What is Direct Deposit?

Direct deposit is an electronic transfer of money, often a paycheck from an employer, from one bank account to another. Financial institutions process millions of these transactions every day, which makes direct deposit an easy way to move cash without needing paper checks.

Direct deposit can be an inexpensive and secure option for banks and consumers who want to get their funds more quickly, a potential win-win for both.

Benefits of direct deposit

There are a number of reasons you might consider using direct deposit:

•  It’s fast. Direct deposit allows money to move between accounts quickly, typically making funds available sooner than with traditional checks.
•  It’s secure. Direct deposit can be a safer alternative to paper checks, which can easily be lost or stolen. Transactions are also easy to track. You can monitor your direct deposit in your online account.
• It’s streamlined. The system reduces paperwork and the number of steps for banks that process direct deposits.  The system can also save time and effort for consumers. Many banks offer perks such as reduced fees or higher interest rates to account holders who set up direct deposit into their accounts.

Traditional uses for direct deposit

You may already receive your paychecks as a direct deposit if you enrolled in direct deposit via your employer’s payroll. More than 86% of U.S. workers receive their pay via direct deposit. Many employers prefer direct deposit because it eliminates paperwork—and the hassles and errors that come with it. The speed of automatic payroll saves a trip to the bank to deposit your paycheck. Banks encourage direct deposit for many of the same reasons: speed, fewer headaches, and easy electronic tracking.

Other uses for direct deposit

Direct deposit is used for a host of other transactions beyond employee payroll. The Internal Revenue Service (IRS) encourages taxpayers to make tax payments and receive refunds electronically. In fact, approximately 80% of all 2018 federal tax refunds were paid electronically. The Social Security Administration has been even more aggressive in promoting direct deposit: a 2013 federal law mandated that, with a few exceptions, the U.S. Treasury pay all Social Security and SSI benefits electronically.

Insurance providers and the U.S. Department of Veterans Affairs are among other institutions that have adopted direct deposit to streamline payouts to beneficiaries. Most states have instituted systems for making child support payments via direct deposit.

Like direct deposit, the internet has opened the door to a new class of electronic transfer service providers. PayPal, Venmo, and Google Wallet are among the best-known services that allow individuals and businesses to make and receive electronic payments. Users provide their routing and account information and can move funds to and from traditional bank accounts, often instantaneously.

Who is eligible to use direct deposit?

Anyone with a checking or savings account at a U.S. bank can use the direct deposit system. Both types of accounts can receive a direct deposit, and most banks will allow you to automatically split a deposit among multiple accounts. Brokerage accounts, or accounts through which you can make investments, may also accept an electronic transfer; but brokerage firms will sometimes use an intermediary bank to process them.

How to set up direct deposit to receive payments

To set up direct deposit of your paycheck, your employer will likely give you a set of forms that ask for your bank’s routing number and your account number. The routing number is a nine-digit number that you can find in the lower left-hand corner of your personal checks. If you don’t use personal checks, you can contact your bank directly to ask for its routing number. Your account number is immediately to the right on a check. You may also be asked to supply your bank’s mailing address. You’ll also have to provide your employer with a voided personal check to ensure that they receive all the correct details.

When setting up direct deposit into a brokerage account that uses a third-party bank, you’ll likely have to ask the broker for that bank’s routing information and the account number at that bank. This account number may not match your brokerage account number since your broker may be using the bank account as a temporary holding account. Not all brokerage accounts accept direct deposit so be sure to look into the limitations of your specific account.

Once you provide these numbers to your employer, they may set up a test deposit of a nominal amount—usually a few cents—to confirm that they have your correct banking information. Your first electronic deposit may be delayed until you verify your information. 

Making payments through direct deposit and electronic transfers

Direct deposit and electronic transfers can be a good way to send money to a friend or pay taxes or bills. Services such as PayPal and Venmo allow you to make payments to other individuals without writing a check or getting cash from the bank. In fact, many states, such as California and Massachusetts, require electronic payment for some taxpayers.

Electronic transfers have also streamlined payments for services such as credit cards and utilities. You can set these payments up to occur automatically on a certain day of the month or elect to review your bill before authorizing a transfer. Either way, you avoid the hassle of writing and mailing a check.

How long does direct deposit take?

In many cases, you will have access to direct deposits immediately, and banks must make them available by the next business day after the business day that the bank received the money. Electronic deposits often require no human oversight and are automatically validated by your bank, so there is no need to wait a couple of days for a check to clear. In rare cases, an employer may choose to use an electronic check, which is a type of Automated Clearing House (ACH) transaction. E-check funds may not be available for several days.

Direct deposit is great but getting your money earlier is even better. With Stash, you can access direct deposit funds up to two days before they arrive with Stash’s banking’s Early Direct Deposit feature.³ Remember that in many cases, an employer or other benefit provider will notify your bank of a pending payment before it actually arrives. And money always posts as soon as it’s received. With Stash banking, you can also divvy up your paycheck into different partitions¹³ so that you can stay on top of your bills and expenses. To learn more about direct deposit and how to take advantage of Stash banking’s Early Direct Deposit service, visit Stash Banking.