Direct Deposit
An electronic deposit of funds directly into an account.
What Is Direct Deposit?
Direct Deposit (also known as direct credit), is an electronic deposit of funds directly into an account. It is a fully automated method of a payer sending money directly to a payee's chosen account. Many places of employment use direct credit as a way to pay their employees.
Using this differs from physical checks because there is no need for a company to physically write and mail checks. Instead, it is done electronically. This makes it much easier for both parties and makes payment faster and more secure.
This payment method has been gaining popularity in the workplace over the past few years because it is easier and much more time-efficient for both the employer and the employee. If an employee chooses to enroll, they just need to fill out a form, and the employer does the rest.
Another benefit of getting paid this way is that you are able to get paid even if you are sick or on vacation. The electronic payment would just be sent straight to an account no matter where you are in the world, making it more convenient than a physical check.
Since this method happens electronically, there is also no risk of losing the paycheck or waiting for it in the mail. It is an extremely easy way for an employee to have their paycheck in their account hassle-free and without extra steps.
How Direct Deposit works
A company would offer direct deposit to its employees during the onboarding process and give their workers the option to enroll in it. If an employee chose to enroll, then they would have to fill out a form provided by their employer.
A worker would give their employer the name of their bank, the account number, and the routing number if they desire to be enrolled in direct deposit. This information is usually collected by employers when a worker first starts their job.
Funds are deposited electronically into the worker’s account on the payment date after the funds clear through the automated clearing house (ACH).
When the automated clearing house gets the instructions from the employer, the funds are then processed through the employee's bank and deposited into their chosen account.
Example: A company sends its payroll instructions to its desired bank, and then that bank sends the instructions to the automated clearing house (ACH). The ACH then ensures that all the funds get deposited into the correct bank accounts on payday. The funds are then available immediately.
Why use Direct Deposit?
Direct credit automatically transfers funds into your account electronically, so there are no extra steps in between. Workers who choose to use checks have to obtain the physical check, take it to a bank, and deposit it.
There are also holds from the bank after depositing a check ranging from 1-3 days. Another benefit is that there are no costs in regard to printing, writing, and mailing checks for the employer.
This electronic payment method is advantageous because deposits cannot get lost in the mail, misplaced by you, or stolen and cashed in by someone else. Direct deposit makes funds available quickly, and setting up is only a few steps.
Direct credit has many other uses, like paying child support, getting tax refunds, and paying bills.
A few reasons people choose this method of payment are:
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Faster Access to Funds: Your funds are available faster than if you used paper checks. Since the funds are sent directly into an account, there is no wait time for a physical check to clear.
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Safer: No need to worry about someone stealing your check or losing/misplacing a check. Since a check is a physical piece of paper, it can get lost by an employee, employer, or even in the mail.
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No Paper Check: Helps the environment by going paperless; no need to spend resources on printing or mailing checks. The only interaction happening is entirely online, so many costs to make and deliver the checks are cut out.
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Less time: No need to spend time picking up a check or traveling to the bank to deposit. There is no time needed for picking up a check or time for a check to be delivered in the mail.
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Choose Accounts: You are able to send a percentage of the funds to a different account, like savings and checking. This is a good way to put aside money in a savings account and help it grow over time.
Who offers Direct Deposit?
A payment paid straight into the account of the payee is known as a direct deposit. Since businesses utilize direct deposits to pay their staff, they are particularly popular.
1. Companies/Organizations
A person's place of work often offers this payment method. Many companies pay their employees this way because it is much more efficient and easier for both parties.
2. Government
The U.S. government uses direct credit to pay for things like tax refunds and social security benefits to its citizens. It is much faster and easier than printing and mailing checks to millions of people. The tax refunds are available much faster.
3. Dividends
Dividends for stocks and investments are often paid using direct deposit. An investor sets it up and fills out a form if they choose to get paid this way. When dividends are distributed, they are sent directly to a bank account.
4. Billing companies
People can choose to pay a lot of their bills using this direct payment method. A lot of companies that have recurring bills like rent or utilities often let users pay using direct deposit. This automatically uses account funds to pay for charges.
Disadvantages of direct deposit
There are risks associated with anything online or electronic-based.
1. Cybersecurity Concerns
With an electronic transaction, cybersecurity risks are involved with using direct credit. Criminals are able to do things like lock your account down by guessing the password wrong too many times.
A thief can also use viruses and bugs to gain access to someone's information and get into an account. To increase security, banks advise using harder passwords or even things like two-factor authentication. This is a helpful tip to protect sensitive financial information.
Thieves are able to access your account and steal money. Lots of banks have security measures to ensure this does not happen, but even the largest institutions can get hacked.
2. Setup Fees
For a business offering direct credit, there are often fees involved with setting up. This has more of an impact on smaller businesses that may not have a ton of extra funds to be able to pay their employees this way.
3. Timing
It is important to keep track of timesheets and payroll to ensure workers are paid on time. This is vital because no worker wants a late paycheck because of processing times from the ACH.
How to set up Direct Deposit (what info do you need)?
Overall, setting up only takes a few steps, and they are generally universal and simple.
1. Fill out Form
Your employer will provide a form to fill out during the onboarding process if you wish to enroll. You will need to give information like your address, name, phone number, and social security number.
2. Provide Bank Information
The second step is to provide the routing number, account number, and name of your bank. This is what the employer will use to ensure funds are deposited to the correct account.
3. Select Deposit Amount (Optional)
Sometimes you are able to select what percent you want deposited into a checking account and into a savings account. This gives people the option to divide their paychecks between their accounts.
4. Show Void Check
It is sometimes required by the employer for you to attach a voided check so they ensure they have your correct bank information. This is to stop any risk of sending funds to the wrong account.
5. Submit Form
That’s it! After you complete all the steps and have the deposit form filled out, you just hand it to your employer and they do the rest.
How long does Direct Deposit take?
The time it takes for the funds to be deposited into an account can vary. An employer always has to go through an automated clearing house (ACH) in order to send the funds. The ACH is sometimes notified in advance, so funds are available by a certain day.
This is how a company ensures an employee's funds are available on payday. If an employer does not notify the ACH beforehand and initiate the transaction, it can take up to 1-3 days for funds to be available in a worker's account.
Example 1
Payroll for Employees: An employer has a worker fill out the form. The employer then sets everything up with the automated clearing house, and on payday, the worker will receive their funds in their account.
There is no risk of losing a check in the mail, and the funds are available in the worker's account with no other action needed.
Example 2
A beneficiary enrolls in the Social Security direct deposit program. On the date they receive their benefits, the government will send the funds to the recipient's bank account. These funds will be readily available in the account when they arrive.
Direct Deposit vs. Check
A check is a physical piece of paper and can be lost, misplaced, or even stolen. If someone steals the check, they can fraudulently deposit it without you knowing. Oftentimes if you happen to lose a check, the issuer charges a fee to replace it. This can be a hassle for workers.
Other payment methods like direct credit do not have these kinds of issues. The money is electronically transferred from the payer to the payees' account, so there is no physical transaction.
To get direct credit set up, a worker needs to fill out a form, while for a check, an employer just provides the piece of paper on the date of payment. Filling out the form is what you do to set up, but it is hands-free from there. For checks, a worker needs to pick them up or have them mailed.
The most common mistake that happens during the setup process is when people put in the wrong information. Their account number or routing number may be off, which will send funds to the wrong account.
Direct deposit is also not the same as cash because it is an electronic payment sent to an account. It requires no need for actual cash or a check. The only transaction taking place is online.
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