Direct deposits and paper checks are both ways to move money from one bank account to another, typically for payroll purposes, but there’s a difference: A direct deposit automatically transfers wages from an employer to an employee’s bank account. While a paycheck is also a money transfer, it involves the employer cutting a check from their bank account. The payee or recipient can then deposit the funds into their bank account or cash the check at a local business.
Although both payment methods help employers pay their employees and conduct other fund transfers, each has its own advantages and disadvantages. It can be helpful to understand the pros and cons so you can decide the best way to receive your salary or move money around.
Read on to learn the details, including:
• What is direct deposit?
• What are the benefits and downsides of direct deposit?
• What are the pros and cons of paper checks?
• When should you use direct deposit vs. a paper check?
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What Is Direct Deposit?
Direct deposit is an electronic transfer of funds to a bank account. By using direct deposit, a payee can automatically send money to another party’s bank account without handling paper checks or cash. It’s quick and convenient for both an employer and employee, whisking funds from one account to another. This method can also help employers cut costs since they don’t have to print and mail checks every pay period.
For these reasons, direct deposit has become very popular. In fact, according to the 2022 “Getting Paid In America” survey, almost 94% of workers receive their paycheck via direct deposit.
That said, receiving a direct deposit from your employer isn’t the only way to use the technique for transferring funds. You can use it for other transactions including:
• Getting a tax refund
• Receiving child support
• Getting Social Security benefits
• Paying bills like garbage, electric, and water bills (this may be set up through your bank’s “bill pay” option).
Pros and Cons of Direct Deposit
Using direct deposit has its upsides and downsides. First, here are some of this the significant advantages of this financial process:
• Convenient. Technological advancements have made direct deposits a fast and easy way to receive and send money. The payee and payer don’t need to travel to the bank to write or deposit checks since the funds transfer electronically from one account to the other.
• Safe. When you exchange cash or a check, there is a possibility that funds can be lost or stolen. Since all direct deposits happen electronically, you don’t have to worry about a thief swiping your money.
• Efficient. Many employers offer direct deposit because it helps expedite the payroll process. Funds are automatically transferred from their bank account to those of the recipients. There’s no need for an employee to pick up a check, deposit it, and wait for it to clear. The time it takes for direct deposit to go through can be hard to beat.
• Avoid maintenance fees. Some banks will do away with maintenance fees if you set up direct deposit, which can be a nice financial perk.
• Boost savings. Sometimes, you can identify a percentage of your paycheck and direct it to be deposited into your savings when you get paid. This way, you can automate your savings and pad that account without thinking about it.
While direct deposit is convenient, safe, and efficient, there are also some downsides you should consider.
• Risk of cyber crimes. Yes, there are hackers and other sorts of criminals out there. Direct deposits are vulnerable to cyber crimes since all transactions occur electronically. While banks and financial institutions take precautions to keep bank accounts safe online, direct deposits may still be somewhat susceptible to cyber theft.
• Requires a bank account. Direct deposits usually require the payee and payer to have a bank account. That’s not possible for folks who lack traditional bank accounts. They may need to find an alternative solution to send or receive payments.
• Fees. Depending on your bank, you may have to pay a set-up fee to initiate direct deposits. Check with your bank to verify any potential costs before you get started.
• Errors are easily missed. Because payments are 100% electronic, you may not have the opportunity or inclination to review the pay stub as you would with, say, a paper check. Not looking over your paystub regularly can make it easier to miss errors such as an incorrect paycheck amount.
Now, here’s how the pros and cons of direct deposit stack up in chart form:
| Pros | Cons |
|---|---|
| No risk of losing cash or a check | Risk of cyber crimes |
| Convenient | Requires a bank account |
| May avoid account fees | May have to pay a fee to set up direct deposit |
| Can set up auto-transfers to savings | Errors can be easily missed |
Recommended: What Is an Electronic Check?
Pros and Cons of Paper Checks
Now, let’s consider the benefits and disadvantages of using time-honored paper checks. First, the upsides:
• Protects privacy. When you decide to use paper checks, you can keep your banking information private from your employer. For some people, it may provide peace of mind to know that your employer doesn’t have access to your bank account.
• Save money on banking fees. Some banks charge fees for setting up direct deposit. If you prefer not to pay these fees, you can likely cash your paper checks for free.
• May include an informative paystub. For some people, looking at their paystub is more convenient with a paper check. They can assess the deductions and other aspects of their wages without going hunting for the information online.
Drawbacks to using paper checks include:
• Risk of theft. When you carry a physical check, it’s easier to misplace it or have it stolen. If this happens, your employer will likely be able to replace it. However, you may have to wait for the new check to process and pay a fee.
• Time-consuming. When you receive a paper check, you must deposit it at the bank via a bank branch or online. Either way, it can eat up time that you could spend doing other things.
• Waiting period. Even if you deposit a paper check right away, it could take several days to clear and hit your bank account, especially if it’s the weekend or a holiday.
Here’s how these advantages and disadvantages compare in chart format:
| Pros | Cons |
|---|---|
| Protects bank information from employer | Risk of theft or losing the check |
| Saves money on banking fees | Time-consuming to get and deposit check |
| Makes payroll details easily accessible | Must wait for funds to clear |
Recommended: Business Check vs. Personal Check: What’s the Difference?
When to Use Paper Checks Over Direct Deposit
When deciding to use checks vs. direct deposit, here are a few situations where it makes sense to opt for paper checks:
• You don’t want to share your banking information with your employer. Using checks may make sense for folks who are worried about sharing banking information or who prefer not to put money into a bank account.
• You distrust banks or don’t want to pay their fees. One of the top reasons millions of Americans choose not to have bank accounts is that they don’t trust banks and don’t want to pay banking fees. If you fall into this category, you may feel more comfortable opting for paper checks you can cash.
• Don’t qualify for a bank account. Maybe you don’t have enough money or don’t meet the requirements to open an account. Whatever the situation, if you don’t have a bank account, it’s going to be hard to accept a direct deposit. Paper checks might be the only solution to receiving your paycheck.
Recommended: How Do You Write a Check to Yourself?
When to Use Direct Deposit Over Paper Checks
Now consider the flip side: situations in which direct deposit may make more sense than paper checks.
• You want a quick, easy way to get paid. If direct deposit is a payment option, it could help you receive your wages or salary more quickly than with a paper check. Since funds are transferred electronically, your paycheck will be in your bank account on payday, ready to be used.
• You struggle to save money. If you have difficulty setting aside savings, a direct deposit may help. Some direct deposit programs let you distribute a portion of your paycheck into your savings, allowing you to boost your emergency fund or another account without lifting a finger.
• Your bank waives maintenance fees. Some banks waive maintenance fees when you meet specific requirements like setting up direct deposit.
The Takeaway
Paper checks and direct deposits are two payment options that allow your employer to transfer money so you can get paid. When comparing paper checks vs. direct deposit, know that direct deposit is usually the most convenient way for employees to receive their pay. However, employees who don’t have bank accounts or don’t like sharing their banking information may prefer paper checks instead. It’s all about what best suits your banking needs.
If you’re ready to open an online bank account, take a look at what SoFi has to offer. Our Checking and Savings account lets you avoid account fees (like those for direct deposit) and earn a competitive APY Qualifying accounts can get their paycheck up to two days early with direct deposit, too.
FAQ
Do more people use direct deposit or paper checks?
Direct deposit is usually the deposit method of choice. In fact, about 94% of employees prefer to receive wage or salary payments via direct deposit.
Can you change from paper checks to direct deposit?
In many cases, yes. Whether you want to set up direct deposit with the IRS, your employer, or your utility company, you can follow a process to switch from checks to direct deposit.
Can you change from direct deposit to paper checks?
Yes, you can usually ask your employer to switch back to checks. Verify with your employer what the process is so you know what to expect.
Photo credit: iStock/RyanJLane
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SoFi members with direct deposit activity can earn 4.20% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.
As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.20% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 10/31/2024. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.
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