Direct deposit: what is it and how it works

Here’s what you need to know about direct deposits

direct deposit

Direct deposit: what is it and how it works. Source: shutterstock.com

If you need to send or receive funds, then you should know that you can do it in several ways. Which options are the first to come to mind when it comes to sending/receiving funds? Old-school cash (or cash transfers), checks, or maybe electronic payments are popular options. Moreover, nobody can really say which option is better since any type of the above-mentioned ways to transfer funds has both advantages and drawbacks. Or maybe we should rephrase this. Any listed option is good for its purpose, and different situations require different solutions. Thus, one way can fit some particular situation, while another situation would demand another solution.

Today PaySpace Magazine would like to talk about one of the ways to send or receive payments. What if we consider more official situation? Mostly, organizations and companies prefer direct deposit (if that’s at all possible) when it comes to sending or receiving payments. What is more, sometimes you are obliged to use this very option. If you think that it is kind of unfortunate situation, then you are wrong. In a nutshell, direct deposit is a safe and inexpensive way to send or receive money for all involved parties.

Therefore, we offer you to consider this option and decided whether it is good or not.

What is direct deposit?

Eventually, we will start from the definition of direct deposit.

direct deposit

EXPLAINED: How ACH Payments work. Source: shutterstock.com

Basically, direct deposit is an electronic payment from one financial institution/bank account to another. For instance, funds (wage) go from a business owner’s bank account to a staff member’s bank account. However, it doesn’t work this way only. It was just an example, so you should know that this kind of payment can be used in different situations, and there are various ways to implement it. Talking about direct deposit, we cannot but mention ACH (Automated Clearing House) since the direct deposit is a part of ACH (or even it will be better to say the direct deposit is a prime example of ACH payment). Thus, when someone carries out a transfer, financial institutions use the ACH network, which will coordinate these payments among banks. Here’s a look at how these work.

Automatic transactions: When you receive funds via a direct deposit, your account balance will automatically increase when the payment arrives. You don’t need to accept the payment or deposit funds to your account, which would be required if you received cash or a check. Likewise, when you pay with direct deposit, your checking account balance will automatically decrease when the payment leaves your bank.

Frequently used: Direct deposit has become increasingly popular because it does away with unnecessary paperwork, and billions of ACH payments take place every year. For example, some branches of government, such as the Social Security Administration, no longer print checks. Instead, they require that you receive funds electronically (either through direct deposit or via a reloadable debit card). Even small employers enjoy the ease of making payments to not just employees but vendors.

Reasons to make the switch

direct deposit

The funds seamlessly move from one checking account to another. Source: shutterstock.com

There are several reasons for both businesses and consumers to use direct deposit including:

  1. Automated deposits: When receiving funds by direct deposit, the funds are added to your account without any action required on your part. Whether you’re out of town or too busy to make it to the bank, your account will be credited.
  2. No mail or paper: With electronic payments, you don’t need to print checks or pay to mail them. Payees don’t need to keep checking their mailbox. Also, payments don’t get lost as long as you set up the process up correctly the first time.
  3. Electronic records: Everybody has a record of the payment, and it’s easy to see what happened in your checking account’s transaction history. You don’t need to manually write down details about payment.
  4. Security: Nobody can steal a check, alter it, or attempt to cash it. The funds seamlessly move from one checking account to another.
  5. Cost: It’s generally free to receive payments, and sending funds by ACH is often less expensive than other options—including paying accountants. Also, you don’t go through checks, envelopes, or postage as quickly.
  6. Faster pay: Sometimes payees get paid sooner, with deposits arriving in a person’s checking account a day or two earlier than a paper check arrives in the mail. Plus, the funds are available for spending immediately, and there’s no need to deposit the check and wait for it to clear.

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