Making the best choices for your business will always be dependent on being informed of the options available. Wire transfers have been instrumental in moving funds from one business to another since we used telegraphs to communicate. Direct deposits have vastly improved how employees are compensated, redefining payday as the day your money hits your bank account rather than just collecting a paper check. As money transfer technology evolves, knowing when—and where—to use each option is essential to bringing the best experience to payees while making the most efficient and cost-saving choice for your business.
What is a wire transfer?
Wire transfers electronically move money from one bank account to another. The transfers can occur domestically and internationally; from banks within the same chain or between two different banks connected by a network of financial institutions. For international payments, wire transfers account for currency exchange and allow for larger payments, though maximum limits may differ from bank to bank.
To complete a wire transfer, the payer provides either their banking information or cash as well as the payee’s name and full address, bank account number, bank routing number (also known as the American Bankers Association (ABA) number, and authorization. Additionally, the wire transfer may require the payee’s bank number and address. For international wire transfers, a Bank Identification Code (BIC)/Swift code and an International Bank Account Number (IBAN).
While the actual transfer of funds is completed electronically, wire transfers are usually initiated in person either at a bank or through an institution like Western Union. Due to security issues, banks prefer in-person verification for this type of payment method.
How long does a wire transfer take?
Wire transfers generally complete within 24 hours from the time they are initiated with the transferred money available to the payee in local currency. However, bank locations and time of initiating transfer may have an impact on that. International wire transfers may take up to 3-4 business days.
What is direct deposit?
Direct deposits are an electronic fund transfer (EFT) that occurs from one bank account to another. Direct deposits use an automated clearing house (ACH) to complete the transaction. These transactions are overseen by the National Automated Clearing House Association (NACHA). Direct deposits are for domestic transfers only though some international direct deposits that are available for select use cases like military payments. Any available options for international direct deposits are regulated by the International Treasury Service (ITC) and use SWIFT and fedwire protocols to complete.
Direct deposits are used for recurring transfers or large batch transfers like paychecks, tax returns, and government benefits. To initiate a direct deposit, a recipient provides a bank account number, routing number, and authorization to the sender.
Direct deposits are not the same as payments made using services like Paypal or Venmo. While these options do provide an immediate transfer of funds, the money does not go directly into a bank account; an additional step is included in the process for recipient settlement.
How long does a direct deposit take?
Most direct deposit payments take 3-5 business days to process once they are initiated. However, according to NACHA, business owners can opt-in to “same day” direct deposits that initiate 1-2 days in advance for payroll.
What are the advantages of wire transfers and direct deposits?
Advantages of wire transfers
- Fast. Wire transfers happen quicker than other payment methods like mailing paper checks.
- International. Wire transfers can be used to make international payments with the recipient’s funds available in local currency.
- Accessible. Wire transfers do not require a bank account and they can be initiated with cash, making them a preferred payment method for many migrant or overseas workers looking to send money to family in the country of origin.
Advantages of direct deposits
- Risk management. Direct deposits reduce the kind of fraud risks that come with traditional payment methods. Companies that use direct deposit enjoy the control while employees benefit from paychecks arriving on-time and ready for use.
- Cost saving. Direct deposits have lower transaction fees than other electronic payment methods. They also save users on bookkeeping supplies like ink and check paper.
- Ease. With direct deposit, companies are able to process large batches of payments as well as process recurring payments. Larger companies that make payments in various locations are able to make faster payments rather than rely on snail mail.
Wire transfer vs. direct deposit: A detailed comparison
Safety and security
Sending money electronically through wire transfers and direct deposits offers a higher level of security than sending paper checks which can be lost and are susceptible to fraud. If for some reason an error occurs in the payment like an incorrect amount or a duplicate transaction, direct payments can be stopped or reversed. However, wire transfers are nearly impossible to stop once the transaction has been initiated.
Costs and fees
Wire transfer fees tend to vary but typically range from $15-$30 for domestic and $45-$50 for international, depending on the bank or institution. Wire transfers may also be subject to receiving fees. Direct deposit fees vary based on how a business is set up with their bank or financial institution and may be subject to batch or monthly fees for the service. General fees for ACH payments are: flat fees $.20-$1.50, percentage .5%-1.5%, and monthly $5-$30.
Domestic wire transfers occur almost immediately with funds available in the recipient’s bank account same day, depending on where the transfer has occurred, even if the actual transfer of funds has not been settled between the two institutions. International wire transfers may take an additional day or two to complete. ACH payments have generally taken 3-5 business days to complete and are subject to cut-off times for batch processing. However, the speed of ACH payments continues to increase. In 2018, NACHA provided a phased approach to implementing same-day ACH payments that is changing the expected settlement timeline for direct deposits.
Arranging a transfer
Both direct deposit and wire transfer require sensitive information to initiate and settle an electronic transfer of funds. Both require the recipient's bank account information, recipient’s bank identifying information, and authorization from the recipient and sender through signature. While wire transfers are generally initiated in-person, direct deposits occur online and even from a mobile device providing ease of use.
Wire transfers are fast but include a loss of control that finance teams may not find ideal. Once a wire transfer has been initiated, stopping the bank transaction is nearly impossible. Direct deposits can be stopped, but are subject to cut-off windows that impact the speed of settlement. Wire transfers include higher per-transaction fees, but allow for international payments in local currency where direct deposit is only domestic and is only available in the US dollar.
Direct deposit is a useful option for batch payments and recurring payments including employee payroll, or other reimbursements a company may make to an employee, as well as government benefits payments. However, for one-time, large payments—primarily those made internationally—wire transfer is still the most commonly used option.
Wire transfer vs. direct deposit: Which is best?
Because there is currently a predominant use case for each option, determining whether to use direct deposit or wire transfer depends on your needs. If the payment needs to be made internationally, wire transfer is the best bet despite high fees. However, for domestic, recurring payments, direct deposits are the way to go.
With that said, as NACHA continues to update the regulatory guidelines around ACH transactions, the ease of use of direct deposit will improve. According to NACHA, in Q1 2021, ACH payments continued to set new records: “Same Day ACH volume increased 88% in the first quarter as the number of payments exceeded 141 million. The value of these payments, $187.6 billion, reflects a 133% increase over the first quarter of 2020. Operating hours for Same Day ACH were extended on March 19, 2021, and the ACH Network now settles payments four times a day.”
Best practice would be to stay apprised of these watershed improvements and work with a financial institution that is ready to efficiently bring your business through these changes.
We haven’t quite given up the telegraph. Wire transfers are still very much a part of the money transfer landscape, helping businesses make international and same-day payments a reality. However, direct deposit is closing the gap in a changing world that demands the consolidation of security and speed with control and cost-savings. Using the information here, make the best choice—at the right time—for your business.