Setting up online payroll with your bank

Paying your employees can take a lot of time. Online payroll can streamline the process. But how do you arrange it?

A small business owner doing online payroll on their phone

Payroll doesn't stand still

Payroll processes are evolving all the time. Over the years businesses have moved to new payment systems. Historically, employees have been paid with:

  • cash payments
  • handwritten cheques
  • printed cheques
  • manual direct deposits into employee bank accounts
  • online direct deposits into employee bank accounts

So the obvious next stage is to automate the online direct payment of your employees. Modern businesses use software to connect to their bank accounts. Then they can set up automated payments for their employees – and do other useful things too.

Linking your business to your bank

Your bank account is an integral part of your business. You make and receive payments every day. So it makes sense for your bank account to be closely tied to your business software.

Modern accounting software can link to the internet banking facilities of most major banks. This lets you manage all aspects of your money, without even entering a bank branch.

For example, good accounting software can take a bank feed from your bank. A bank feed is a way for you to see your bank transactions when you log in to your accounting software. It's a quick way to match bank transactions and reconcile your accounts almost effortlessly.

You can also make faster payments to your employees, without having to enter all the details manually. Online payroll is good for your employees – and good for your business.

How does it work?

Online banking is covered by strict regulations and tight security. Bank account holders need to know that their money is safe at all times. So banks and accounting software companies work hard to ensure that online payroll is secure. This is how accounting software makes simple and secure online payroll payments:

  • Your accounting software creates a payment file containing payment instructions in a form that your bank understands
  • Log in to your online banking and upload the file
  • Then simply confirm that you want to make the payments – and off they go

You can control the whole operation from within your accounting software, and you’ll only have to log into your bank account to make a single payment.

Connect to your account

It's simple to get automatic bank feeds from your bank once you connect it to your accounting system. Your bank statement lines are fed into the accounting software so that you can match them and then reconcile them with your records.

Your accounts will be updated automatically with all your recent banking transactions. You won’t have to type anything, saving you a lot of time and effort. Quality accounting software will let you have direct feeds from most major banks.

You may need to sign a form giving the company authorisation first. You may also have to pay a small fee to the bank. But it's worth the cost, because of the advantages it brings.

A bank connection makes it easier to do business

Simpler payroll is just one of the benefits of linking your accounting software to your bank. Being able to access bank feeds containing updated information gives you lots of flexibility. Some of the other advantages include:

  • much less manual work – your financial information is updated automatically
  • faster accounts reconciliation through bank feeds
  • less chance of typing mistakes or other manual errors
  • you get an accurate, real-time view of your accounts
  • you can access your bank data from wherever you are
  • you can make and schedule payments quickly and easily
  • you'll have happier employees and suppliers, because you can pay them faster

Anything that simplifies accounts reconciliation and payroll payments is good for your business.

Choosing the right software

If you want to connect to your bank to get the benefits of automated payments and feeds, you'll need the right software.

Accounting software packages work in different ways – and with different banks. Make sure you choose the software that's going to work best for you. It should have these features:

  • Support for bank feeds and account reconciliation: Ideally this should be automated, so you don't have to manually download the data from your bank account.
  • Support for payment data files: It should be possible to create standard format payment data files that you can upload to your bank.
  • Accessibility: With online or cloud-based software you can access your accounts securely, whether you're in the office or elsewhere. It means you're not tied to one computer when you want to manage your online payroll.
  • Ease of use: Accounting can sometimes be complicated, but your accounting software should make life as simple as possible for you.
  • Payroll features: You can't pay your employees automatically if your accounting software can't handle online payroll operations.
  • Scalability: As your business grows, so will your payroll – because you'll have more employees. You need to make sure your accounting software can handle this growth.
  • Low maintenance: You won't want to have to keep applying upgrades and patches to your accounting software. Ideally it should be cloud-based – that usually means the upgrades and backups happen automatically.

Better online banking – six aspects to look for

Some banks have a traditional, old-fashioned approach to business banking. Others are more modern and proactive and have adapted to the world of cloud-based applications. So once you’ve identified a potential business bank for your online payroll needs, it’s time to dig a little deeper. Here are some things to look for in an ideal banking partner:

1. Support for your chosen accounting software.

2. Simple sign-up process, where they walk you through each step.

3. Comprehensive and easy-to-use online banking tools. You should be able to access your accounts via a web browser and also smartphone and tablet apps.

4. Ability to connect to your accounting software.

5. Ability to upload payment data files, if you choose that method of online payroll.

6. A local presence. If anything goes wrong, it can be frustrating trying to resolve it via a telephone call to someone halfway around the world. A local branch lets you deal with any issues face-to-face.

It always pays to shop around. Check out customer reviews, and read each bank’s terms and conditions carefully. A good bank will stay with you for the life of your business – so this is not a decision you should rush.

Test and test, then test again

Once you've chosen the accounting software and bank account that best suits your business, do some testing. Don't try to do live payroll payments immediately. Take the time to understand how the process works.

Test your bank feed – check how well it integrates into your accounting software. Make sure the numbers make sense.

Then you can move to online payroll. Start with some test payments to make sure everything is working as it should. For example, you could pay a small amount to yourself or one employee. This would be a great first test as you can reverse the transaction and easily get the money returned.

It's important that you are able to trust the connection with your bank. Any errors might be hard to fix later. So check the numbers regularly in the early stages. Make sure the automated processes are doing what they should.

Bank integration simplifies payroll

Integrating your accounting software with your bank can make life simpler for you. As well as making your financial information available in real-time, it can make payroll faster.

It also reduces the risk of human error, and the time and effort required to keep your accounts up to date.

With a little work up front, you can improve the efficiency of your payroll operations. This will help keep your employees happy – and that's good for business.


Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.

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