What is direct deposit?

Direct deposit is a form of payment in which one party electronically transfers funds to another's financial account. With direct deposit, you don't have to deal with paper checks, or the hassle of depositing your check and waiting for the funds to be ready to use.

Many companies allow direct deposit for their employees, and some may even require it: but they can't specify which bank employees must use to receive the deposit. It's common that you can also choose direct deposit for other types of payments, such as tax refunds, retirement funds, unemployment benefits, or Social Security benefits. If you've set up direct deposit to your checking or savings account, you can even split your paycheck between more than one account, giving you easy access on or before payday.

How does direct deposit work?

To transfer money through direct deposit, financial institutions use the Automated Clearing House network (ACH), an electronic payment system that facilitates money transfers.

Once your business has your bank account details, you can initiate payments based on your paycheck details. At that point, the money is transferred from the company's bank account to yours.

As soon as that money is deposited into your account, it is typically immediately available for withdrawal or use with a debit card. This is very different from depositing a paper check, in which case your bank may hold some of the funds to verify that the check is valid.

What do I need to do direct deposit?

If you want to receive your salary via direct deposit, you will need to confirm that your company offers this service and provide your bank account details to your employer's payroll administrator. You may even be able to do the process online through your company's payroll portal. In some cases, your employer may ask you to provide a voided check to confirm your routing and account numbers. Here are some of the personal details you'll typically need to provide (some of which are on the bottom of your checks).

      Your name

      Account number

      Route number

      Account type (checking or savings)

      Name of the bank

      Bank address

Depending on how quickly your company processes the information and when your next pay is due, you may receive a paper check during an additional pay period before your direct deposit is set up. Check with your payroll department to make sure you understand the deadlines.

What are the advantages and disadvantages of direct deposit?

Although there are some clear advantages to using direct deposit instead of paper checks, there are also some potential drawbacks that you could run into over time.

Here are some of the advantages of direct deposit.

      Usually Free: Financial institutions or payers typically don't charge for directly depositing funds into your account.

      You'll save time: You won't have to run to the bank to deposit or cash your check after work, which can be especially difficult if you leave work shortly before your local branch closes.

      Quick Access: Your bank or credit union generally won't hold your direct deposit – as soon as it arrives in your account, it's available for your use. In fact, banks are required by law to make directly deposited funds available to you no later than the business day after the business day the deposit was made. This can help you access your funds more quickly.

      No paper checks: Checks can easily be misplaced or lost, and if that happens, you'll have to wait for your company to stop payment on the check and issue a new one. With direct deposit, there is no paper check.

      Flexibility: Depending on your company's policy, you can divide your salary between your checking account and your savings account. This could come in handy if you want to automate your savings.

On the other hand, these are some of the possible disadvantages of direct deposit.

      If you change banks, you'll need to change direct deposit: Changing banks means you'll have to go through the direct deposit setup process again. If your company offers online access, you may be able to do this yourself, otherwise you'll need to arrange it through your payroll administrator.

      Bank accounts aren't available to everyone: In 2017, more than 8 million households were “unbanked” (no access to banking services), according to the Federal Deposit Insurance Corporation (FDIC). If you do not have a bank account, you will not be able to participate in your company's direct deposit program.

      Direct deposit advances could be expensive: If your financial institution offers a direct deposit advance, you can get money from your next direct deposit before it reaches your account. But keep in mind that the next deposit will be reduced by the amount of your advance, and could be accompanied by high fees.

Is direct deposit safe?

Direct deposit is a safer alternative to depositing with paper checks, since the money goes directly into your account and there is no danger of losing a check or having it stolen. But it's probably a good idea to check with your payroll administrator to find out what happens to your bank account details once you give it to them. Signing up for direct deposit online can reduce the risk of someone copying your information that appears on paper. 

Previous Post Next Post