There are many ways to pay online, but almost all of them incur some costs. Wire transfers cost $15-$50. Checks and money orders cost money.
Even good-old cash isn’t free. Mailing it will cost you. If they lose it, you pay for the replacement. And even if nothing goes wrong, it’s still slow.
Too slow to even protect against inflation.
Then there are 3rd-party providers. You can use Venmo or Paypal to “send money anywhere you want for free” as long as you meet the requirements. But these services aren’t always free. And it’s not the first time we’ve heard of these brands suspending accounts.
How do you make sense of the whole situation? Why do you need to pay to receive or send money?
Each payment method exists for specific uses, and none of them is perfect. But if free transactions is what you want, then there’s a method you should know: direct deposits.
- What Is A Direct Deposit?
- Direct Deposits VS ACH
- Direct Deposits VS Wire Transfers
- How To Set Up Direct Deposits?
What Is A Direct Deposit?
Also known as electronic payments, it’s the preferred payment method by most people. Many use it because of how inexpensive it is (zero) and its safety features. Banks use the Automatic Clearing House (ACH), so you can deposit money into the payee’s bank account directly.
Now, direct deposits may require some paperwork to set up. So even if they’re free, are they worth your time? Here’s why they are (or not):
After you set up the system, deposits will happen automatically. You no longer need to monitor nor transfer funds manually, which is relieving and efficient.
CON: It makes accounting more laborious
Every time you make a direct deposit, you have to update the payee’s account number. For example, if you paid an employee or service provider, but you no longer work with them, you have to cancel that automated payment system.
PRO: It’s FREE
It’s not 100% paperless because you might still need to print and sign the agreement. But besides that, it costs nothing compared to printing and mailing checks. Even though it’s an electronic payment, it doesn’t charge any fees as wire transfers do.
CON: Changing information takes weeks to make an effect
In case you need to update the direct deposit data, it will take a while for the bank to process it. You may need to confirm the deposit agreement again.
PRO: It’s safe
Nobody can “steal” your money when you pay online. You move the funds from one bank to another with virtually no risk.
By the time they receive the amount, both parties can check the transaction record. What the amount was, when they did send, and how long it took.
CON: Lower cash flow
Maybe you don’t mind paying a few days earlier. But if you want to have your money available for as long as possible, direct deposits may not be for you.
You see, when paying employees with checks, you can still keep the amount paid. You only send the funds when the employee cashes the check. So even though you technically paid with the check, you haven’t spent anything all that time.
With direct deposits, the money is gone the moment you send it. Plus, these take about two business days to process, which is less time than mailing a check. By contrast, your payee can receive it instantly with a wire transfer. But then, it would cost money.
If you are open to alternative payments, other then those directly via your bank, then you can take a look at the guide on popular and safe payment methods.
Direct Deposits VS ACH
We’ve said that direct deposits use the ACH to make free online payments possible. But these deposits are just one type of ACH transfer.
- You can only DEPOSIT money in someone else’s bank account via direct deposit. Although you can reverse the payment before it’s complete, you cannot withdraw money from the payee’s account.
- Check deposits may count as ACH transfers if, for example, you photograph a physical check and then deposit it into a bank account.
In case you want more context on what ACH means, you’ll find it in the video below:
Direct Deposits VS Wire Transfers
Although differences are obvious by this point, we’ll mention them again:
- Direct deposits take longer to process than wire transfers
- The former is free while the latter may costs up to $20-$50 per transaction, depending on your and the recipients bank and the transaction amount.
Another key difference: wire transfers work with any currency. Your payee will instantly receive money in their home currency, assuming you cover the conversion cost. This fee is usually around 3.5% of the real-time rate. If the EUR-USD rate were 1, you’d need to pay 1.035.
With direct deposits, however, you can’t. The banking system dictates what currency you can deposit. So ACH is for USD, SEPA for EUR, BACS for GBP, and so on.
If the payee has a bank account in a different banking system, you have to wire money instead.
If you don’t know the seller, it might be informative to familiarize yourself with the different bank transfer scams.
How To Set Up Direct Deposits?
Usually, it’s employers who set up direct deposit, but you can really do it yourself to pay anybody. It’s only five steps:
#1 Get A Direct Deposit Authorization Form
As a payee, you need a document to authorize others to deposit money in your account periodically. Although it may sound complex, all you need to do as they payer is go to a page like this and download the document.
#2 Provide Banking Information
The payee has to show the sender where to transfer the funds:
- Your bank account number. You can find it in your bank statements, credit card reports, or at the bottom of your checks
- Your SSN. Direct deposits aren’t very different from W2s tax-wise, and they both need a Social Security Number
- Your personal data, such as legal name, email, and address. When setting up the direct deposit, they may notify that email as a verification step
- Your bank’s routing number
- Your bank’s mailing address. If you’re using the payee’s bank form, you need your bank address as the payer. If you use your bank’s form, you’ll need the payee’s bank address.
#3 Confirm The Address And Amount
The payee can decide where to send the money. Maybe:
- You have multiple bank accounts and want to split among them
- You want to receive all your money in your checking account
- You want to send some of that money to your savings account for emergencies
#4 Account Number Verification
Some banks may require you to verify the other bank account and routing number. To do so, the other party can provide a voided check or deposit slip. They can also scan copies and send these electronically.
The payer should attach this proof to the form.
#5 Submit The Form
Submit the form with the bank that will be depositing the funds. After a few days, it will go into effect, and you can already enjoy your automatic payment system. For free, of course.