Trying to choose between direct and ACH deposits for your business?
All companies need a way to transfer funds to pay employees and take care of other financial business. The right kind of deposit mechanism for your company can help increase employee retention and prevent financial issues. However, if you choose the wrong method, you might run into trouble without understanding why.
In this guide, we’ll clear up the differences between ACH vs direct deposit, so you can choose which one fits your company best. Keep reading to make the right choice!
What is Direct Deposit?
Direct deposit is a kind of payment automation that keeps money moving when it should without you having to take any action. This works well for things like automatically making regular payments to vendors.
With direct deposit, funds are sent electronically between bank accounts. These transfers often happen automatically with no delays.
What is ACH Deposit?
ACH stands for “Automated Clearing House.” This type of electronic funds transfer uses the Automated Clearing House to move funds where they need to be.
The ACH verifies these transfers and keeps the money going where it needs to, using pre-approved bank account information. These approvals from the ACH only happen at certain times of day, which can slow down the transfer. The transfers might not be complete for a few days after they’re initiated.
The ACH network is actually used to make direct deposit transfers, but ACH debit transfers are different from direct deposit transfers. With direct deposit, the company and the employee or vendor all have to agree to any changes or adjustments to the transfer of funds. But with ACH transfers, the business retains control over when and how payments go out. Companies like Tipalti help you connect direct deposits to the ACH system.
ACH vs Direct Deposit Pros and Cons
Is ACH or direct deposit better for your business? Both come with certain pros and cons – let’s take a look at what you’ll need to consider before making your choice.
Direct Deposit Pros
One benefit of the direct deposit method of transfer is speed. There’s no waiting – most of these transfers will be completed on the same day, so payments get where they need to be faster.
There also generally isn’t a hold placed on funds sent via direct deposit. The recipient can use that money right away, rather than waiting for it to be approved.
Direct deposit also keeps things simple, since everything is pre-approved. Payments will go out automatically, without needing approval every time. This is ideal for recurring payments that are always the same.
Both direct deposit and ACH transfers share the benefits of being electronic. There are no checks to deposit or to wait for in the mail. Payments won’t get lost, and they also come with fewer fees than credit card payments. Finally, both kinds of payments can be sent remotely, so it doesn’t matter where vendors or clients are located.
Direct Deposit Cons
Sometimes, employees or vendors might have issues with direct deposit because of mistakes made by the company doing the transfers. For example, if you accidentally deposit too much money in a vendor’s account, you could also automatically remove it without getting their approval. This can create issues in a business relationship.
Direct deposits also can’t be adjusted except for manually, so making changes can be difficult. The automation of regular payments makes it easy for mistakes to happen without getting noticed right away. Since the payments don’t need approval every time, you might not update the amount before it gets transferred, and then you’ll have to face the issue of removing funds that were already sent to another account.
ACH Pros
ACH payments are great if you regularly need to make changes to the payment date, amount, or other details. The fact that you’re controlling the payment amount each time it goes out also helps prevent errors that might occur with direct deposit.
ACH transfers are fast, although not as fast as direct deposit. The delay also makes these payments almost impervious to tampering. These transfers are very secure, so nothing can happen to the funds during transfer. If there’s an error or a fraud, you’ll be able to reverse the payment as needed.
Finally, ACH payments are cheaper than credit card payments (as are direct deposit transfers). Many of the benefits of ACH and direct deposit are the same, but ACH allows for greater control over each individual transfer.
ACH Cons
Sometimes, the wait of two or three business days for an ACH transfer can cause problems. And making changes for each individual payment can be an annoyance when the same payment is occurring again and again.
If an ACH payment is authorized to remove funds from an account, there’s always the chance that too much money will accidentally get removed. It can take a long time to get those funds back since the error will have to be investigated by the bank. This can lead to overdraft fees and other issues.
ACH vs Direct Deposit: Which is Right for You?
Choosing between direct and ACH deposit mostly depends on the specifics of the situation. Many businesses will find that one is ideal in some situations, while the other works best for different transactions.
For example, you might choose direct deposit to make reoccurring payments to a vendor who you always place the same regular order from. But for a different vendor who you place a variable order from, ACH deposit might be a better choice to avoid mistakes. And you might choose to pay employees through fast, simple direct deposit or slow, secure ACH transfer, depending on what fits your company culture best.
Want to learn more about online bank transfers? Check out our guide to how banks went digital.
