When it comes to sending or receiving money, there are a few different options available.
Traditionally, cash and paper checks were the two most commonly used methods to transfer money. Today, however, there are more efficient ways to move your money.
Most people don’t keep their money under their mattress but in an account, be it with a bank or a credit union. Direct deposits save a lot of time and hassle by directly transferring money from one bank account to another.
In this article, we cover everything there is to know about direct deposits, including how to set it up and when it’s a good idea to enroll.
What is a Direct Deposit?
Direct deposits are ACH transfers used to deposit money from a bank account into another electronically.
Direct deposits are an electronic form of payment, so there is no need to withdraw any money or write checks. Instead, an electronic bank form is filled out and then passed on to the bank. These forms are relatively easy to fill in and can be found on your mobile banking app or banking website.
You need to find a few pieces of banking information, and you’re good to go.
How Do Direct Deposits Work?
When talking about direct deposits, it’s essential to know that we are talking about an ACH payment type.
ACH is short for Automated Clearing House, and it underpins how direct deposits work. It’s a network of all US banks that allows money to move from one account to another.
ACH payments also have a counterpart called ACH debits. These are the opposite of direct deposits since they debit an account instead of crediting it.
Direct Deposit vs. Wire Transfer
While direct deposits may sound similar to wire transfers, the two are very different. Wire transfers deposit money directly into a bank account, but two significant differences are the price and speed — they are more expensive and faster.
How To Set Up Direct Deposits
To receive direct deposits, you need to supply the payer with your account information so they know where to send the money.
There are different ways for this information to be collected. You may be asked to provide a voided check or complete a direct deposit form.
Direct Deposit Forms
If you need to fill out a form, you can often get the necessary information from your mobile banking app or bank website.
In fact, some banks offer the feature to see all of the necessary information on a single screen. If that fails, you should also be able to contact your bank’s support team for assistance.
One key thing to note is that this information is highly sensitive and, as such, should not be given out freely to just anyone.
Ensure that you trust the person you’re giving it to, and make sure you destroy any copies you make if you write it down on paper.
You will need to provide the following information:
- Your bank account number. The account number of where you want to receive your money. Typically, it will be your checking account.
- The type of account. The type of account for which you’re providing the account number.
- Your bank’s routing number. A routing number is also known as the ABA routing number, and it essentially tells the payer which bank should receive the funds. Depending on your bank’s size, it can have one routing number for all branches or multiple ones.
- The bank’s name and address. Here you can use the address of any of the bank’s branches.
- The account holder’s name. Ask for the recipient’s full name, as it appears on their bank account.
Benefits of Direct Deposits
Direct deposits have many advantages over other methods of depositing money. This section will be looking at some of the benefits that direct deposits offer over other payment methods.
- Faster. Direct deposits are much faster than a paper check. Since everything happens electronically, there is no need to mail anything, which means that payments will not get stuck in transit. A personal check also needs to be deposited at the bank and can take up to 5 business days to clear. Direct deposits are cleared automatically.
- Cheaper. Direct deposits are much less expensive than wire transfers. In most cases, direct deposits are free. However, there might be some small charges. Usually, this depends on the originating bank (the bank from which the direct deposit is made).
- More secure. Direct deposits are more secure than cash, checks, and wire transfers. They can not get lost in the mail and are processed through a secure network that uses several checks and balances to ensure it’s as safe as possible.
When should I use direct deposits?
People and companies use direct deposits for various reasons, with many institutions making it their preferred method to make payments.
Employers used it to pay paychecks; the government uses it to pay social security benefits and tax refunds, among other things.
Taxpayers can use it to pay their tax returns. You can also use direct deposits to move money from one account you own into another, pay utility bills, or make other payments.
They can be handy if you want to transfer money from your checking account into your savings account.
Direct deposits have become more and more popular in recent years, as they’re quick and save companies from dealing with unnecessary paperwork.
Federal benefits (Social Security Benefits) also transfer funds through a direct deposit to your checking account or a prepaid debit card.
How long do direct deposits take?
In most cases, a direct deposit will be deposited on the same day or the next. How quickly this happens will depend on several things which we will be discussing next.
As we said earlier, direct deposits use the ACH network to move money from one account into another.
That means that the bank that holds the account from which money is coming needs to connect to the network to send money to the other bank account.
Banks have time windows during which they can send these instructions. They will typically pile all direct deposit requests until their window opens and then send everything in batches.
The earlier you send a direct deposit, the earlier the money will get into the payee’s target account. Direct deposits done late in the day may be processed the next day, especially after the bank’s cut-off time.
New Rules for Direct Deposits
NACHA, the organization that manages the network passed new rules in September of 2019 about how direct deposits are handled, directly impacting how long they take.
As part of the new rules, direct deposits sent in the first time window will be received by 1:30 PM.
Direct deposits can also have what is called a Settlement Date. This date specifies on which day the funds are to be made available.
An example of this is an employer who pays employees on a specific day of the month. They may send the direct deposits well in advance with instructions that the funds should be released on a particular day.
In this case, the recipient will get the money on the instructed date by 9:00 AM.
Frequently Asked Questions
How does direct deposit work?
Direct deposits work through what is known as the ACH network. This network connects the entire banking industry in the United States, allowing money to move between accounts in the most convenient way.
If you want to send a direct deposit, you should be able to do so from your bank website or mobile banking app. If you want to receive a deposit, you will need to provide a voided check or fill in a direct deposit form.
What counts as a direct deposit?
The following electronic payments count as direct deposits: salary or other regular monthly income, pension, Social Security, and Supplemental Security Income (SSI).
If you need to set up a direct deposit to claim a bank bonus offer, it’s best to check on the bank’s website and the offer details to make sure your payment counts as a direct deposit.
While the two most common forms of direct deposits are paychecks or government benefit checks, there are usually other ways to meet this requirement like simply setting up an ACH deposit from your main bank account to your new one.
You can also often make your bank think you made a direct deposit by moving money from a Paypal account to your bank account. There are also bank bonuses without direct deposit requirements as well.
Does direct deposit work immediately?
Direct deposits work immediately, but there are a few things that you need to know.
Once the payer sends direct deposit instructions to the bank, the bank has to wait for its next window to send it to the other bank. If the instructions are received after the cut-off time, they will be processed on the following business day.
What time do direct deposits usually come in?
Recent changes implemented by NACHA should ensure that direct deposits made first thing in the morning come in by 1:30 PM the same day.
Deposits done later in the day should come in by 9 AM of the following day. NACHA is the organization that manages the ACH network – the technology that connects bank which enables direct deposits to work.
What are some of the cons of direct deposits?
Direct deposits are great as they can save you so much time plus make sure you pay on time, but just like with everything else, there are some drawbacks worth mentioning.
You need a bank account. While this may not seem like a drawback because you probably don’t know anyone without a bank account, FDIC’s survey showed that in 2019, 5.4% of American households didn’t have a bank account.
It’s also easy to miss things. Since the money comes out of your account automatically, you need to monitor your checking account and paystubs carefully to make sure you’re on top of the game.
An excellent way to keep up is to set up alerts so you can see when money leaves your account.
Direct Deposits Are Fast & Secure
Whether you’re sending or receiving money, direct deposits solve many of the problems that other payment methods have.
They are faster than checks, more convenient than cash, and cheaper than wire transfers.
Recent changes to direct deposits also ensure they work faster than ever while remaining secure and accessible.
If you have any questions, contact your bank who can provide more information on setting up direct deposits.