Pluses Add Up For Direct Deposit Of Paychecks - direct deposit cuts business costs - Brief Article

Nation's Business, March, 1999 by Peter Weaver

Peter Weaver is a free-lance business writer in Bethesda, Md.

Direct deposit of payroll checks is not only a convenience for workers but also a cost saver for employers.

Companies can save as much as $1.25 for every payroll check that is deposited directly in an employee's bank account, according to the National Automated Clearing House Association (NACHA) in Herndon, Va.

So far, however, enthusiasm for direct-deposit arrangements has lagged among small firms. While 84 percent of companies with 100 or more employees offer direct deposit, according to the Federal Reserve Bank in St. Louis, the figures for smaller firms are 49 percent (50 to 99 employees) and 31 percent (under 50 employees).

"It's a convenience perk for our employees," says Larry White, payroll manager for Oklahoma Fixture Co., a custom woodworking firm in Tulsa with 500 employees. "And it's cost-effective because we can cut down on check forms that have to be printed and handled."

Although some employees still prefer to have their check in hand on payday, many enjoy not having to wait in line at a bank to deposit it. The St. Louis Federal Reserve study shows that when direct deposit is offered to a firm's employees, an average of 71 percent of them sign up for it.

In some instances, though, it can take a while to get a majority of employees signed up. "We started offering direct deposit three years ago, says Steve Harmeling, controller for Cincinnati-based Paradigm Communications Group, an industrial-video production company, "and less than 20 percent went for it. Now the number is more than 80 percent."

The percentage of participation may depend on the mix of blue-collar and white-collar employees within a company "Overall, we have 60 percent of our employees on direct deposit," says Oklahoma Fixture's White, "but the figure is 90 percent for our white-collar people."

Lower participation in the blue-collar, manufacturing part of the company, White says, is attributed to higher employee turnover and to a degree of distrust for a payroll system in which there's no chance to handle the paycheck.

In addition, says NACHA spokesman Mike Herd, some lower-income workers don't have bank accounts.

Getting Started

Educating employees on how the system works and how it can make life easier for them is an important first step in instituting a direct-deposit arrangement, Harmeling and White say. This is why banks and payroll-service companies usually provide on-site orientation programs for employees and managers.

"We go out to companies to show employees how it works," says Donald W. Hance, vice president for small-business banking at Union Bank of California in Los Angeles, "and they can use our bank or any other bank they choose."

Says Paradigm's Harmeling: "The bank we dealt with showed us how to do direct-deposit payroll and how simple it was." The first step, he says, was to give the process a dry run. "We tested everyone's deposits offline for two weeks," he explains, "to make sure all the numbers were correct."

If management and the implementing bank or payroll-service company do a good job of educating employees on how smoothly direct deposit can work, there's usually a sufficiently high enrollment to make the program cost-effective.

Benefits For Employees

Most employees seem to like the convenience of having paychecks show up in their bank accounts, and direct deposit is a major plus for some employees. "Our sales reps really like it," White says, "because when they're out of town on the road, they know their pay will be in the bank and not sitting around someplace."

Direct deposit can also help employees implement basic money-management strategies. "Some of our employees have part of their pay routed into savings or investment accounts," says Harmeling, "with the bulk of it going into checking accounts."

To make more information available to a wider business audience and to encourage the formation of more direct-deposit payroll programs, especially among small businesses, a Direct Deposit Coalition has been formed by NACHA, regional clearinghouse associations, some Federal Reserve banks, and the U.S. Treasury Department.

Following are resources for business owners thinking of starting direct deposit for their employees:

* Direct Deposit--A Business Strategy, published by the National Automated Clearing House Association, identifies all the benefits for management and employees and provides a time line for setting up a direct-deposit program within 45 days. For a free copy, call 1-800-487-9180.

* The Payroll Manager's Guide To Successful Direct Deposit, published by the American Payroll Association in New York City, is a complete, 320-page start-up manual. The price is $54.95. Content and ordering information can be found at the association's World Wide Web site, at www.americanpayroll.org.