When you start working for a new employer, one of the first questions you’re asked is about how you’d like to be paid. Employers may offer a physical paycheck, a debit card, or Direct Deposit into your own checking account.
If you choose Direct Deposit to receive your funds, then they will become available on or before the day you’re supposed to be paid. Instead of cashing a check or dealing with debit card fees, you can access your salary through your own bank- or credit union-issued checks or debit card instead.
How that process begins is the foundation of the prenote vs Direct Deposit question. Prenote stands for “pre-notification.”
What Is a Prenote?
A prenote is a zero-dollar (or other currency) test. It is done to validate the banking information that was submitted by the employee. Before a Direct Deposit request can be fully authorized, a prenote must be sent and verified.
If there is no prenote, then there is no Direct Deposit payroll processed for that account.
Think of it as a test transaction. After the routing number and account number for the employee’s financial institution are entered, the prenote will enter into a “pending” status. When the prenote period passes without error, then the status changes to “complete” and the Direct Deposit will be allowed to proceed.
Without the shift in status from pending to complete, the Direct Deposit cannot be processed. The employee would then receive their salary in an alternative method until the prenote can be successfully authorized.
What Is a Direct Deposit?
Direct Deposit is an electronic payment. It occurs when money is electronically transferred from an employer’s account to an employee account which has been authorized through a prenote. Most transfers are completed using an automated clearing house, or ACH network. This allows the payments to be coordinated among several different financial institutions simultaneously when payday arrives.
If you receive your paycheck through a Direct Deposit, then your account balance will increase automatically when that payment arrives. You’re not required to deposit the funds into your account physically or accept the payment.
The opposite occurs with the employer. Once the payment is initiated, the balance in the company account will automatically decrease without a requirement to accept the transaction.
Several billion ACH payments are initiated each year around the world as part of the Direct Deposit process. Some branches of government, especially in the United States, have even started to use the prenote vs Direct Deposit process to pay entitlements, benefits, or structured payments, like Social Security.
Information Required to Start Direct Deposit
There are 5 pieces of information that are required to initiate the prenote process to begin a Direct Deposit.
- The bank account number of the employee must be provided.
- The routing number for the financial institution is needed.
- Employees must choose which type of account they have (checking vs savings).
- The name and address of the financial institution is necessary, even if there aren’t different branches.
- The name of the account holder listed on the account is required as well.
If an employee and a spouse share the bank account where the Direct Deposit is being requested, both names may be required by the financial institution for the prenote to be moved to completed status.
For this reason, many employers request a voided or canceled check as part of the documentation to begin a Direct Deposit. Because a valid check often contains all of the information listed in the bullet points above, there are fewer errors or missing pieces of data that would slow down the process.
From an employee standpoint, it is important to remember that the routing number and account number of your account is sensitive information. These should only be provided in circumstances where you absolutely trust your employer.
Why Choose Direct Deposit Over Other Payment Methods?
Even SMBs and SMEs are discovering that the using Direct Deposit is easier than printing checks or using other forms of employee payment. If you’re looking at the prenote vs Direct Deposit debate because you’re considering a switch to this system of payment, then there are several reasons to ponder here.
1. It automates your deposits.
Once employees submit their information to you, which usually includes a canceled check for information verification, then all you need to do is initiate the payment transaction. Employees aren’t required to take any action to receive their funds.
2. It eliminates the paper trail.
When you pay electronically through Direct Deposit, you’re eliminating the need to print checks. You eliminate the cost of stamps to mail out a paycheck. Even the withholding information that your payroll department handles can issue statements electronically instead of on paper. That means fewer payments get lost and necessary information remains at the ready.
3. It creates an electronic record.
Direct Deposit creates an electronic record of the payment. That makes it easy to know if a payment was sent through properly or not. The need to manually document payment transaction details disappears for all parties involved.
4. It offers a higher level of security.
If an employee is issued a paper check, then there is always the threat that someone could steal it, then cash it before a stop request is processed. Paychecks cannot be altered through Direct Deposit either. The funds transfer from you to them in a seamless way. For some transactions, employees might even be able to access their paycheck up to 48 hours sooner than someone who is paid with a physical check.
5. It is cheaper.
Receiving payments is usually free for the employees who are working for you. Sending an ACH transaction is often cheaper than other methods of payment, including the printing of checks. You won’t go through envelopes and other office supplies as quickly with this payment option. Depending upon your circumstances, there is the possibility of saving money by being able to outsource your payroll instead of hiring accountants to do the work for you.
Have You Decided to Pursue Direct Deposit?
When initiating a prenote for Direct Deposit, it is important to remember that it may take several days, and sometimes 2 to 4 weeks, to process the paperwork. Employees will want to speak with their employer about what to expect with the prenote process, so they can understand how and when they will be able to access their paycheck.
From an employer standpoint, the benefits of offering Direct Deposit make it worthwhile to offer it as an option. Although not every employee will qualify for a checking or savings account, those who do will benefit from these ACH payments to access their salary quickly and securely, without the hassle of other payment methods.