Electronic payments are the preferred choice of many small business owners. After all, who has the time to make checks every payday? Plus, you save your employees the effort of depositing checks.
However, there can be confusing steps in choosing the right electronic payment and setting it up. What do you need to know about this technology to mitigate risk and avoid fraud?
At CSI Accounting & Payroll, we’ve worked with small business finances for over 50 years. That means we’ve gotten a lot of questions about electronic payment methods and their validations (like prenotes), including:
- What are the differences between direct deposit, wire transfers, and prenotes?
- What is a prenote used for?
- What validations are used for wire transfers?
Direct Deposit vs. Wire Transfer vs. Prenote
Let’s talk about some of the most common terms that come up when small businesses are looking for electronic payment methods.
Direct Deposit
This is a popular electronic payment method where funds from a business are transferred directly into a bank account. It can also be referred to as Automated Clearing House (ACH) transactions.
Direct deposit usually takes about two to three banking days to be deposited and is usually a lower-cost money transfer option. That’s why it’s often used for regular, recurring payroll runs.
Learn more about the timeline for direct deposit transfers with CSI here!
Wire Transfer
This is a different type of electronic payment method where there are funds transferred from one bank account to another. The major perk is that the transfer is instant, but the major downside is that it tends to cost more than direct deposit.
It’s typically used for urgent and high-value transactions and is not commonly used by small businesses to run payroll. There may be circumstances when it’s used to immediately remedy errors or missed payments, but this is rare for business use. However, CSI does offer wire transfer options for our clients if they prefer to go that route.
If you work with CSI, you can also do a reverse wire transfer to our ACH provider to facilitate faster payments to your employees. This is used to speed up your payroll if it's late, and there will just be a small fee from your bank to do this.
Prenote
Short for “prenotification”, this is not a true money transfer at all. It’s a verification method to ensure the accuracy of the account’s details before any money is sent out. It will appear as a zero-dollar “payment” to the recipient’s bank account.
The rest of this article is focused on verifications for direct deposit and wire transfers. However, you can learn more about other factors to consider when paying your employees here!
What a Prenote Is Used For
There’s a huge value in making sure your payment methods are secure and reliable. That’s why a prenote is the verification method for direct deposits.
Again, this is a zero-dollar transfer to a recipient’s bank account to ensure their banking and routing information is correct – like a pretend direct deposit. It’s only used once before your first payment to a new account.
If you use a prenote, you’ll need to wait for it to clear before you can send a direct deposit. This typically takes around three banking days, prolonging the first payment.
However, not everybody will use a prenote. It’s not necessary, and it’s not too common these days since your payroll specialist will be required to input account numbers twice to ensure they match.
These reasons are why CSI doesn’t do prenotes anymore (unless requested). When we used to do them, we rarely had any errors uncovered. So, with the process causing needless delays in processing direct deposit for employees, we ultimately took prenotes out of our direct deposit setup process.
Bank Verifications
Are prenotes used for other bank verifications, too? No, but there is a similar validation process with a small dollar amount (typically under a dollar), often called a penny verification.
However, CSI only does this for our business clients’ bank accounts (not their employees, since it wouldn’t be relevant). A penny verification ensures our clients have access to the accounts used to pay their employees, minimizing payroll fraud potential.
Use Electronic Money Transfers & Avoid Risk!
Now that you know the differences between direct deposit, wire transfers, and prenotes, as well as the validations for electronic money transfer options, are you ready to check out payroll services?
If so, please consider CSI Accounting & Payroll! To see if we can be a good fit for your business, click the button below for a free consultation:
Not ready to talk? That’s okay! First, learn more about the cost of a payroll service by clicking the image below:
