A prenote is a test transaction used by a banking institution to make sure the account information provided is valid before processing a live transfer. Prenoting is not typically required by most banks, however, there are perks that should be considered!
To prenote, or not to prenote…that is question. Have you ever asked yourself whether or not your company needs to prenote direct deposits?
It’s the goal of many companies today to get 100% participation in direct deposit and pay cards, which would alleviate the need to prenote. Many companies are striving for paperless pay, but may not know if their state allows the company to mandate direct deposit. When in doubt, check your state regulations!
Most banks no longer require prenotification of bank account information for direct deposits; if you have the option, how do you decide on your company stance?
In the past, it was popular to send a penny prenote before the live direct deposit passed through the entire ACH process, including the RDFI (Receiving Destination Financial Institution). Any problems with account or routing number were returned for correction, and the employee continued to receive a paper check until all issues were resolved. Today, prenotes are sent as zero dollars so the full prenote process of the past no longer takes place.
Why Should I Prenote?
While prenoting is no longer required, it can prevent mistakes and save you time! Prenotes are an easy way to validate employee banking data.
Prenotes for the zero amount were required to be sent at least six banking days prior to the first live payroll for the employee’s direct deposit. Essentially, the direct deposit process was being confirmed and the account information verified. Did the employee give you a valid routing number? Is the bank account number the correct length? Does it start with the correct digit for the employee’s bank?
Since the prenote will not go through the RDFI until all information is correct, accounts may still be rejected. For example, an account number may be invalid, the account could be closed, or the account name may not match the account number.
If you are using Employee Self Service, there are additional areas that need to be monitored. If your company is allowing employees to change their own banking information, those employees may not completely understand what numbers should be used where. Be sure to have PR or HR review any new or changing banking information entered into the payroll system to be on the lookout for keying errors.
There may be other keying errors as well. For example, employees may try to use deposit slips to get their information. The information you need for direct deposit should come from a bank statement, the deposit slip was not intended for payment or receipt and may include numbers the bank uses differently. A canceled check is also a good place to get direct deposit info, but keep in mind that with the rise of ATM cards, personal checks may be very old and contain outdated and incorrect information.
Frequently, payroll software embeds a formula to check the bank ABA/routing number entered for employees’ direct deposit information based on the last digit of the number. Check out the Federal Bank Routing Number directory for a valid list of banks and their corresponding routing numbers.
The Bottom Line
Although no longer required, prenoting may still be a good route to take in many cases. It can save you from having to correct mistakes down the road…especially if employees are entering their own changes to their banking information.
So what will your decision be, to prenote, or not to prenote?
Up next: Benefits of Direct Deposit