The idea of direct deposits

Direct deposit is a more secure and convenient way to transfer funds because it eliminates the possibility that a check or cash will be lost or stolen as deposits are made electronically.

8 min.

Over the last couple of decades, a direct deposit has evolved from a privilege to a standard feature for most employees. But despite being ubiquitous not everyone is aware of all the advantages and disadvantages of this payment method. It is better to ensure that you realize what to expect and the ways to get the most out of it.

The idea of direct deposits

This article contains all the information you need to know about direct deposits.

Direct deposit. What is it?

Previously, for payment made, you had to draw a paper check and have time to visit a bank. Thanks to direct deposits several steps in this process have been eliminated. Instead of paper checks, an electronic installment is issued by a payer and it is credited directly to the recipient's current account.

This procedure not only helps save time by not visiting a bank but also provides faster access to your funds. It is related to the fact that it takes from 2 to 5 business days to settle your account with paper checks or even longer in case a large amount has been deposited. Direct deposits don't apply a waiting period for funds to be credited so you have access to your money the same day it was transferred.

In Canada, the Automated Clearing House (ACH) network processes direct deposit transactions. Direct installments can also be sent via this network.

Note! In case a banking institution affords payments through ACH then it is possible to set up direct deposits for various purposes from service provider billing to child support.

What financial institutions offer direct deposits?

Direct deposits are associated with payroll by most people. Eventually, moving to a fully electronic system allows employers to save time and money, which is why this is where most people get acquainted with offers of direct deposits. But you can receive payments not only from the employer.

Thus, government agencies prefer to pay citizens through direct deposits rather than paper checks. For almost a decade now, all social welfare benefits have been paid with the help of direct deposits or prepaid debit cards. Likewise, you can choose to electronically transfer your tax refund to the banking account rather than waiting for paper checks which might take up to 6 weeks to receive.

Besides, a lot of independent suppliers, private companies, utility companies, charities, leasing agents, and other companies offer direct contributions to both payers and recipients. Thus, with direct deposit, it's possible to remove paper checks from the financial life.

Setting up a direct deposit

The procedure is pretty much the same for all payers. It is necessary to have the following data:

  • ABA routing number. It consists of nine-digit and is assigned to a banking institution or a credit union and it provides a payer with the information on which bank will receive funds. This number is typically printed in the lower-left corner of a business or personal check or it can be found on the bank's app or website.
  • The number of the banking account. That is the number where funds will be credited. The number of your current account appears on personal checks and usually, you can see it to the right of the ABA Routing Number or by logging in to your account through an app or website.
  • Account type. You may have a direct transfer to a savings or current account and a payer might want to be aware of the account type used.
  • The address of the bank. The address of any bank's branch can be provided.

Important! You should remember that the number of an account is confidential information, that's why you need to be careful with whom and in what way you share it. Make certain that the direct deposit is being set up with a trustworthy payer.

It is also recommended to avoid sharing an account number as well as other data by email or regular mail. Processing your application to participate in the program of direct deposits in person or by telephone with an authorized person can help keep your information secure.

A direct deposit processing time

A big advantage of direct deposits is time-saving. This process means you don't have to go to the bank each time to get payments.

But what is the speed of such a payment? While a direct deposit can be almost instantaneous the actual timing of the receipt of money in your account may to some extent depend on where it comes from.

For example, employers have a complete system that guarantees employees to be paid per the payroll schedule. The majority of employees may expect direct payroll transfers to be made to the account at midnight before the due date. Thus, you can get your money long before arriving at work on payday. The procedure is the same even if an employee is out of town or for some other reason is unable to work on payday as direct transfers are automatic and require no input from a payee.

Government payments are systematized too. Social welfare benefits are credited to your account on a specific date based on your birthday. (If the due date falls on a public holiday, your payments will be transferred the working day before the holiday).

As for other kinds of direct deposits, funds may be received within 1 business day upon the payment but sometimes they are credited the same day. Since these deposits are usually not subject to bank blocking, the money can be used right upon it is received to the account.

Is it safe to use direct deposits?

Security is a common issue with a direct deposit. Still, this payment method is usually safer than checks because they can be stolen or lost and someone could fraudulently cash checks that were not issued. In case of a paper check loss issuers usually charge a fee for issuance. Provided a check has been stolen you will have to overcome a cumbersome and costly process of stopping the payment by the payer.

In the meantime, a direct deposit doesn't have any of such potential security issues. Since the money is automatically transferred from one account to another, it just cannot be stolen or lost.

Note! The Social Security Agency informs that no direct deposits have been lost starting from the time when this option was first offered to beneficiaries.

Actually, the biggest potential security issue with direct deposit comes when you set it up. Making sure that your bank account information is passed on to the company you trust through a secure channel can help keep your direct deposit secure.

Other advantages of direct deposits

In addition to the convenience and security, a direct deposit can benefit you at the bank whether it is regular or online banking.

Firstly, direct deposit usage is among the easiest ways to avoid monthly fees related to a traditional current account. A lot of people find a direct deposit to be much easier than keeping a daily minimum balance or performing a minimum quantity of transactions on a debit card each month. Rather than tracking transactions or balances to avoid service charges, it is worth letting direct deposits do all work for you.

To be granted these benefits clients usually need to create a direct deposit with the help of the ACH network for their monthly income, including wage, social welfare, and retirement benefits.

Attention! Generally, a deposit of $500 or more is required and there may be cases when the bank counts definite ACH transfers from other banking institutions as eligible direct deposits.

The applied rules may differ so it is better to check the small print of the agreement with your banking institution.

Internet-only banks offer another great bonus for the direct deposit which means clients may access funds 2 days afore by utilizing a direct deposit. The time period within which funds become accessible stands upon the time of the direct deposit receipt from the payer. These ACH deposits are processed at online banking right after they have been received which may take two days ahead of the payroll schedule. Thus, payees can enjoy the fruits of their labor sooner with every payment.

What are the possible downsides of direct deposits?

Despite the presence of various major advantages of direct deposit, this does not mean that it has no disadvantages.

Important! Direct deposits are only accessible to those with a bank account.

Non-banking individuals are required to obtain direct deposits by utilizing prepaid debit cards and these cards can incur high fees. In addition, debit cards may be stolen or lost.

People who have access to banking accounts may encounter some difficulties when using direct deposits. Inattention is the most common. Since money is automatically deposited into an account, a lot of clients simply forget to monitor their payment bills or deposits. This means that you may not notice the trouble for some time.

One possible solution to this problem is to set up alerts via the bank. Having a text or e-mail message each time a direct deposit is received may provide a little nudge to double-check the correctness of all aspects when transferring.

Finally, a direct deposit can bring troubles if you decide to change the bank. This can happen to anyone when a bank that you have been using for many years merges with another bank which gives new routes and account numbers. To transfer information about the new account payers are required paperwork.

Is it worth setting up direct deposits?

Traditional paper checks are likely to proceed to be a widespread payment method. We've seen the financial world use direct deposits over the years and it's almost certainly the case in the future. Overall, the trend towards direct deposit provides safer transferring and faster access to funds for most people.

However, potential recipients should be careful with their confidential banking information and create systems to ensure that the income is monitored. But some people find that direct deposits make their financial life easier and more convenient.

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