6 Direct Deposit Alternatives

Direct deposit overview

Direct deposit is a payment method that delivers paychecks to employees electronically. Employees provide their checking or savings account information to HR during the onboarding process. The employer transfers workers’ paychecks into their bank accounts every payday, thus eliminating paper checks and trips to the bank. 

Most employers offer direct deposit, and it’s a popular, convenient and practical option. However, direct deposit is not suitable for all workers, particularly those without a bank account. 

According to the most recent FDIC survey of unbanked and underbanked households, more than 5.9 million U.S. adults, or around 4.5 percent of U.S. households, are unbanked. An income of less than $30,000 is the strongest indicator of a higher-than-average unbanked community.

When employees lack banking options, they may turn to alternative finance methods with unreasonably high interest rates and fees, often leading them to live from paycheck to paycheck.  

Employers have payroll options to help unbanked employees or those who prefer other payment forms. 

6 alternatives to direct deposit

Here’s a look at six popular direct-deposit alternatives that may benefit your staff and business.

1. ACH 

The Automated Clearing House (ACH) network began in the 1970s. As the growing number of paper checks became overwhelming, U.S. banks wanted to improve how money was transferred. Nacha (formerly the National Automated Clearing House Association) manages and governs the ACH network. 

ACH provides a bank-level encrypted electronic transfer of money between banks. ACH manages the system behind direct deposit and direct payments. Your business, the government or an individual can make payments using this network. 

ACH is different from a wire transfer or credit card network. It is a direct payment between two bank accounts. ACH transfers are grouped by the two banks that completed the transaction. The bank checks and holds the transactions before they are sent in bulk.

While ACH transfers are often associated with direct deposits, ACH direct payments are another option. ACH direct payments can be made via ACH credit payments and ACH debit payments. 

• ACH credit payments: You can use an ACH credit payment to pay family and friends or an invoice.
• ACH debit payments: An ACH debit payment allows your company to debit money from your business bank account, usually to pay recurring bills, such as utilities and rent.

ACH pros

• Security: ACH direct payments are one of the safest ways to transfer money electronically.
• Reversal options: An ACH direct payment can be reversed if an error or payment fraud is detected.
• Easy setup: ACH direct payments make it easy to set up recurring payments and avoid late fees.
• Low transaction fees: ACH direct payments are an affordable payroll management solution with low transaction fees. Additionally, ACH is more stable through banks than through payment cards.

ACH cons

• Potential delays: Transfers can take up to four days. 
• Short windows: Transfers must be made during specific hours, or the transaction could be delayed.
• Few options for international payments: ACH direct payments have limited international use.
• Transaction limits: Depending on the account, you may face transaction limits. 
• Additional fees: Some banks impose rules and fees regarding the transfer limit of six times per month (although the federal government no longer enforces this rule).

Setting up ACH payments

To set up ACH payments, follow these steps:

1. Choose a payment processor. Select an ACH payment processor, and sign up for an account. Your current bank may have comparable fees, or it may make more sense to use an ACH operator or automated payroll software. 
2. Submit ACH paperwork. Once you choose a provider and create an account, you must complete the paperwork for ACH payments. However, once the paperwork has been completed, you can pay vendors and employees on a one-time or recurring basis because the payee’s information is saved.
3. Choose correct entry classes. Next, choose the correct entry classes when you process ACH payments. Your bank or payroll software should be able to do this for you to prevent any mistakes and delays in processing. 
4. Understand ACH payment terms. Finally, always read the ACH payment terms when you’re choosing your preferred financial partner so you understand the process and fees. 

2. Prepaid card, aka payroll card

Some employees may prefer to receive their paychecks via a payroll card. Payroll cards work like debit cards. Every payday, the card is loaded with the employee’s earned wages. The employee can use the money to take out cash from an ATM, make purchases, pay bills online, and transfer money to friends and family.

Payroll card pros

• Environmentally friendly option: Payroll cards are considered eco-friendly because no paper checks are involved. 
• Inexpensive method: Payroll cards are cheaper than paper checks.
• Fast payments: Payroll cards are a quick payment method because there’s no need to cash a check. 
• Security: Because these cards require an employee PIN, there’s a higher level of security. 

Payroll card cons

• Fees: Banks may impose payroll card fees, such as for using ATMs, purchasing, checking an account balance at an ATM, replacing the card, and transferring funds.
• Lack of awareness: You may need to educate employees on how to use payment cards.

Setting up payroll cards

Here’s how to set up payroll cards: 

1. Select a provider. First, choose a provider to set up payroll cards. This provider could be your current payroll platform or a bank, credit card company or professional employer organization (PEO). Some providers offer payroll cards for free to clients, while others charge fees for the initial setup, ATM use and inactivity. 
2. Enroll and get set up. It takes a few days to a few weeks to enroll and set up the payroll card system. Any employees who sign up for the service will be given participation instructions. Cards are mailed after the setup is complete.

3. PayPal

Paying contractors or irregular part-time employees can be a hassle if you use paper checks or pay cards. PayPal is a great option for paying freelancers or one-time invoices.

When sending these payments, be sure to check the box for “service.” Sending a service payment may incur a fee for the contractor, but this fee gives the recipient an instant payment option. You must determine a different payment option if the freelancer doesn’t agree to this fee. It’s a good idea to clarify from the outset that you’re paying via PayPal.

PayPal pros

• Recurring payments: PayPal has a convenient recurring payments option.
• Security: PayPal is a secure payment platform.
• No merchant account: You don’t need a merchant account to access PayPal.
• International options: You can convert currency to make international payments.
• Mobile app: The PayPal mobile application helps send payments.
• Automation: PayPal offers automated payroll, so you can choose a specific day and time to make payments.

PayPal cons

• Limited access to support: PayPal customer service can be difficult to reach.
• Charge-back fees: Charge-backs can incur hefty fees with PayPal. 
• Lag time: Once you add an employee to the system, they’ll have to wait 48 hours for their first paycheck.
• Instant-access fee: There’s a 1 percent fee if an employee wants to access their money instantly.
• Verification time: Verifying a new business bank account or credit card can take a few hours or days.

Paying contractors with PayPal

• Direct payments: Request the contractor’s email, and send a direct payment through your PayPal account. 
• Invoice payments: Ask the freelancer to email you a PayPal invoice when their work is complete. You’ll then receive an email requesting payment. Click the email link to log in to your account and complete the money request.

Either way, you can pay the contractor via a bank account or credit card; additional fees may apply.

4. Mobile wallet

According to Statista, 92 percent of Americans own a smartphone. Because employees can access social media accounts, email, banks and more on their smartphones, receiving their paychecks through a mobile wallet like Venmo or Apple Pay is likely quick and convenient.

Mobile wallet pros

• Easy sign-up: Your employees can quickly sign up for a mobile wallet account using their cellphone number.
• Multiple uses: Once funds are transferred, employees can use the money to purchase items and pay bills.
• Low fees: Transfer fees are virtually nonexistent if you use your company’s bank account.
• Security: Mobile wallets are more secure than debit or credit cards.
• Data: The mobile wallet can store more financial information than a paycheck can.

Mobile wallet cons

• Extra fees: Users may incur fees when withdrawing money from a mobile wallet.
• No physical records: If a pay stub is required for taxes or applications in your state, it might be challenging to provide an adequate record from a mobile wallet.

Paying employees with a mobile wallet

To offer a mobile wallet as a payment method, it’s best to partner with payroll software that supports this feature. Payroll software platforms such as QuickBooks Payroll, Paychex and Gusto offer mobile app solutions to complete payroll on the go. 

5. Paper check

Paying by paper check may seem old-fashioned, but it still brings benefits. For instance, paper checks can help you track payroll quickly if you’re not ready for automated payroll software. 

Plus, smaller companies may benefit from the personal touch a paper check can provide. For example, you can touch base with your employees when handing out checks directly, automate the process by having your bank fill out and mail the checks, or write a check on the fly if there’s an accounting mistake.

Paper check pros

• No transaction fees: There are no transaction fees for you or your staff — unless checks are mailed by your bank, which may charge your company for the service.
• Personal interaction: Handing out paper checks can deepen your relationship with employees because you can interact with them in person.
• Records: Paychecks provide a written payroll record if you’re not quite ready for payroll software.

Paper check cons

• Additional paperwork: All paper check transactions must be reported on a 1099 form for each employee or contractor.
• Extra costs: Paper checks are additional expenses. 
• Time: Additional time is needed for ordering and completing paper checks each pay period.

Paying employees with paper checks

You can order paper checks through your bank and personalize them with your business information. However, it’s advisable to open a dedicated payroll account so no other debited business expenses cause the account balance to fall below zero.

Fill out paper checks each pay period, or have your bank’s bill-pay service mail them to your employees. If there are any discrepancies, you’ll have to void the checks and rewrite them.

6. Cash

Paying employees cash may save you fees, but it doesn’t always make sense. For example, even though you save money on payroll software and bank fees, tracking cash is challenging. If you have more than a few employees, electronic paycheck records make bookkeeping easier and help your small business avoid an audit. 

Cash pros

• Zero costs: There’s no cost to transfer money from your business to your employee.
• No fees: Cash incurs no bank, usage or other fees. 
• Instant transfer: When you hand off cash, there’s an instant money transfer to employees. With cash, your employees can immediately make purchases and pay bills.

Cash cons

• No paper trail: Your bookkeeping won’t have precise records. 
• IRS audit: Your business is at higher risk of an IRS audit.
• Confusing taxes: It can be challenging to assess taxes accurately when you pay your staff with cash.
• Potentially inaccurate amounts: It can be challenging to have the correct amount of money readily on hand.
• Cash flow issues: When you’re expected to have some money on hand for payroll, it could hurt your cash flow. 

Setting up a cash payment system

You’ll need a sound bookkeeping system in place to set up cash payments. Plus, you’ll need to withdraw ample cash from the bank to pay all of your employees in full on payday. Finally, you must keep impeccable records to avoid an IRS audit.

Best payroll services for direct deposit alternatives

The best payroll services can accommodate your business’s payroll needs and support multiple methods to pay your team. Consider the following payroll services that provide direct deposit and alternative payment methods:

• OnPay: OnPay is a flexible payroll provider that offers unlimited payroll runs and multiple pay schedules. Employees can set up bank accounts through the vendor’s employee portal and select direct deposit, payroll cards or physical checks. The platform is licensed in all 50 states for employee benefits and affordably bundles its essential tools into one plan. Our OnPay review explains its error-free guarantee for tax filing and multiple integrations with popular accounting and time-tracking software. 
• QuickBooks Payroll: QuickBooks helps small businesses access an all-in-one solution for running payroll, managing bookkeeping, consolidating vendor contracts and streamlining business operations. Read our review of QuickBooks Payroll to learn how it offers same- or next-day direct deposit and can handle tax filing, employee health benefits and 401(k) plans.
• Paycor: Paycor enhances employee convenience via a handy self-service portal and mobile app where staff can view pay stubs, benefits and time off and get tips for meeting financial goals. You can pay employees via multiple payment options, including direct deposit, payroll cards, checks and even on demand. Our Paycor review details its tax compliance support and compensation planning tools.
• ADP: ADP is a flexible payroll platform that can suit businesses of all sizes. It supports direct deposit, paper checks and payroll cards. Read our ADP review to learn about the platform’s multiple tech-forward features, including digital recordkeeping and workforce management.