What are direct deposits?

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A direct deposit is an electronic transfer of funds from one account to another, typically scheduled for completion on a specified date (and time) with a specific amount.

The most common type of direct deposits is for employee salaries and wages. Such direct deposits can be established by employers to pay employees, as well as by individuals contributing to a savings or retirement account.

Business, organizations and even the government utilize direct deposits to more efficiently pay their employees. Electronically transferred funds replace the need for paper checks – as well as for envelopes and stamps – when distributing payroll. Some companies provide a paper copy of the direct deposit payment to the employee as a physical record, but most companies are opting to eliminate the paper copy altogether and just provide a secure online dashboard for employees.

How direct deposits are processed

Direct deposits in the United States are routed through the Automated Clearing House (ACH), which is an electronic financial network responsible for processing debits and credits between institutions and individuals. The ACH network is governed by regulations established by the Federal Reserve Bank (the “Fed”) and the National Automated Clearing House Association (NACHA).

American banks have increasingly taken advantage of the efficiencies that direct deposit and ACH has to offer. Without the physical handling and processing of payments authorized by physical checks, fewer bank employees are needed to manage deposits and withdrawals. This results in potentially lower expenses for banks.

To establish a direct deposit, the consumers, businesses and banks basically needs two items:

  • Routing number of the receiving bank
  • Account number of the receiving bank account

Many account holders will typically provide a copy of a check from the account, into which the funds are to be deposited, to the employer or business initiating the direct deposit. The check has the receiving banks’ routing number as well as the receiver’s account number, which allows the depositor to accurately transmit the funds.

An individual can also direct funds to be placed into a savings, investment, retirement or other account by the same method, providing the issuing bank the routing number, name, account number along with the regular amount of funds to be deposited. For example, an employee gets paid $2,000 on the 15th and 30th of each month and has direct deposit established with the employer. On the 15th, $2,000 is directly deposited in the employee’s checking account who then has $200 automatically withdrawn from his bank account to a retirement savings account, all electronically.

Direct deposits are a convenient and efficient way for businesses to transfer payments on regular basis. Employees who take advantage of direct deposit always know their paycheck is deposited right on payday and sometimes before when a regular payday falls on a weekend or a holiday. If your employer offers direct deposit, it’s a good idea to take advantage of the program.

In addition, direct deposits have become a preferred way to receive gifts and loan funds. Many banks use a form of the direct deposit to allow account holders to send money to another person’s account. Many lenders also speed up the delivery of their loan funds by using direct deposits to electronically transfer loan funds into the borrower’s account.

Disclaimer: NetCredit is a direct personal loan provider and does not provide financial advice, nor does it vouch for any vendor or service mentioned on our NetCredit personal finance blog or online consumer loan glossary. Always research and perform due diligence on any service provider or vendor before deciding to use them, and we recommend that you speak with a financial advisor regarding all decisions that will affect your finances.

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