December 5, 2022
Summary: Direct deposit is a helpful financial tool for safely and conveniently transferring money from one account to another. The most common use of direct deposit is for paychecks, as close to 94% of all working Americans use direct deposit to receive their pay every payday.
Direct deposit has overtaken paper checks as the preferred method of payment for both employers and employees across the country. However, despite how common direct deposit has become, you may still have questions about what it is, how it works and whether it’s safe.
We’ll provide detailed answers to these questions below. But please note, you should always discuss any specific questions about direct deposit with your employer’s payroll department, because often, the processes surrounding direct deposit are specific to the business or agency setting it up. It’s always wise to double-check with the person responsible for managing your organization’s payroll to see if they have any specific requirements or rules for setting up direct deposit.
What is direct deposit?
A direct deposit is an automated, electronic transfer of money from one bank account to another. Direct deposit is useful because it helps people and businesses transfer money without having to visit a bank with a paper check in hand.
The primary benefit of direct deposit is convenience, as it usually results in less paperwork for both parties involved and no trips to a physical bank. The money direct deposited will also usually become available sooner than if you had to pick the check up and cash it at your local bank.
For these reasons, recent surveys have shown that close to 94% of Americans receive their paycheck through direct deposit every month.
How does direct deposit actually work?
Direct deposit requires a network to electronically transfer funds between banks. This network is known as an automated clearing house, or ACH. Simply put, an automated clearing house is a financial hub that processes transactions between different financial institutions.
When you set up direct deposit, you’re giving out your financial “address” for where you want the other party to send the money. Then, after your employer adds the information on their end, they can press a button to send the money through the automated clearing house to your specific account.
In real-world terms, this financial “address” is a combination of your bank’s routing numberand your personal account number.
When you go through onboarding at your employer, they’ll typically ask for this information to set up direct deposit in their payroll processing tool.
How long does direct deposit take?
Because of how the direct deposit system is set up, your pay should appear in your account immediately on payday. This is because most banks finish processing these transactions the night before so the money will be immediately accessible on your payday.
For example, let’s say your employer runs payroll once a month on the last day of the month.
The person who manages your company’s payroll will usually run the numbers several days before this end-of-month deadline and send this information along to their bank. Your employer’s bank will then send information about the transaction to your personal bank through the ACH network.
At this point, your bank will hold onto the money while they complete the transaction. Then, on payday, your bank will formally “release” the funds into your account, where they’ll be immediately available.
You can compare this to the process for physical checks, where you’d have to pick up a check from your employer on payday, drive it to the bank, deposit it and wait for the check to clear before you can use the funds.
It’s clear, direct deposit creates efficiencies for both employees and employers.
Is direct deposit a safe way to get my paycheck?
Yes. Direct deposit is one of the safest ways to receive payments and is trusted by both the U.S. government and banks across the country.
In fact, recent usage statistics by the National Automated Clearinghouse Association (Nacha) (the organization that manages the ACH network) show that the ACH network processed 29 billion payments in 2021 for a total transfer amount of more than $72.6 trillion.
Not only is direct deposit safe from a process standpoint, but it also eliminates the possibility of your physical paycheck being lost, stolen, delayed or damaged.
Remember, the primary benefit of direct deposit is convenience. This means that the entire system is set up to make it as easy and safe as possible for people, banks and businesses to send money to one another across the network.
How do I set up direct deposit with my employer?
The process for setting up direct deposit is the same no matter who is sending you money:
- Fill out the direct deposit form — You’ll usually have to fill out a direct deposit form each time you start a new job. This form will ask you for the information needed to set up the ACH transaction, such as your name, social security number and bank account information, including your bank’s routing number and your account number.
- Choose a deposit amount — Your employer’s form will likely have the option to split the money between several different accounts if you so choose. For this reason, you should make sure to list all the accounts you’d like them to add funds to, with specific deposit amounts for each. Note that you can usually only set up direct deposit for checking and savings accounts.
- Attach a voided check — Many employers will ask you to attach a voided check to your direct deposit form. This is a security method to ensure the routing and account numbers you wrote on the form match the ones for your bank account. It’s usually wise to double-check that these numbers match the ones on your check before you submit the form to your employer. (Note: You can void a check by simply writing the word “VOID” in large letters across the entire check. Make sure not to write over the routing and account numbers in the bottom-left corner.)
Boiled down even more, most employers just need your personal information, your bank information and how much money you’d like to send to each account (if you choose to split your paycheck). The forms and other requirements such as a voided check are just there to help make the process easier and more secure for you.
Setting up direct deposit for other payments
Direct deposit isn’t only helpful for getting quick access to your paycheck. In fact, you can use direct deposit for a variety of different payments and benefits:
- Social Security benefits — The U.S. government pays out Social Security benefits as a form of income in retirement and for individuals who suffer from a disability. Federal law mandates that all benefit payments, including Social Security and related benefits, be made electronically. This means that you can have the Social Security Administration direct deposit the payments into your checking or savings account.
- Federal and state tax refunds — Depending on how you file, you can choose to receive any refunds as a direct deposit by choosing that option on your tax return. This also opens your account to other forms of direct deposit from the government, such as stimulus check payments or one-time tax rebates.
- Insurance benefits — If you make a claim for insurance benefits such as for a life insurance policy, homeowners insurance or any other payout, you can usually have the insurance company direct deposit the payment into your account (as opposed to having a check mailed to you).
- Child support — Individuals who receive child support as a part of a court-mandated order will often request that the other parent direct deposit the money into their accounts.
- Third-party payments — The recent rise in third-party financial tools such as Venmo, Cash App, Google Pay and Apple Pay have made quick and easy payments more accessible. When you need to withdraw your money from these digital wallets, you can choose to direct deposit the funds into your personal accounts.
This is far from an exhaustive list, and there are numerous other reasons to set up direct deposit for your accounts. In all these cases, you’ll have to provide your bank’s routing number and your account number to tell the agency or service where they should send the funds.
Save time each month with direct deposit
Put simply, direct deposit makes your life easier on payday. You don’t have to pick up a check from your employer, you don’t have to physically deposit the check at your bank and you’ll have more time in your day to do other things.
Direct deposit is a convenient and safe method of receiving your paycheck. Best of all, if you choose to use direct deposit the money will immediately become available in your account on payday.
Direct deposit is a unique benefit of checking and saving accounts, meaning you’ll have to open an account at a bank to take advantage of direct deposit for your paychecks if you don’t have one already. If you have any questions about setting up an account—or if you’d like to open an account today—reach out to a local Associated Bank branch to schedule an appointment with an experienced local banker.
