Direct deposit has been one of the most popular payment methods for the past two decades. This is a standard monetary procedure for most residents. It is safe and inexpensive. Despite the ease of use, not everyone understands the specifics of making such a payment. We have prepared for you detailed information about how it functions and how to set it up.
What Exactly Is Direct Deposit?
Direct deposit involves a financial transaction between two bank accounts. One of the most common types of transfers is a salary transfer for an employee. Financial institutions coordinate such payments with the help of Automated Clearing House.
Direct deposits do not require any physical control. No one checks the process while sending the funds. There is no need to manually confirm the transfer or visit the bank for a deposit claim.
The Procedure for Setting up a Direct Deposit
According to statistics, about 95% of employees participate in the direct deposit process. Thanks to this, they conveniently receive a salary on a specified date. For the employer, this simplified procedure also saves time and effort.
To take advantage of such convenient payments, you must first understand how to set up direct deposit for future use. The whole process is undemanding and will take you no more than 20 minutes. Here is how you can set up direct deposit for your payments:
Fill out the form.
The procedure begins when an organization (or any other subject) collects banking information from its workers (or payment recipients). The employees (or recipients) must provide their personal data. These will include address, name, and Social Security number. At the end of the registration, they will need to lay out a digital signature to activate the deposit.
Finalize filling out your account data.
You will need to fill out the registration form completely. Your bank account will be the essential data. This is required for an employer to complete a direct deposit. The basic information includes your account number and bank routing number.
Decide on the amount.
The amount on your check equals what you will receive as a result of direct payment. For example, if you expect a salary of 1000 dollars, then this sum will appear on your balance on the agreed day. But direct transfer allows you to divide the amount into two different accounts.
For example, if you want to put aside some money for a rainy day, you can deposit something into your savings account. These funds will be inviolable until a certain time. The rest of the salary will be credited to your main balance.
Provide a deposit slip.
Besides a deposit slip, a voided check can also be of use. This procedure will allow the payer to check once again that the bank account entered by the recipient is correct. In this way, you can avoid erroneous operations when making transfers.
Send in the application.
Your application contains sensitive information. It is best to pass it from hand to hand. For example, if it is in the workplace, you can physically transfer it to the finance department. When sending a document via e-mail, make sure that you use encrypted correspondence.
The period for setting up an account and organizing a payment varies. The minimum term is several days. At most, this process can take several weeks. You will automatically receive all configured payments when you connect the account. Direct deposits from the state and wages will be available immediately after the transfer. Payments not falling into these categories may take a couple of days to arrive.
What Is the Mechanism of Direct Deposit?
To understand how direct deposit works, let us consider an example. Employees apply and set up an account. The employer collects bank routing numbers and account data. After the necessary financial information has been obtained, the employer sets the date when you will receive your salary. Let’s say it will be the 1st and 15th of each month.
A few days before, the organization sends your payment details and clear instructions to the Automated Clearing House. They sort and forward each check to the appropriate institution. Immediately after this, banks credit the money to the correct accounts of employees.
Such a straightforward procedure for both parties makes direct deposits more popular. Looking at the graph from the Board of Governors of the Federal Reserve System (US), we can see positive dynamics. On the left, we see the number of deposits measured in billions of dollars. The bottom line represents progress in chronological order since 1975.
If, in the beginning, this amount was less than a billion dollars, the number of direct deposits doubled after 15 years in the early 90s. In 2000, the number of deposits was increasingly gaining momentum. A notable jump was noted in 2020. In a short period of time, they increased by more than 2 billion, from 13 billion to 15. As of now, the annual amount exceeds 18 billion dollars.
Ways to Use Direct Deposit
We know several additional ways where the direct deposit can be useful.
- Besides paying wages, it can be applied to one-time payments to contractors. The client does not act as an organization, so taxes are not deducted from the contractor’s salary. As soon as the service is received, the entrepreneur sends a detailed description of the work. The job is paid immediately upon receipt of the invoice.
- Social security payments. The transaction is commission-free. Transfers are made to a debit card. Without a bank account, it will be impossible to receive funds.
- Child support funds. This procedure saves time. The payer should not issue paper checks anymore. Also, the payment does not include additional fees. Transaction tracking is available for a recipient through banking services.
- Payments to the tax office. The most efficient and fastest method for tax refund is to make an electronic payment to your account without charges. The processing time is 21 days, which is less than the processing period required for paper checks. You can also pay utility bills and recurring bills using this payment method.
Direct deposit has revolutionized regular payments. It is not only a fast but also a safe method. From now on, there are no paper checks to steal. Funds are not transferred from hand to hand. The transaction is protected by encryption protocols. No third party can access the funds, as the process is automated.
The only action required from you is to create an account. You need to provide the necessary data to the payer and wait for the salary to be credited in the promised time. In addition to salaries, direct deposits are used to pay taxes, social benefits, alimony, and one-time payments to contractors. According to statistics, the number of deposits now exceeds 18 billion and is constantly growing.