Direct deposit is an electronic transfer of a paycheck right into a payee’s bank account. A direct deposit uses an automated clearing house (ACH) network, an electronic alternative to paper checks that’s been around since the 1960s.
Transactions are conducted online, which cuts out the need for a paper paycheck or a trip to the bank.
It’s safe, easy, and painless to set up a direct deposit—so why doesn’t everyone use it? Learning how to set up direct deposit isn’t difficult, but understanding what’s needed to set it up and what to expect in the process makes it easier.
Pros and Cons of Direct Deposit
After the set-up process, using direct deposit has more benefits than drawbacks for many people. Some benefits of direct deposit include:
• Convenience. Direct deposit means getting paid on payday whether or not an employee is in the office. A person using direct deposit could be at work, on vacation, or out sick, and their paycheck will still appear in their account.
• Time-saving. Employees don’t need to head to the bank or ATM or use their banking app to upload a paycheck. Typically, direct deposit is instant, and the payee doesn’t need to do anything on their end.
• Environmentally friendly. Using direct deposit can help reduce a payee’s carbon footprint on payday since there’s no physical check to print out and no need for a postal service to deliver it.
• Secure. An automatic direct deposit means no keeping track of a paper paycheck. If an employee has signed the check and for some reason can’t cash it immediately, that could be a scary scenario if the check is lost.
• More control of the flow of money. Depending on how a person sets up their direct deposit, they can designate where the money goes each payday. That means sending a portion of the deposit directly into savings, or multiple savings accounts for different goals. That could mean saving more in the long run.
All these benefits come from the one-time setup that comes with filling out a form and learning where to find a few bank account numbers.
But with the benefit of direct deposit come a few drawbacks. If enrolling in direct deposit, you may want to consider the following:
• Security. As when sharing any sensitive account information, people enrolling in direct deposit should understand the risks of sharing their account number and banking information. Share via secure link or in person, if possible.
• Changing banks. Any time a person changes banks or wants their paychecks deposited into a new account, they’ll have to go through the enrollment process again with their employer.
• It can be easy to miss errors. Because the money is automatically deposited into bank accounts, it can be easy to miss errors in paycheck amounts or a completely missing paycheck.
Since direct deposit comes with both positives and negatives, it might not be the best fit for everyone. The decision is best left to personal financial preferences, if you have a choice. However, some employers in some states are allowed to require their employees to accept payment via direct deposit.
Information Needed to Set Up Direct Deposit
Most employers offer direct deposit, but the process and requirements might vary from place to place. Expect to need some or all of the following to enroll in direct deposit.
Employer’s direct deposit form. Many employers have their own version of a direct deposit form for employees to fill out. If they don’t, employees can request a direct deposit form from their bank or credit union to give to their employer once completed.
Bank’s mailing address. Employees will need to provide the mailing address of their bank. This information can be found on a bank statement or on a banking institution’s website. This may not always be needed, but it could be good to have this information on hand if they ask for it.
Checking/Savings account number. It’s easy to find a checking or savings account number on a monthly bank statement or in a bank’s online portal. A checking account number will be between 10 and 12 digits long.
Bank routing number. A routing number is a nine-digit transfer number that identifies a payee’s bank. Unlike an account number, routing numbers for banking institutions are publicly known and can easily be looked up online through the American Bankers Association (ABA) database.
Voided personal check. In some instances, an employee might have to provide a voided personal check along with the direct deposit form to verify the account and routing numbers. To void a check, simply write “VOID” in ink across the front of the check so that the check can’t be used for any other purpose than setting up the direct deposit.
Depending on when a person submits their request, they could start receiving paychecks via direct deposit the next pay period. However, it may take one or two pay periods in some cases.
Employees should check with payroll or HR to confirm when they can expect direct deposit to take effect.
How to Send Direct Payments
Automating a banking process can work the other way, too, setting up regular payments from a personal bank account for recurring charges. A person might choose to set up direct payments for utilities, mortgage, or rent.
The benefit of using direct payments is its ease. After providing the information once, withdrawals are automatic. There is no need to go into a payment portal each month or write a paper check to pay a bill.
Sending a direct payment from one bank account to another is an ACH transfer, and often won’t require the same paperwork as an employer’s direct deposit form. You might also see direct payments called bank-to-bank transfers or automatic debit payments.
The process involves entering your bank account number and routing number into a company’s payment platform, then confirming the amount to be transferred from your bank account for a single payment or on a recurring basis. If you choose to set up recurring payments, the money will be transferred from your bank account to the company you’re paying each month. Since the payments are automatic, they’ll be made on time and you won’t have to worry about late payments.
But setting up direct payments doesn’t mean you can just forget about it. Making sure there’s sufficient money in the account to pay the bill and periodically checking on recurring direct payments is recommended, confirming that the amount withdrawn from your bank account every month correlates with the correct amount you owe.
Many banking institutions have a bill-pay feature to set up recurring payments for utility bills or mortgages, for example, which is different from direct payments. Setting up bill-pay means you are giving permission for your bank to send a payment, whereas setting up direct payment gives the company you’re paying permission to take payments from your bank account.
Other Uses for Direct Deposit and Payment
Direct deposit isn’t just for payday or recurring bills. It’s also commonly used for other transactions.
Since 2013, electronic direct deposits have been required for people receiving Social Security or Supplemental Security Income. The process of setting up direct deposit for Social Security payments is all online, and is similar to how to do direct deposit with an employer.
Eight out of 10 taxpayers opt to use direct deposit to get their tax refunds faster. On average, taxpayers get their refunds within 21 days.
Taxpayers can also elect to have the refund deposited in up to three different accounts, including an IRA, making it easier to save on the spot.
If receiving unemployment benefits, you may be able to elect to receive the payments through direct deposit into your bank account. While unemployment insurance is governed under federal law, each state administers its own program, so it’s important to check the availability of direct deposit in your state.
Third-party payment apps
More than ninety million people use peer-to-peer payment apps like PayPal or Venmo. But what most of them probably don’t know is that these tools also use the ACH system for each transaction.
When a person sets up their payment methods on each of these apps, they have the option to connect it directly to their bank account, providing account and routing numbers, or to a credit card.
Learning how to set up direct deposit can be a good step toward automating your finances, and it might make it easier to meet your personal savings goals. Sending a portion of a direct deposit right into a savings account—or multiple accounts—can make saving automatic.
With a SoFi Money® Cash Management Account, users can easily set up direct deposit to their cash management account and earn interest on all the cash they deposit, without incurring account fees.
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