Over the past 20 years, direct deposit has gone from being a perk to the default for most workers. But just because direct deposit is ubiquitous doesn’t mean everyone knows all the benefits and drawbacks of this payment method. So it’s a good idea to make sure you understand just what you can expect and how you can get the most out of it.
Here’s everything you need to know about using direct deposit.
What is direct deposit?
In the past, depositing a payment required a paper check and some spare time to visit the bank. Direct deposit eliminates several steps in that process. Instead of issuing a paper check, the payer issues an electronic payment, which is deposited directly into the payee’s checking account.
This process not only saves the payee time at the bank, but it also means faster access to the funds. That’s because paper check deposits can take two to five business days to clear your account, or even longer if you are depositing a large amount. Direct deposit does not require a waiting period for the funds to clear, so you have access to your money on the very day you are paid.
Direct deposit transactions in the U.S. are handled through the Automated Clearing House, or ACH, network. The ACH network also can send direct payments. If your banking institution allows ACH payments, you can set up direct payments for everything from service provider billing to alimony or child support payments.
Who offers direct deposit?
Many people associate direct deposit with payroll. After all, switching over to an all-electronic system saves employers both money and time, so that is where most people first see direct deposit offerings. However, you can sign up for direct deposit payments from more than just your employer.
In particular, the U.S. government prefers to pay citizens via direct deposit rather than paper check. Since 2013, all Social Security benefits are paid via direct deposit or to a prepaid debit card. Similarly, you can choose to have your tax refund electronically deposited into your bank account rather than wait for a paper check, which can take up to six weeks to arrive.
In addition, many private companies, independent vendors, utilities, leasing agents, charities and other organizations offer direct deposit both as payer and payee. It is entirely possible that you can eliminate all paper checks from your financial life through using direct deposit.
How do you set up direct deposit?
The process for setting up direct deposit is basically the same, no matter the payer. You will need the following information:
- Your bank’s routing number. This nine-digit number, also referred to as the ABA routing number, is assigned to a bank or credit union and tells the payer which bank should receive your funds. Your bank’s routing number usually is printed at the lower left of your personal or business check, or you can find it on your bank’s website or app.
- Your account number. This is the number of the account into which your funds will be deposited. Your checking account number appears on your personal checks, usually located to the right of the nine-digit ABA routing number, or you can access your account numbers when you log in to your bank account’s website or app.
- Type of account. You can have direct deposit go into a checking or savings account, and your payer may want to know which type of account you are using.
- Bank address. You may use the address of any branch of your bank.
Your account number is sensitive information. You should be careful how and with whom you share it. Make sure you trust the payer with whom you are setting up direct deposit.
It’s also a good idea to avoid sending your account number and other information over email or through the mail. Handling your direct deposit enrollment face-to-face or over the phone with an authorized individual can help ensure that your information is safe.
How fast is direct deposit?
The big selling point of direct deposit is the time it saves you. This process means you don’t have to make a trip to the bank every time you get paid.
But exactly how fast is this kind of payment? Although direct deposit can be near-instantaneous, the actual time frame for the money to hit your account can depend somewhat on where the money is coming from.
For instance, employers have a complete system set up to ensure employees are paid according to their payroll schedule. Most employees can expect payroll direct deposit to arrive in their account at midnight the day prior to the pay date. You may receive your money well before you arrive at work on payday. This is true even if you are out of town or otherwise unable to get to work on payday, since the direct deposit is automatic and requires no input on your part.
Payments from the federal government are also systematized. Social Security benefits arrive in your account on the second, third, or fourth Wednesday of each month, depending on your birthday. (If a payment date falls on a national holiday, then your benefits are deposited the business day prior to the holiday.)
For other types of direct deposit, you can expect the funds to arrive within one business day of payment, although they can sometimes arrive the same day. And since direct deposit is not generally subject to a bank hold, you can begin using the money as soon as it arrives in your account.
Is direct deposit safe?
Safety is a common concern with direct deposit. But this method of payment is generally safer than being paid via check. That’s because paper checks can be lost or stolen, and it’s possible for someone to fraudulently cash a check not made out to them. If you do lose a paper check, the issuer will often charge you a fee to reissue it. If your check is stolen, the process to get your payer to issue a stop payment is onerous and expensive.
Direct deposit does not have any of these potential safety issues. Since the money transfers automatically from the payer’s account to your account, it cannot be lost or stolen. In fact, the Social Security Agency brags that not a single payment via direct deposit has been lost since 1976, when beneficiaries were first offered the option to receive direct deposit.
Ultimately, the biggest potential safety issue with direct deposit occurs when you are setting it up. Making certain that your bank account information goes to the correct party in an organization you trust—via a secure channel—can help ensure the safety of your direct deposit.
What are the potential drawbacks of direct deposit?
While there are a number of major benefits to enrolling in direct deposit, this doesn’t mean there are no downsides.
To start, direct deposit is only available to those who have a bank account. According to the FDIC, 6.5% of American households were “unbanked” as of 2017. These 8.4 million households did not use or have access to traditional banking institutions. Unbanked individuals have to accept direct deposit payments via prepaid debit cards, which can have hefty fees. Additionally, debit cards can be lost or stolen.
For those who do have access to bank accounts, direct deposit can still present some snags. The most common is lack of attention. Since your money automatically transfers into your account, it’s very easy to forget to monitor your pay stubs or deposits. This means you might not notice a problem until quite some time has passed.
One potential fix for this issue is setting up alerts through your banking institution. If you have your bank text or email you every time you receive a direct deposit, it can give you the little push you need to double-check that everything is correct when the transfer occurs.
Finally, direct deposit may cause headaches if you decide to change banks. This happened to me earlier this year when the bank I had been using for 18 years merged with another bank, giving me new routing and account numbers. There was paperwork involved to get my account information transferred with all of my payers.
Although I spent time trying to identify and alert all of the payers with whom I had set up direct deposit, I missed one. That meant I had to wait for my payment until after it was returned by my previous bank and reissued to my new bank.
Should you sign up for direct deposit?
Paper checks will probably go the way of the dodo as time goes on. We have seen the financial world embrace direct deposit over the years, and it is almost certain that this will continue. In general, the trend toward direct deposit provides more secure transfers and faster access to money for the majority of Americans.
That said, potential payees should be cautious with their sensitive banking information and set up systems to make sure they are keeping an eye on their income. But most people will find that direct deposit can make their financial life simpler and easier to navigate.
That’s not a bad upside for a few minutes of paperwork.
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