The majority of U.S. employees use direct deposit, and the benefits of this payment tool is no secret. But for the unindoctrinated, direct deposit might sound like pure magic.
Direct deposit is an electronic transfer of a paycheck right into a payee’s bank account. A direct deposit uses an ACH (or automated clearing house) network, an electronic alternative to paper checks that’s been around since the 1960s .
It happens 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? Setting up direct deposit for the first time can seem like a hassle, but understanding what is needed to set it up, and what to expect in the process, makes it easier.
Read on to learn the ins and outs of this process, and how it could be beneficial come payday, and beyond.
Pros and Cons of Direct Deposit
Setting up direct deposit might sound daunting or frustrating, but in reality, 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. 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 set-up that comes with filling out a form and learning where to find a few bank account numbers.
But with the benefit of direct deposit comes the drawbacks. If enrolling, employees should 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 direct deposits automatically hit bank accounts, people could be less likely to notice errors in paycheck amounts or missing paychecks entirely.
Direct deposit comes with positives as well as a few negatives. Based on financial preferences, it might not be the best fit for everyone.
Information Needed to Set Up Direct Deposit
Most employers offer direct deposit, but the process and requirements might vary from place to place. Employees can expect they’ll 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 ABA’s (American Bankers Association) 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 it.
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 Deposit Payments
What some may not know is that direct deposit can work the other way, setting up regular payments out of a person’s personal bank account for recurring charges. A person might choose to send direct deposit payments for utilities, mortgage, or rent.
Some people might’ve already sent direct deposit payments without even knowing it. Oftentimes, these transactions are called “automatic payments,” but they use the same mechanics as direct deposit.
The benefit of sending direct deposit payments is its ease. After providing the information once, a payee can rest easy knowing withdrawals are automatic. They don’t have to go into a payment portal each month to settle a bill.
Sending a direct deposit to another bank account is easy, and is often called a bank-to-bank transfer. These transfers are ACH transfers, and often won’t require the same paperwork as an employer’s direct deposit form.
Most banking institutions have online tools where a person can enter another person’s banking account information and send deposits directly.
Typically, this can be done online, but in some instances, a person sending the payment might need to visit a bank branch.
Recurring direct deposits can also be set up for utility bills or mortgages. These are often set up through a person’s utility company or mortgage holder.
All a person needs to do is input their bank account number and routing number into the platform, then confirm the amount deposited each month.
The benefit of sending direct deposit payments is the peace of mind it brings. Payees don’t have to worry about making payments every month, and they won’t run into late payment penalties, because the payments are automatic.
But setting up outgoing direct deposits doesn’t mean you can just forget about it. Those using direct deposits should periodically check on them, confirming that the amount withdrawn every month reflects the correct amounts.
They should also make sure there’s enough money in the account to be withdrawn.
Other Uses for Direct Deposit
Direct deposit isn’t just for payday or recurring bills. It’s also commonly used in the following 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, similar to direct deposits from an employer.
80% of taxpayers opt to use direct deposit to get their tax refunds faster. The IRS allows taxpayers to enroll in direct deposit for free, and on average, taxpayers get their refund back faster, 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.
Third-party payment apps
Ninety million people use payment apps like PayPal, Venmo, or Cash. But, what most of them probably don’t know is that these tools use direct deposit ACH payments each time someone withdraws from their bank account to make a payment, or deposits cash from the app back into their personal account.
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.
If a person enrolls in unemployment compensation, they can elect to receive the payments through direct deposit into their bank account. Most states allow people to enroll online or send in a form to set up direct deposit of unemployment benefits.
Making Saving Easier With Direct Deposit
While direct deposit won’t make a paycheck any larger, it might make it easier to save. People can’t spend what they can’t see, so sending a portion of direct deposit right into a savings account can make saving automatic.
Direct deposit is also beneficial in the case of multiple checking and savings accounts, and can save the headache of transferring a paycheck manually to different accounts each pay period.
With SoFi Money®, users can easily set up direct deposit to their cash management account and earn interest on all the cash they deposit, plus no account fees.
Direct deposits mean account holders can save more easily, without lifting a finger or cashing a paycheck.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
SoFi Money is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member FINRA / SIPC . Neither SoFi nor its affiliates is a bank. SoFi Money Debit Card issued by The Bancorp Bank. SoFi has partnered with Allpoint to provide consumers with ATM access at any of the 55,000+ ATMs within the Allpoint network. Consumers will not be charged a fee when using an in-network ATM, however, third party fees incurred when using out-of-network ATMs are not subject to reimbursement. SoFi’s ATM policies are subject to change at our discretion at any time.