Direct Deposit: What It Is and How to Set It Up

Direct deposit is a form of automated electronic funds transfer from one party to another. Your employer may transfer your paycheck to your bank account with direct deposit, and the government often uses it to issue Social Security payments and tax refunds.

It is a popular payment method, especially for paychecks. Direct deposit is the way that 94% of Americans get paid.

That’s because direct deposit is a convenient alternative to paper checks. It’s one of the quickest ways to transfer money. Here’s more about direct deposit, including how it works and how to set it up.

What is direct deposit?

Direct deposit is also known as electronic funds transfer (EFT). An EFT, according to federal law, is “any transfer of funds initiated through an electronic terminal, telephone, computer or magnetic tape for the purpose of ordering, instructing or authorizing a financial institution to debit or credit a consumer’s account.”

When you receive a direct deposit, the money goes directly into your bank account — no need to cash a check. You can choose to have your funds deposited into a checking account or a savings account.

Direct deposits are processed through the Automated Clearing House (ACH) system, the network financial institutions use for moving payments. The network handled 31.5 billion payments worth $80.1 trillion in 2023, according to the National Automated Clearing House Association (Nacha).

How does direct deposit work?

Employers or other companies require your bank account information to start making direct deposits to a checking or savings account.

Direct deposit is commonly used for paychecks, but it can also be an option for tax refunds, investment dividends, retirement account payments and government benefits, such as Social Security or unemployment payments.

The employer’s or the company’s bank sends direct deposit requests to the ACH to process and then to pass on to your financial institution. The bank simultaneously credits your account and debits the company’s account according to the direct deposit orders.

Pros and cons of direct deposit

Direct deposit is a secure and convenient way to quickly complete transactions with no fees for recipients. It’s generally the easiest way to receive paychecks or other routine deposits and can eliminate the hassles and risks of depositing paper checks or cash.

Pros:

• Convenient. Payments are automatic, which means you don’t have to visit a bank or ATM to make deposits.
• Quick. Your payment is usually immediately available, with no waiting period for a check to clear.
• Secure. ACH payments happen electronically and are more secure than carrying cash or checks that can be stolen or lost.
• Free. You don’t have to pay a fee to receive a direct deposit, and bank accounts may waive monthly maintenance fees if you set up direct deposits.

While direct deposits are convenient, you will also want to consider some of the downsides.

Cons:

• Requires a bank account. You must have a bank account or prepaid debit card to receive direct deposits.
• Potentially involves set-up fees. Some banks may charge a set-up fee to initiate direct deposits. Verify any costs before signing up.
• Introduces cybersecurity risks. Although financial institutions take steps to keep bank accounts safe online, direct deposits may be susceptible to cyber theft because all transactions occur electronically.
• Makes errors easy to miss. That’s because you may not review digital pay stubs the same way you would paper checks.

How to set up direct deposit

If you want to establish direct deposit, you will typically start by providing some account information to the company or institution that will be paying you.

The required information can vary depending on the type of direct deposit you are setting up. If you’re enrolling in direct deposit with your employer, for instance, here’s a step-by-step list of what you’ll need to do:

1. Get a direct deposit form. Most employers will offer you a form to fill out when you’re new on the job. If your company doesn’t have one, you may be able to get one from your bank.
2. Fill out the direct deposit form. You’ll generally need to provide your bank’s name and address and your account number and routing number. You can find your account and routing numbers by logging in to your online account, calling your bank or looking at the bottom of your paper checks.
3. Determine deposit amounts. You may want all of your money in your checking account, or you can split it between a savings account and a checking account or multiple accounts. Just set a percentage or dollar amount for your deposits.
4. Return the completed direct deposit form to your employer. You may want to ask how long it will take to receive your first direct deposit. Sometimes it can take one pay cycle and you will receive a paper check for your first payday.
5. Update as necessary. If you change banks or want to adjust how you split direct deposit payments into various accounts, you will need to update your direct deposit form.

If you’re setting up direct deposit for Social Security benefits, this process will look a bit different. You can have your benefit payment deposited into a bank account or onto a Direct Express Debit Mastercard. Your bank or a Social Security Administration representative can assist you with setup.

How long does direct deposit take?

Setting up direct deposit for paychecks can be done in minutes, but it may not take effect for a few weeks or even longer as your bank account details are confirmed. You may need to wait one or two pay cycles for direct deposit to become active and will receive paper checks instead.

Once direct deposit is established, exactly when you’ll receive your direct deposit varies by bank. Generally, you’ll be able to access it by 9 a.m. on your payday — and sometimes between midnight and 6 a.m. Note that a direct deposit that falls on Saturday or Sunday will be received on Monday.

If getting your paycheck early is important to you, then make sure to research direct deposit programs at different banks. Some banks provide early direct deposit on certain accounts, making the funds available up to two business days earlier than usual.

Is direct deposit safe?

Direct deposit is usually safer than getting a paper check or cash. Cash or checks can be lost or stolen.

However, data security risks are real. Enhanced security measures must accompany direct deposit to avoid information theft.

Only set up direct deposits with companies you trust, such as your employer or the Social Security Administration. If you want to be extra cautious, send direct deposits to a bank account you use only for deposits and then transfer those funds to an account you use for most transactions.

You can also follow these best practices to sidestep security issues with direct deposits:

• Avoid using public computers or networks for financial activity.
• Use virus protection on your computers.
• Don’t click suspicious links or provide sensitive information via email.
• Always look for a padlock icon in your browser’s URL bar to indicate that your financial data is sent with secure encryption.

What are alternatives to direct deposit?

Direct deposit is a popular way to receive payments, especially paychecks, but it’s not your only option. Consider these alternatives to direct deposit:

• Paper checks can be deposited at a bank or ATM or with online banking, but banks may charge a fee to cash a check without a bank account.
• Digital payment services such as PayPal enable users to send and receive money.
• Prepaid cards or paycards can receive deposits and be used like debit cards.
• Cash payments remain an option but can be risky for both employers and employees without a paper trail or security measures.