What is Direct Deposit and how to set it up?

Fernando Figueiredo
5 minute read

Everybody gets excited when payday arrives. It's a sign that another milestone has been reached. However, if you have to wait for a paycheck, enjoying the fruits of your labor doesn’t come so quickly. Direct Deposits are a great way to send and receive money between two accounts, allowing your money to be available when it’s needed.

Learn everything about Direct Deposit in this article, and also see how Wise can save you money when you need to send and receive in different currencies.

What is a Direct Deposit?

Direct Deposit is an electronic funds transfer from one bank account to another, and often seen as the simplest and fastest way to be able to access money.

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.

Once the Direct Deposit is set, Banks will use the ACH network to make these transfers between them.

How does direct deposit work?

With direct deposit, the sender sets up their banking information to include receivers’ banking data. The receiver (like a employee) doesn’t have to use the same bank, as established bank routing protocols allow different financial institutions to seamlessly communicate with one another. 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.

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.

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Wise for sending money

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How to set up a Direct Deposit (as the sender)

Setting up direct deposit is straightforward and doesn’t require a lot of time. However, it’s important that both parts, usually through a payroll clerk, pay attention to all of the details in order to ensure the account information is correct. One ill-placed number can jeopardize the entire process. Let’s check the steps for a case where a company wants to have direct deposit to pay their employees salaries:

  1. The first step in setting up direct deposit is to sign up with a direct deposit provider - a financial institution that works with ACH, like business bank accounts, bookkeepers or payroll providers. In the event payroll services are outsourced, you can request them to create a direct deposit structure.
  2. After the direct deposit service has been created and verified, employers need to collect their employees’ banking information. This information is necessary to properly record the direct deposit destination account in the payroll system, as well as to let the bank know where the money needs to be sent. It also ensures proper tracking of employee pay for accounting purposes.
  3. Once the information is ready, it can be input into the direct deposit database. This step requires attention to detail which is important since all of the information needs to be included exactly as provided.
  4. With the information properly stored in the database, the last step is to run payroll. Typically, pay amounts are stored in the direct deposit database, which means, on payday, the only thing that needs to happen is for the payroll to be run by selecting the individuals to whom money should be sent. The direct deposit system will provide confirmation of the delivery of the transactions, which can then be kept on file by the employer.

Direct deposit information

There are two components associated with direct deposit – the sender (organization) and the receiver (employee, for example). Each has its own requirements in terms of what information they need to provide in order to properly set up direct deposit payments, but usually you should expect:

  • An application (only necessary if using a third-party payroll provider)
  • A current bank statement
  • Business information, including business name and Tax ID number (FEIN in the US)

How to set up Direct Deposit (to receive payments)

You should do this with the organisation that is sending the money to you, and usually you just need to provide them some bank account information, that is usually available on your check:

  • 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

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.

Employees might receive their funds in a matter of minutes, especially if they 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

You can set up direct deposit as an individual or as a business. Here’s a few cases where you might want to consider the option of avoiding checks and postage:

  • Paying employees - or independent contractors
  • Tax refunds
  • Investment redemptions
  • Pay for bills as a consumer
  • Government benefits (like Social Security)
  • Child Support and Maintenance

Pros and cons 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.

Less time, more efficiency
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.

Save money and resources
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.

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.

No need to accept the check
The receivers welcome the opportunity to receive their money digitally. They don’t have to stand in lines to cash their checks, which can sometimes incur additional transaction fees, and they don’t have to be physically in the office to get paid. If an employee is sick or working remotely on payday, the money is still safely delivered when paid through direct deposit.

Split the Direct Deposit
One of the biggest benefits of direct deposit is the ability to assign where the money goes. They 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 them to responsibly start a savings plan and learn to manage their finances using only the funds they have decided are available.

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This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from TransferWise Limited or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date.

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