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Washington, D.C.

The idea of direct deposit

30.06.2021
880
10 min.

Within the last 20 years, these deposits have ceased to be a privilege for most employees. But despite being ubiquitous not everyone is aware of all the advantages and disadvantages of this payment method. That's why it is better to ensure that you realize what to expect and how to obtain the best benefit out of it.

The idea of direct deposit

The idea of a direct deposit

Previously, a paper cheque as well as a visit to a bank were required for making payment. Thanks to direct deposits several steps were eliminated from this procedure.

Note! Instead of drawing a paper cheque the payer performs an electronic payment that is credited directly to the checking account of the recipient.

Thanks to this process a payee not only saves time for visiting a bank but gets access to funds faster as well. It is related to the fact that clearing an account with a paper cheque can take 2-5 business days or even longer in case a large sum is being deposited. A waiting period for funds to be credited is not required by direct deposits so you have access to the money the same day it was transferred.

US direct deposit transactions are handled via the Automated Clearing House (shortly ACH) network. This network can also transmit direct payments. Provided payments through ACH are allowed by the banking institution then it is possible to set up direct instalments for everything from vendors billing to alimony.

Who can provide direct deposits?

Generally a direct deposit is associated with payroll. Switching to a fully electronic system allows employers to save money and time which is why this is where most people face with a direct deposit offers for the first time.

Attention! You may receive direct deposits not only from the employer.

Thus, the US government prefers making payments to people through direct deposits rather than paper cheques. For quite some time 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 cheques 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 cheques from financial life.

A direct deposit setting up

This 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 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 your funds will be credited. A number of your checking account appears on personal checks and usually you can see it to the right of the ABA Routing Number or by logging in your account through an app or website.
  • Account type. You may have a direct transfer to a savings or checking 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.

Duration of a direct deposit transferring

A big advantage of direct deposit lies in time saving. Thanks to this process means you don't have to go to the bank each time to get payment.

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 vary somewhat depending on where the money is coming from.

For example, employers have a complete system that guarantees employees to be paid in accordance with the payroll schedule. The majority of employees may expect direct payroll transfers to be made to the account at midnight prior to 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.

The Federal government's payments are systematized too. Social welfare benefits are credited to an account on the second, third or fourth Wednesday of each month. If the due date falls on a public holiday then payments will be transferred the working day before this 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 receipt to the account.

Is it safe to use direct deposits?

Security is a common issue with a direct deposit. However, this payment method is usually safer than cheques because they can be stolen or lost and someone could fraudulently cash a cheque that was not issued. In case of a paper cheque loss issuers usually charge a fee for reissuance. Provided a cheque 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 1976, the year the option of direct deposits was first offered to beneficiaries.

Actually, the biggest potential security issue with direct deposit comes when you set it up. Making sure that the information regarding your banking account 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 regular checking account. A lot of people find a direct deposit appears 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 balance to avoid service charges, it is worth letting direct deposits do all work for you.

In order to be granted this benefit 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 financial 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 direct deposit which means clients may access funds 2 days afore by utilizing a direct deposit. 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 to 2 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.

First of all, a direct deposit is only accessible to those with a bank account. Until recently, 6.5% of American households did not have access to banking services, according to the FDIC. These nearly 8.5 million households didn't have access or use regular banking institutions. Non-banking individuals are required to obtain direct deposits 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 transferred to 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 credited 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.

A lot of time can be spent to identifying and alerting all payers who have set up their direct deposits. In case they skip informing some clients will mean that they will have to wait for the payment until it is returned by the previous bank and reissued to the new one.

Is it worth setting up a direct deposit?

Traditional paper checks are likely to proceed being 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 quicker access to funds for most Americans.

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

This is a nice benefit for a couple minutes of paperwork.

Particular considerations

A direct deposit is a convenient and popular method for transferring and receiving payments. Regarding to payers, it cuts any check-issuing, postage and administration costs. For recipients, it eliminates the risk of paper check loss as well as the need to personally visit the bank to deposit money. As mentioned earlier, recipients of direct deposits are not subject to a waiting period for check redemption as it may take a week or more for paychecks paid by check to be paid off.

Not every citizen has a banking account. In case a payer needs to perform electronic payments like direct deposits, they have an opportunity provide funds in another way, for example, a prepaid debit card. This frequently happens when the government sends cards to beneficiaries who do not cooperate with traditional financial institutions.

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