Direct depositing is a type of bank transaction in which money is electronically transferred from one account to another. Often used by businesses to pay employees, direct deposits require the recipient of the money to provide bank account information, including account numbers and routing numbers, to payers to allow access. In addition to employers, government agencies also use direct deposits for Social Security, retirement and unemployment.
What is direct deposit?
In the form of direct deposits, a business registers to be automatically deposited by its bank into a specific account, whether at that branch or a completely different bank.
Before sending the money directly, the employer must print the check on paper, then hand it out to the employee so that they deposit it themselves in the bank. This means that instead of waiting in line at the bank along with others on Friday afternoon, employees will see the money displayed in their accounts.
Direct deposits also make the lives of employers and workers easier. Financial institutions prefer to send money directly because it ensures stable, predictable cash flow into their location. They can also enjoy the benefits of a high account balance without having to hire additional tellers at their branches to manage all the salaries sent weekly.
How does direct depositing work?
There are many steps involved in transmitting an electronic payment, starting with the payer directing his bank to issue the payment on a specific date.
The issuing bank will then send the request to Automated Clearing House, which manages all electronic transactions to U.S. banks. Once approved, the payment will go through the Federal Reserve, and the Federal Reserve will transfer the transaction to the payment recipient’s bank account.
Each bank has its own policy on when ACH transactions are transferred to the account. The rule is that money needs to be in the account no later than the business opening date on the date specified in the transaction. Weekends and bank holidays can affect this, so employers are instructed to keep this in mind when making a deposit for employees.
How to set up a direct deposit
Setting up a direct deposit for an employee is not so difficult. You just need to get a Direct Deposit Authorization Form from your bank. The employee will provide the account number, routing number and other information, then sign the form.
However, when you have a lot of employees, things can get a little more complicated. You’ll start balancing multiple subscriptions, along with checking to make sure your current payments go as planned.
To make things easier, some employers have set up a registration portal. Through this, employees can provide their information and authorize deposits. The software can automate much of this process, collect information and transfer it to a database, with information collected and transmitted to your financial institution. All of this can help you save money and minimize mistakes.
Things to consider when sending money directly
If your employer offers the option to send money directly, you may be wondering if it’s safe. It has proven to be a safe, secretive way to receive money from one account to another. When the employer gives you a paper check, It is your responsibility to transfer it to the bank without losing it. If something happens before you get to the bank, your employer will take time and expenses to stop paying on the original check and issue a new check.
Like your employer, you should also keep in mind that weekends and holidays can affect work turnaround times. While sending money in person can give you peace of mind knowing the money will enter your account on the specified date, it can also be too easy to lose track of the many bank holidays that take place every year and assume you’ll have the money sooner than you would.