-intensive for employers. It involves checking, writing, signing, and closing. They also have to mail or deliver. These are all time-consuming activities, especially for commercial businesses.

Payment Speed

From the employee’s point of view, direct deposit means getting the funds instantly. They do not have to drive to the bank, sit and wait in line. They don't need to bother about accessing their money during any bank holiday. The flexibility factor is significant, especially for employees who may work from home.

Paper checks imply a long waiting period for receiving the funds. Employees have to endorse it and go through formalities to deposit or cash the check. After doing so, they have to wait for days for the check to be cleared. This can be challenging for employees living from check to check.

Security

Reduced security risk is another benefit of direct deposit. Electronic payroll is free from lost, stolen, or tampered checks. Banking data is secured during transmission. The lack of paper documents eliminates the possibility of fraudulent activities. These include embezzlement or impersonation while handling check payments.

Paper checks expose companies to several risks. Checks in physical form can be lost, stolen, mutilated, or counterfeited. It has become possible to decode the magnetic ink used to imprint the check. They can read the account number, routing number, and authorized signature. 

This information is vulnerable if the check is in the wrong hands. Delayed receipt of wages and extra time spent issuing new checks are two more problems. Usually, these are associated with lost or stolen checks.

Accessibility 

To use direct deposit, an employee must have a bank account. Now, there is the unbanked or underbanked workforce. Those workers do not use any financial institution. They amount to 5.4% of the total number of households in the United States. This is according to the FDIC and previous studies. For these people, direct deposit poses a major challenge. It cannot be easily addressed without proper working arrangements.

Paper paychecks are useful in this way. Employees can get their pay without the need to open a bank account. They can get the money by cashing the check. Of course, they can do this in various places, such as check cashing centers. Certain retail stores also provide such services. They can even do it through the issuing bank. Although, it comes at a cost.

Privacy 

Some employees may have privacy concerns. They may not want to submit their banking details to their employers. Electronic payroll management systems are equipped with security measures. They can protect employees' personal information. Such hesitation may still be a real concern for some workers. Many do not like to disclose their financial data.

For employees who worry about their privacy, using paper checks is convenient. They do not have to give their account details to the employer. This helps to give these workers a certain level of financial confidentiality that they prefer. They avoid issues issues of security. They also don't have to worry about employers intruding into their banking affairs.

Cost

The cost aspect is also significant. To prepare the paper checks, they will need to spend constantly. This is on check papers, documentation, and invoicing. If they're using mail to deliver the checks, they spend on mail. Then, there's the human resources to process all these. All these costs are proportional to the company size. They can be significant for a large enterprise.

Electronic payroll systems can take a lot to set up. But once it's done, you don't have to worry about recurring costs. Usually, you just have to pay a subscription fee. You'll also need to spend on maintenance. But this pales in comparison to the multiple costs of paper paychecks.

Wrap Up

The discussion of direct deposit vs paper paycheck is not just a trend to follow. It is a decision to make in terms of benefits and efficiency in the company and for the employees. When assessing your company’s payroll systems, it is crucial to consider two concerns: business consequences and employee effects. The ideal solution will be the one that meets the need for easy administration. At the same time, you can also implement the best solution for employees.

Choosing between direct deposit vs paper paycheck is a crucial decision. Ensure you have accurate and professional pay stubs, regardless of the method you choose. Our pay stub maker tool can help. Visit today and make payroll management easier and more efficient.