Wire Transfer vs. Direct Deposit — the Pros and Cons of Each
A substantial advantage of online business is offering our customers many payment methods. But two methods stand out regarding security, convenience, and cost-effectiveness: wire transfer and direct deposit.
These two payment options have so much in common that it's easy to confuse them. The similarities are stark, as each is a mode of electronic funds transfer that deals directly with financial institutions. However, understanding the differences can help you and your AR team determine whether direct deposit payments or wire transfers (or both) make the most sense for your business.
Read on for all the necessary information, including the pros and cons and when to choose one.
Wire Transfers 101
A wire transfer is an electronic transfer that sends money from one bank account to another. Individuals and businesses commonly use international wire transfers to send money to other parties overseas. Until the advent of credit cards and digital wallets, bank transfers were the most secure method of cross-border business. However, that's changing rapidly as other payment methods become more widespread and affordable.
This type of money transfer isn't limited to international business. You can also make a domestic wire transfer.
Despite the annual volume of wire transfers declining by 4% between 2021 and 2022, this remains a crucial electronic payment option.
How Wire Transfers Work
Most financial institutions offer wire transfer services, with traditional banks and credit unions being the most common facilitators of money transfers. These providers allow transfers over the phone, an online portal, or an in-person branch.
Issuers can also use a non-bank provider, as these services may be cheaper or more convenient.
Wire transfers require the sender to provide a government-issued identification and the following information:
- Issuer's bank account number
- Recipient's full name and contact information
- Recipient's bank account and transit number
- Recipient's bank name, address, and phone number
Before sending the wire transfer, issuers must read the fine print. Federal law grants all senders the right to know all taxes, exchange rates, and fees. You may also find domestic and international wire transfer instructions on your financial institution's website.
The Pros of Wire Transfers
There are a few reasons why wire transfers haven't faded into obscurity. Here's a look at the top pros for this money transfer method:
- Velocity. This is one of the best advantages of wire transfers. Most recipients can access funds within a few hours. They may have to wait about two business days for international wire transfers. However, turnaround times are still much faster than other methods of sending money overseas. Furthermore, there is an audit trail because these are essentially bank transfers.
- Easy currency exchange options. Wire transfers make it easy to send money in a currency that is not your local one. Most services will offer to exchange it, but you must pay the associated fees.
- Safety. Wire transfers go through the Office of Foreign Assets Control. This ensures those involved in terrorist activities or money laundering don't get the money.
The Cons of Wire Transfers
Wire transfers are great, but there are a couple of downsides to consider:
- High costs. Not surprisingly, there's a price to pay for the convenience of wire transfers. Fees vary for this electronic payment option depending on the provider or method used (online, over the phone, or in person). Money sent within the U.S. will cost around $35, and international transfers can cost $50 in fees.
- Irrevocability. Once a wire transfer is sent, there is no way to reverse the transaction. They need to be sure the recipient's details are correct on the form.
Direct Deposits 101
A direct deposit, sometimes called an Automated Clearing House (ACH) payment, is another quick way to make electronic payments. However, this method has significant differences from a wire transfer. First, an ACH transaction is typically a domestic payment. This is because an ACH transfer uses a specific, US-based network.
It's common for businesses to use an ACH payment for payroll. But as the technology and infrastructure behind the ACH system have improved, this form of money transfer has become standard across the payments landscape.
How Direct Deposit Works
Direct deposits rely on the ACH Transfer System. Essentially, a U.S. banking network facilitates transactions between financial institutions. Banks, credit unions, and the Federal Reserve are all part of this network, making direct deposits accessible.
The Pros of Direct Deposit
Among the many advantages direct deposits provide, we can find the following:
- Affordability. Direct deposits are much more affordable than wire transfers, as banks allow recipients to receive their funds for free. Businesses must pay system implementation fees, but they're nothing compared to the cost of sending frequent wire transfers. The medium cost for an ACH payment in 2022 was between $0.26 to $0.50 per transaction.
- Convenience. Having paychecks deposited directly is much easier than dealing with the hassle of the manual labor paper checks represent. It's also quicker and, of course, safe.
- Safety. Direct deposits are safe because they arrive directly into your bank account. With checks, you have to consider the possibility of fraud.
The Cons of Direct Deposit
Two disadvantages of direct deposit to keep in mind include the following:
- Slowness. Direct deposits are the slowest payment method, taking one to five business days.
- Possibility of insufficient funds. When a paycheck or payment enters your account, it's easy to assume it will always be added to your account automatically. However, reviewing your bank account regularly is vital to ensure the correct direct deposit payment.
Wire Transfer vs. Direct Deposit: Which is the Best Option for Your Company?
To make a decision, evaluate these four aspects of each electronic payment method: cost, speed of receipt, limit, and security. Both methods involve costs on the issuer's and recipient's sides.
Regarding speed, a wire transfer will take longer to arrive, as it has to be issued in the bank's branch office. Direct deposits have a set time limit for receipt (about 24 hours). In some cases, they can be immediate.
Another difference is the limit of money that can be sent. Wire transfers are best for small or international transactions, while direct deposits allow more significant amounts.
Different clients have different needs, and we have the perfect solution if you use both wire transfers and direct payments. Paystand supports these types of transactions and even has a zero-fee option, the Paystand Bank Network, making the process as smooth as it gets for you and your clients.
Discover what Paystand can do for your company's B2B Payment Automation by booking a demo today!