Wire Transfer vs. Direct Deposit – Know The Difference

These days, there are tons of options out there for sending money online. There are more apps dedicated to sending money than most people will need in a lifetime, so the options are truly endless.

Despite plenty of cash transfer apps on the App Store, these electronic wire options really boil down to two common formats — wire transfers and direct deposits. These methods are common, but you may not be familiar with exactly what they are and how they work. Some people don’t even realize that there’s a significant difference between the two.

Read on for all the info you need to know, including the pros and cons of each and when you might choose one over the other.

The key difference between a direct deposit and a wire transfer is that a wire transfer is a quicker method of transferring money, however, a direct deposit is cheaper.

What Is a Wire Transfer?

A wire transfer is a type of electronic transfer that sends money from one bank account to another. Typically, individuals or businesses will use them to send money to another party overseas. However, you can also conduct a wire transfer to send money domestically.

How Wire Transfers Work

Wire transfers occur across a network of banks and transfer agencies from around the world. To conduct one, you’ll need to follow these steps.

1. Choose a Provider

Most financial institutions offer wire transfer services, with common providers being traditional banks and credit unions.

If you’d prefer, you can go through a nonbank provider like Ria, Western Union, or MoneyGram. Their services may be cheaper or more convenient, so you should do your research before deciding what institution to use.

2. Choose the Transfer Method

Providers may let you complete wire transfers via the phone, an online portal, or an in-person branch. See what the cost of each method is to choose the most affordable option.

3. Fill Out the Form

To fill out the form, you’ll need to provide a government-issued ID. Information you must provide includes:

  • Your bank account number. You can find the number on a check, bank statement, or your online account. Make sure the account you use has adequate funds.
  • The recipient’s full name and contact information
  • The recipient’s bank account and transit number
  • The name, address, and phone number of the recipient’s bank

We recommend taking the time to fill out the form carefully. When the information is accurate and legible, you ensure the transfer goes as smoothly as possible.

4. Read the Fine Print

Before you submit the wire transfer, read the fine print. Federal law gives you the right to know about all the taxes, exchange rates, and fees involved.

5. Keep the Receipt

When you go through a reputable provider, you should get a receipt. Keep this document on hand so that you can effectively deal with any issues that might come up.

Who Uses Wire Transfers

Though they may sound outdated, wire transfers are still a popular way to send funds quickly. Because they come with high fees, they are most common for occasionally sending large amounts of money.

You may choose this method when they want to send money to friends or family overseas. For instance, if your relative lives abroad and needs money for an unexpected medical emergency, a wire transfer is one of the best ways to get funds to their bank account fast.

While wire transfers are popular among individuals, companies can also take advantage of them. You might send one to your business partner who needs the money to close a deal with a tight window. Or, you might use it to purchase supplies or fund a construction project. Really, the possibilities are endless.

Pros of Wire Transfers

Wire transfers are popular among individuals and businesses for several reasons.

Here’s a look at the top pros:

They’re Fast

One of the best pros of wire transfers is that they’re speedy. Most recipients can access the funds within a few hours. In the case of international transfers, they may have to wait a couple of business days. However, the turnaround times are still much quicker than other methods of sending money overseas.

Easy Currency Exchange Options

When you need to send money in a currency that’s not your local currency, wire transfers make it easy. Most services will offer to exchange the currency. Just remember that you’ll have to pay any associated fees.

They’re Secure

Wire transfers are safe as long as you use a reputable provider. They go through the Office of Foreign Assets Control to ensure those involved in terrorist or money laundering activities don’t get the money.

Just be sure that you always follow common wire transfer safety measures. Never send money to someone you don’t know, and always double-check the information you entered before submitting the form.

Cons of Wire Transfers

As great as wire transfers are, it’s worth examining their downsides.

Here are a couple of cons you should be aware of:

They can be Expensive

It’s no surprise that the convenience of wire transfers comes at a price. Fees will vary depending on factors such as the following:

  • Your provider (we recommend Currencies Direct)
  • What method you use (online, phone, or in-person)
  • Where the money is going to and from
  • Whether you’re sending or receiving the money

If you’re sending money within the U.S., it will cost around $25 to $30. International transfers can typicall come with $45+ in fees. In many cases, it costs money just to receive the money.

Because of these high fees, it doesn’t make sense to use wire transfers regularly. It’s best to send them when there’s an emergency, or you’re transferring large amounts of funds internationally.

They’re Irrevocable

Once you send a wire transfer, you can’t get the money back. It’s important to be 100% certain you want the recipient to have the funds (and that their details are correct on the form).

What Is a Direct Deposit?

A direct deposit is another fast way to make electronic payments. However, this method has significant differences from a wire transfer. Learn more about direct deposits below.

How Direct Deposit Works

Direct deposits rely on the ACH transfer system. ACH stands for Automated Clearing House and refers to the U.S. banking network that facilitates transactions between financial institutions. Banks, credit unions, and the Federal Reserve are all part of this network, making direct deposits super accessible.

Who Uses Direct Deposit

You’re probably familiar with direct deposits because of your job. Most companies use this method to pay their employees. It’s a win-win for everyone as employees don’t have to worry about paper checks and companies find it easier to conduct payroll.

Realize that the federal government also takes advantage of direct deposit. It uses this method to make Social Security payments to retirees, send tax refunds, and collect corporate payroll taxes.

Additionally, customers will use direct deposit to automate monthly payments. You might set it up to pay off your credit card or car loan.

Pros of Direct Deposit

Individuals, businesses, and even the government rely on direct deposit because of the following pros:

They’re Affordable

Unlike wire transfers, direct deposits are much more affordable. Recipients usually don’t have to pay any fees as their banks allow them to receive the funds for free.

If you are a business, you may have to pay a fee to implement a direct deposit system. However, the fees are nothing when you compare them to the cost of sending frequent wire transfers.

They’re Convenient

In today’s world, few people want to deal with the hassle of paper checks. You have to worry about not only depositing them but also the possibility of losing them.

There’s no doubt that it’s much easier to have your paychecks go to direct deposit. You can even choose to divide the payment between your checking and savings accounts.

They’re Safe

Direct deposits are safe as they go directly to your bank account. With checks, on the other hand, you have to consider the possibility of someone stealing and fraudulently cashing it.

Cons of Direct Deposit

Two cons of direct deposit to keep in mind include:

They’re Slower

Direct deposit tends to be slower than other payment methods. Processing times vary depending on several factors, but most clear within one to five business days. This period is usually too long if you need to send money for an emergency.

Chance of Incorrect Paychecks

When your paychecks go right into your account, you might not be checking them as regularly as you should. The convenience can make it harder to catch inaccuracies.

If you sign up for direct deposit through your employer, make sure you verify that your paystubs are correct.

Direct Deposit vs. Wire Transfer — Which Should You Use?

The bottom line is that one isn’t necessarily better than the other — each method is a practical way to transfer money electronically.

Which one you should use boils down to your situation:

  • When you need to send or receive money fast, wire transfers are your best bet.
  • Direct deposits are ideal if you need to make regular payments or receive money from your employer or the government.
Categories Money Transfer