What is direct deposit and how does it work?

In years past, getting paid meant receiving a physical check from your employer that you would then take to a bank to cash or deposit into your checking or savings account. Often this meant spending your lunch hour on payday waiting in line at the bank, or waiting until the weekend to access your money.

Today, there are more convenient options for receiving payments. According to the National Association of Automated Clearing Houses (NACHA), more than 80 percent of workers in the United States now receive their pay by direct deposit.

We define exactly what direct deposit is, how it works, and how direct deposit accounts differ from other types of bank accounts.

What is direct deposit?

Direct deposit is a form of payment in which funds are transferred electronically to your checking or savings account, instead of a paper check. Although direct deposit is most commonly leveraged by employers paying their employees, it can also be leveraged for other purposes: for example, when receiving a tax refund, Social Security or disability benefits, or other types of payments. Direct deposit ultimately relies on the infrastructure of the Automated Clearing House (ACH) network, which provides banks with an easy means of transferring money electronically.

A direct deposit account is simply a checking or savings account that offers the ability to send and receive funds electronically. Most checking and savings accounts available through commercial banks now come with direct deposit capabilities by default.

How does direct deposit work?

As mentioned above, direct deposit in the United States works using the Automated Clearing House (ACH) network. This is an electronic system that allows banks and other institutions to transfer funds electronically. It is directed, governed and administered by the National Association of Automated Clearing Houses (known as Nacha), a non-profit organization financed by the financial institutions that use its network. In 2018, ACH has facilitated and processed nearly 23 billion financial transactions, worth approximately $51.2 trillion.

ACH uses two numbers, your bank's routing number and your personal bank account number, to know precisely where money needs to be deposited or withdrawn.

How to sign up for direct deposit

Whether it's to receive your weekly paycheck, a tax refund, Social Security benefits, or any other payment, signing up for ACH direct deposit is usually pretty straightforward. It requires you to fill out a unique form providing the following information:

      The account number of the bank account where you want the funds deposited (usually a checking or savings account)

      Your bank's routing number

      The physical address of your bank

      A voided check or deposit slip (used to verify your account and routing numbers)

Sometimes you may also be asked to provide your Social Security number, mailing address, or other information, but this will vary from employer to employer.

You can find your routing number and account number on your check or by logging into your online banking account.

As an employee, you will likely be given the opportunity to opt out of direct deposit during the onboarding process when you are hired. If at any time you want to change your direct deposit to be deposited at another bank, or stop it entirely instead of paper checks, you can do so by requesting that change through your employer, usually by speaking with your accountant or Human Resources Department.

Depending on the options your employer offers you, you may also be able to access split deposits, which allow you to divide your direct deposit among multiple accounts, such as a checking and savings account, instead of just one account. This can help some people reach their savings goals by automating savings.

Once you've submitted your direct deposit application form, it may be a good idea to ask your employer how long it takes for direct deposit to begin. It typically takes one to two payment cycles to set up direct deposit, during which time you may need to rely on paper checks.

Once you have successfully set up direct deposit, you will no longer receive paper checks. Instead, the funds will be directly deposited into the designated account(s). When these funds are deposited will depend on your employer and when the transactions are posted, but generally coincides with a regularly scheduled payday.

What time does a direct deposit hit your account?

Direct deposit is a great way to make sure your finances are on track. Unfortunately, it’s also something that can be a pain in the rear. Once you start getting your paycheck directly deposited into your bank account, you suddenly have to deal with incoming money that isn’t consistent with your budget. Around here, we use direct deposit for many of our expenses, so getting our paychecks on time is a big deal for us.

Most times, everyone receives a direct deposit in their bank account on a regular basis. If you don’t, it could be time to pick up the phone, call your bank and ask what time does a direct deposit hit your account?. Direct deposits are payments from a bank or credit union to your account that can be made electronically or through a paper check. If you’re not receiving a direct deposit, call your bank and ask when your next one is going to hit. It’s always best to get the check right before you start spending it.

The benefits of direct deposit

People choose to sign up for direct deposit for a number of reasons. The most common include;


Direct deposit eliminates the need to make a trip to the bank and deposit a physical check in person. In addition to everyday convenience, this makes it easier to get paid at times when you might be on the road or too busy to visit a bank.

Faster access to funds

Since direct deposit means funds are deposited into your bank account immediately, they can be accessed as soon as they are in your account. This can be particularly beneficial for one-time payments, such as receiving a tax refund check or other form of payment. A physical check can take 7-10 business days to arrive in the mail.

Increased security

Because a physical check is never cashed, there is less chance that the check will be lost, stolen or altered.

Out of paper

Electronic deposits mean fewer paper checks are printed and ultimately end up shredded in landfills, which is better for the environment.

Low cost

Sending a direct deposit payment via ACH is inexpensive for employers and generally free for employees. That means you're not paying for the added convenience of direct deposit.

Potential for other savings

Many banks charge their checking account customers a monthly fee for having a checking account, often in the range of $6 to $15 per month. But they will often waive these fees for people who allow direct deposit into their checking account, which can lead to significant savings. Saving $15 per month would add up to $180 per year.

Automated savings

For people who take advantage of split deposits, direct deposit can make it easier than ever to automate savings and meet your financial goals by dividing funds among multiple accounts.

In most cases, signing up for direct deposit is an incredibly easy and straightforward process. It's convenient, often gives you quicker access to your money compared to paper checks, and can even save you money. If you are interested in signing up for direct deposit, please speak with a member of your human resources or accounting department for details specific to your employer.

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