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How Does Direct Deposit Work?

Written by Marc Guberti

Marc Guberti is a Certified Personal Finance Counselor who has been a finance freelance writer
for five years. He has covered personal finance, investing, banking, credit cards, business
financing, and other topics.
Marc’s work has appeared in US News & World Report, USA Today, Investor Place, and other
publications. He graduated from Fordham University with a finance degree and resides in
Scarsdale, New York.
When he’s not writing, Marc enjoys spending time with the family and watching movies with
them (mostly from the 1930s and 40s). Marc is an avid runner who aims to run over 100
marathons in his lifetime.

Updated February 13, 2024​

5 min. read​

According to a LendingClub report, over 60% of Americans live paycheck to paycheck. Rising costs and other factors put the country in this position, but it also highlights the importance of seamless paydays.

If a consumer receives their paycheck a few days late, it can force them to make difficult decisions about covering emergency expenses. Some workers have to take out short-term loans to cover costs while waiting for a check to arrive in the mail. Consumers with bad credit face an uphill battle and may have to use predatory payday loans to fill in gaps. Alternatives have emerged in recent years that let you get 0% APR for a few hundred dollars. But if the paycheck arrives on time, more people can avoid this problem.

More employers and employees have turned to direct deposits as a more seamless approach to paydays. It’s a great solution that lets you receive cash without waiting for a check to arrive in the mail. This article will explore how direct deposits work and how you can get started.

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What is a Direct Deposit

A direct deposit is an electronic funds transfer between two bank accounts. In this case, funds from an employer’s bank account get sent to an employee’s bank account. The Automated Clearing House (ACH) facilitates these money transfers so that funds go to the right people. This payment plan has several benefits, such as increased security and saving everyone a lot of time. Direct deposits automate payments, so employees don’t have to drive to local banks to cash their checks. Employers can also have better payroll software that saves them time on payday.

How Does a Direct Deposit Work?

Before receiving direct deposits, an employee must provide their bank account information to an employer. The employer then uses this information to send an electronic payment to the employee’s bank account. This process happens automatically. Employees don’t have to wait for a check to arrive in the mail and get paid on payday. Direct deposits happen electronically and can take away some of the stress if you have an urgent cost that you need to address.

Direct Deposit vs. Traditional Bank/Wire Transfer

Direct deposits and wire transfers both exchange funds between two bank accounts electronically. While direct deposits are more useful for recurring payments like payroll, wire transfers are more useful for one-off payments. You will have to provide bank account information to receive a direct deposit or wire transfer, but some wire transfers require additional information. The requested information depends on which country the wire transfer goes to. Some countries have different parameters than others.

Wire transfers are quicker than direct deposits, but not by much. You can receive funds from a wire transfer within a few hours, but it can take a business day to receive a direct deposit. Wire transfers also have more flexibility with the type of currency you can send over. Wire transfers let you do currency conversions on the spot, while an employer can only send direct deposits in their currency.

Some financial institutions charge fees for wire transfers, but this doesn’t happen with direct deposits. Another advantage of direct deposits is that you can make them automatic. As a result, payments can go from an employer’s bank account to employees’ bank accounts without as much effort. On the other hand, each wire transfer requires manual work, which can make paydays more tedious for employers.

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How Long Does a Direct Deposit Take?

A direct deposit usually takes 1-3 business days to arrive in your account. Several factors influence how long it takes for your payment to arrive, but it’s usually faster than waiting for a check to arrive at your doorstep and then having to deposit it. Some banks and credit unions let you access these funds before they arrive in your checking or savings account. Under these arrangements, the financial institution spots you the difference and then repays the difference from your incoming direct deposit. It’s a useful feature for people who need to pay off emergency expenses right away.

Are Direct Deposits Safe?

Direct deposits are safe, and they have more safeguards than paper checks. If the recipient’s name is not on the paper check, a thief could put their name on the check instead and collect the payment. Paper checks can also get lost or stolen, a risk that is not present with electronic transfers. The Automated Clearing House (ACH) acts as a reliable third party that ensures electronic funds end up in the right accounts.

What are the Benefits of Using Direct Deposit to Get Paid?

Direct deposit provides consumers with several benefits over other methods. Here’s the list:

  • Receive payments quicker: Employees won’t have to wait for a check to arrive in the mail or pick it up at the office. Direct deposits allow independent contractors and employees to get compensated sooner. That can make the difference between comfortably covering an emergency expense and having to take out a loan. Fewer people will be sweating it out, hoping that the paper check arrives today instead of tomorrow.
  • More convenient: The funds automatically go into your bank account. You don’t have to take pictures of the check’s front and back or drive to a local bank.
  • Less dependence on physical banks: As more transactions happen electronically, consumers can feel more comfortable using online banks with FDIC insurance. These banks offer higher interest rates on savings accounts (3% APY to 5% APY in many cases). Money in these accounts does not get locked up like certificates of deposit.
  • Increased security: Employers don’t have to worry about the checks getting lost or stolen. Their personal information also doesn’t float around as much if they opt for direct deposits over paper checks. Direct deposits also have data encryption which adds an extra layer of security.
  • Quicker payroll process: You don’t have to sign numerous checks and make sure the amounts are correct every time. Employers can automate their payroll and see the transactions in one place. It is easier and less time-consuming to verify the information and make sure funds get distributed accurately.
  • Better budgeting: The money you promise to someone via a paper check doesn’t leave your bank account right away. Some small business owners may miscalculate how much money they have left because some people cash their checks a few weeks later. If enough people delay their check deposits, one of those deposits can result in an overdraw. The overdraw results in extra fees, and your employee will not be happy about the check bouncing. Issues like these can make talented workers look for other companies.
  • Business owners save money: Direct deposits take less time to set up and maintain than paper check payments. You won’t have to have someone write the checks, put them in envelopes, and pay for shipping. The software can also save time and make it easier for someone on the team to process payments for everyone.
  • Direct deposits enable split deposits: An employee can have 50% of the direct deposit go into the checking account and the other 50% go into a savings account. This arrangement helps employees allocate funds for specific goals instead of lumping every paycheck into the same bank account. Paper checks do not enable this level of flexibility.

Online platforms like Current allow you to get your money faster when you set up direct deposits instead of waiting for the ACH transfer to process. For example, you could get your paycheck up to 2 days early and get paid faster if you set up a direct debit with your employer from the Current Spending Account.

In addition to early direct deposit access, the account includes wealth-building benefits such as spending analysis, a 4% bonus on savings accounts, and up to $200 overdraft protection. Learn more about all the features by visiting their website or downloading Current’s mobile app.

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How to Set Up a Direct Deposit

Direct deposits can simplify your payroll and give employees greater financial flexibility. Receiving payments sooner can help workers avoid payday loans and stay on top of their expenses. In addition, reducing the financial stress of your workers can increase their productivity and help your company achieve new milestones.

Direct deposits help employees and employers. If you are an employee ready to get started with direct deposits, you will have to inform your boss. Employees have to fill out a form that they can get from their employer or a financial institution’s website. You will have to provide the following details:

  • Bank account number
  • Routing number
  • Your bank’s address
  • The name on your account
  • The type of bank account (i.e., checking or savings account)
  • Identification that matches up with the name on your account

You may have to provide additional information to set up direct deposits, but this is the core of what you will have to provide. Some employers may ask for a personal check that contains your bank account number and routing number. If this is a requirement, make sure you write “VOID” on the front and back of the blank check.

Employers will have to look into payroll software to make the process more efficient. This initial investment can save the company time and money in the future. The employer can establish a payment schedule and have those payments take place automatically.

Setting up direct deposits doesn’t take long, and it can save you many headaches. Employees won’t have to worry about payments arriving later than intended, and employers can have a more effective payroll structure. It’s a win-win for both parties, but an employee may have to take the first step to make direct deposits normal throughout the company.

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