What is direct deposit and how to set it up?

Everybody gets excited when payday arrives. It's a sign that another milestone has been reached. However, having to deposit a check at a physical location can take a lot of time – if you have to wait for a paycheck, enjoying the fruits of your labor doesn’t come so quickly.

Instead of waiting, direct deposits can be a faster way of sending and receiving money between two accounts, allowing your money to be available when it’s needed.

In this article, we’ll tell you everything that you’d like to know about using direct deposits, such as what is a direct deposit, how does it work, and how to set up one.

Plus, we’ll also talk about how Wise can save you money when you need to send and receive in different currencies – but more on this later.

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What is direct deposit?

Direct deposit is a fully automated funds transfer method from one bank account to another, where the transfer is done electronically instead of using a physical check. It is often seen as the simplest and fastest way to be able to access money.

Once a direct deposit is set, banks will use the ACH (Automated Clearing House) network to make these transfers between them.

It’s also a great way to reduce transfer costs, automate payments, and avoid fraudulent payroll scams, which is why it’s become a popular method among companies for paying their employees and other expenses.

In a lot of places, direct deposit is a required method of paying wages, but this can vary from one region to another.

How does direct deposit work?

With direct deposit, funds are transferred through a secure electronic network. The sender sets up their banking information to include receivers’ banking data, such as the name of their bank and the bank’s routing number.

Once the account, or accounts are added, payments can be directly sent from the sender’s bank account, usually with just a couple of clicks and keyboard strokes.

The receiver (like an employee) doesn’t have to use the same bank, as established bank routing protocols allow different financial institutions to seamlessly communicate with one another.

When an employee or vendor receives funds via direct deposit, the account balance will automatically increase when the payment arrives.

Unlike when you receive money with cash or check, with direct deposit you don’t need to accept the payment. And as to the sending account, when paid with direct deposit, the designated balance will decrease when the payment is made.

How to set up direct deposit?

Regardless of signing up with your employer or a different provider, the process is fairly similar. While the direct deposit forms you need to fill out may be different depending on the provider, generally, you just need to provide them the further bank account information:

• A bank account number (or numbers)
• The associated routing number
• Bank name and address
• Type of account (typically, a checking or a savings account is used)
• Name of the account holder
• In some cases, the company paying you might ask for a voided check or a specific form.

Routing numbers are something banks use to identify each other in the US banking system. They're made up of nine-digits, and ACH network also requires them to facilitate electronic money transfers. You may be also asked to provide your bank’s address and for verification purposes, the provider might ask you to provide a voided check as well.

Once you have all the information, these are the following steps you need to follow to set up a direct deposit:

• Fill out the direct deposit form.
• Provide your account information.
• Deposit the amount
• Attach a voided check
• Submit the direct deposit form.

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If you create a Wise account, you'll avoid the big conversion fees in international transactions - either if you open a business or a personal account Wise account. Your money will be converted with the mid-market rate, and there will be no Swift fees nor intermediary banks taking their cut.

This is why Wise could save you money and time especially in international transactions:

• Send money at the real exchange rate with no hidden fees (not any maintenance costs)
• If you have a business, you can send batch payments in more than 50 currencies
• Use the card in 200 countries, spend with Apple and Google Pay, and withdraw anywhere
• Get your own UK account number, Euro IBAN, US routing number, and more
• Hold multiple currencies for free, and convert money with the mid-market rate

See how much you can save with Wise

How long does a direct deposit take?

Creating the direct deposit process might be time-consuming if the company has a long list of employees to be entered.

However, once everything is in place, adding (or deleting in case of departure) employees takes just a couple of minutes. After everything is set up, running the payroll batch on payday only requires a few minutes.

As an employee, you might receive your funds in a matter of minutes, especially if you use the same bank as the employer.

However, if transfers have to pass from one bank to another or involve cross-border payments, the money won’t arrive quite as quickly. In some cases, it is possible that the funds will be available in as little as one to two hours. In others, substantial delays of a couple of days may occur. However, this only applies to cross-border payments.

Direct deposits: possible uses

Here are a couple of cases where direct deposits can provide a real advantage to physical checks – saving you plenty of time. Set up a direct deposit to arrange payments such as:

• Tax refunds
• Investment redemptions
• Paying bills
• Government benefits (like Social Security)
• Child Support and Maintenance

Benefits of direct deposits

There are a number of benefits to use direct deposit over issuing traditional paychecks. On the other side, there aren’t many disadvantages, which is why direct deposit has become the go-to solution for companies to manage their payrolls.

Direct deposits are safer

Direct deposit is inherently more secure than printed checks, both for the sending and the receiving parts. If you go digital, there is no possibility of a check or signature being forged and the risk of identity theft is greatly reduced.

Saves a lot of time and effort

One of the great advantages of direct deposits is saving time. You don’t have to stand in lines to cash in your checks, which can sometimes incur additional transaction fees, and you don’t have to be physically in the office to get paid. If you get sick or working remotely on payday, the money is still safely delivered when paid through direct deposit.

You can split a direct deposit

One of the biggest benefits of direct deposit is the ability to assign where the money goes. You can request that a portion of the money be sent to a checking account and another portion to a savings account, or to a third-party banking account as well. This allows you to responsibly start a savings plan and learn to manage your finances using only the funds they have decided are available.

It’s good for the employer, too

For employers, for example, offering direct deposit allows them to drastically reduce the amount of time spent on payroll-related work. There’s no longer the need to prepare payroll, write and sign checks and deliver them to employees, some of whom may be working remotely. Direct deposit is more efficient, allowing the business to focus on other matters. Also, they arrive faster to the payees’ bank account when compared to checks, and don’t require any other action from the receiver.

Plus, the reduction of manual work also leads to reduced expenses. In addition, if a check is lost or stolen, a company has to spend a great deal of time and money to resolve the issue. Not to mention that the company won’t have to print the checks and pay to email them. And for the receiving side, the fees for receiving those checks won’t probably be an issue with electronic payments.