What Is Direct Deposit and How Does It Work?

Banking
Updated: 11th Jun 2021
Written by Brian Latchford
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Banking
June 11, 2021
Written by Brian Latchford

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More than 145 million Americans get paid using Direct Deposit from either their employer and or for their government benefits. But what is Direct Deposit, and why is it so popular?

What is Direct Deposit?

Direct Deposit is an electronic deposit made through a system called Automated Clearing House (ACH). It is used primarily by employers and government agencies (e.g., social security payments) to pay employees.

How Does Direct Deposit Work?

Instead of being paid by a physical check that you must sign and deposit into your bank account, Direct Deposit is sent directly to your account, avoiding the hassle that comes with depositing checks at your local bank.

This is done using your bank’s routing number and your bank account number. It is seamless, convenient, and, more importantly, environmentally friendly.

This makes Direct Deposit faster, safer, and your balance automatically updates when your bank accepts the electronic transfer.

>> More: Explore the Best Checking Accounts

How to Set Up Direct Deposit

Setting up direct deposit is easy and should only take you a few minutes. Below will walk you through setting up direct deposit.

#1. Ask Your Employer for a Direct Deposit Form

Since more than 90% of employers now offer Direct Deposit, most will have a standard Direct Deposit form for you to fill out.

This can either be an electronic form or a piece of paper that you have to print out.

To fill out the Direct Deposit form, you will need to have the following information. This can be found on a check or within the online portal offered by your bank.

#2. Know Your Account Information

  • Bank Account Number: Your bank account number is a unique number to you that lets your bank know where the money should go.
  • Bank’s Routing Number: Your bank routing number is a unique number to your bank. This tells the electronic systems (and other banks) which bank the funds are going to.
  • Bank’s Mailing Address: Either your banks’ corporate headquarters or your local branch address will work for this.
  • Type of Account: You need to declare if the funds will be deposited into a checking account or savings account. Typically, Direct Deposits go into your checking account.

#3. Set Up Deposit Amount

You will want to work with your employer on how much will be sent to you via Direct Deposit as you may have opportunities to send part of your monthly payment to a retirement account or savings account.

#4. Submit a Deposit Ticket or Voided Check

Employers sometimes use this step to verify the information you gave them is correct (you don’t want your pay going into the wrong account).

If you are asked to supply a check for verification, make sure you write “VOID” across the check so it can never be used.

It also is not a bad idea to request the check to be shredded upon verification.

#5. Fill Out Direct Deposit Form & Submit to Employer

Once the form is complete, submit it to your employer (normally to your boss or HR staff).

The process of setting up a Direct Deposit can take a few weeks, so you may receive one or two checks before your payments start going into your account via Direct Deposit.

Advantages of Direct Deposit

There are many benefits to setting up Direct Deposit. Here are some benefits that stand out.

Convenient

Although it can take a couple of weeks to set up, once Direct Deposit is finalized, the funds are deposited like clockwork, and you do not need to do anything.

This means you no longer have to go to the bank to deposit your monthly check.

Saves Money, Time, and Resources

Direct deposit frees companies from printing checks, signing them, and mailing them to employees. Direct deposit saves time, resources and mitigates fraudulent activity across the company.

More Secure

Direct Deposit is essentially a bank-to-bank transfer. This eliminates, or at least drastically reduces, the risk of fraud or something going wrong due to a human error.

The safety and speed of Direct Deposits are why government agencies also pay this way, including millions of stimulus checks.

Reduces the Chances of Losing a Check

It is easy to lose or have your check stolen. Fraudulent checks are a big reason why checks can take three to five days to clear.

Having a Direct Deposit eliminates these risks, which allows your deposits to clear much faster.

What Banks Offer Direct Deposit?

Nearly every single financial institution in the United States offers direct deposit. This includes traditional banks, online banks, and neobanks.

To help you find a bank that supports direct deposit, review the list below. These banks all offer direct deposit, online banking services, and more:

Is Direct Deposit Worth It?

Yes, direct deposit is a must-have as banks pivot to the digital world. Moreover, direct deposit is convenient for employees and employers.

It reduces a business overhead, which improves their bottom line. This is largely the reason why 90% of employers require direct deposits.

How Long Does Direct Deposit Take?

Depending on your pay schedule (bi-monthly or monthly) and your financial institution, the direct deposit may not take effect until after about two pay cycles.

As we said earlier, direct deposit takes time to set up. You have to fill out a form, verify the information, and make sure money is deposited into the proper account. Additionally, once it is set up, some banks have a 3–5-day processing period.

What Is Early Direct Deposit?

Early direct deposit is a relatively new phenomenon that is offered by online banks and neobanks. Depending on the institution, they allow you to access your pay up to two days earlier.

They avoid the “holding” period and allow you to access your money instantly. This enables you to pay your bills on time and budget appropriately.

Bottom Line: What Is Direct Deposit?

Setting up a Direct Deposit is easy but a little bit of a process. If you follow the steps above, you can set up Direct Deposit with your employer or anyone that would like to pay you consistently.

Within just a couple of weeks, you will enjoy getting paid quicker and automatically without the risk of losing your check or having it stolen.

Due to the speed, security, and cost-efficiency of Direct Deposit, more than 90% of employers now offer it as the preferred payment option.

Also, government agencies utilize it to pay pensions, social security payments, stimulus checks, and tax refunds.

Brian Latchford
Brian Latchford
Brian is a serial entrepreneur that loves technology and coffee. From working with start-ups to creating his own recruiting company, Brian is eager to share his experiences with other founders and business executives. Throughout his career, Brian has enjoyed writing on many topics in the Business, Technology, Finance, and Gaming industry and helps other business leaders as a freelancer.