What is Direct Deposit and How Does it Work?

Whether through a regular salary payment, a government benefit or a tax refund, It’s common to receive funds in the form of a check, but did you know you can have your money put directly into your bank account instead of needing to cash a check at a bank or ATM? Direct deposit is an electronic payment method where funds are automatically transferred into your bank account, without the need for a paper check. Keep reading to learn the ins and outs of direct deposit and how it may benefit you.

How does direct deposit work?

Direct deposit is an electronic method of transferring funds from a payer, such as your employer, directly into your bank account. This eliminates the need for physical checks.

Here’s a simple example of how the process works:

• The payer initiates payment: Your employer authorizes a payment to your account after processing payroll.
• Funds move through the network: The Automated Clearing House (ACH) network transfers the money between your bank and your employer’s bank.
• Your bank receives the deposit: Once your bank receives the transfer instructions from the ACH network, it credits the money to your account and makes it available for withdrawal.

Direct deposits are typically processed quickly. Payments often hit within two business days. The exact timing can depend on your bank’s internal processing times and the payer’s schedule. Many employers set up payroll so that the funds are deposited the morning of your payday, or even a day or so before.

How do you set up direct deposit?

Setting up direct deposit is relatively straightforward. Your employer will generally walk you through the process within a few days of starting a new job. Steps can include:

1. Gather your bank account details: You’ll need to provide your bank account number, the bank’s routing number (called an ABA number) and sometimes the type of account (checking or savings). You can find these details on your checks or in your bank’s online portal.
2. Fill out a direct deposit form: Most payers will provide a direct deposit authorization form. Fill in the details you gathered in Step 1.
3. Submit the form to the payer: Once completed, return the form to the payroll office, HR department or whoever handles payments for your company. They will use this information to initiate direct deposits into your account.
4. Confirm the deposit: Keep an eye on your account to ensure the deposit goes through successfully. It may take some time for the direct deposit to post to your account, so don’t panic if you don’t see it immediately.

Additionally, you may be able to set up direct deposit digitally with your bank by following these steps on your bank’s website or mobile app:

1. Search for your payer: Enter your employer or benefits provider in the search bar to quickly find the right payer
2. Select deposit accounts: Choose which of your bank accounts you’d like your paycheck or payments to be deposited into
3. Review your request: Check that your payer, account details and deposit preferences are correct, then submit your request to complete setup

When you first set up direct deposit, the employer or payer may conduct a “test deposit” where a small amount, usually less than $1, is deposited into your account to confirm the information is correct. If everything goes through correctly, you’ll be all set for direct deposit during your next paycheck or payment.

What do you need for direct deposits?

To set up a direct deposit, you’ll likely need:

• An active checking or savings account with a bank
• A direct deposit form from the person or company paying you
• Your bank account number
• Your bank’s routing number (or ABA number)

How long does it take for direct deposit to hit?

Most employers set specific payroll schedules, meaning deposits will arrive in your account on designated dates (such as bi-weekly or monthly). The direct deposit is usually processed before 9 AM on your scheduled payday. If a payday falls on a weekend or holiday, the deposit may be delayed to the next business day, or your employer may schedule the payment so it occurs early.

Pros and cons of direct deposit payments

Direct deposit is often used because it's convenient, but like any financial tool, it has its benefits and drawbacks:

Pros

Convenience: With direct deposit, you don’t need to visit the bank to cash a check or deposit money. Instead, the money is automatically placed in your account, ready for use.

Speed: In many cases, direct deposit allows you to access your funds more quickly compared to the waiting period for a check to clear.

Automated savings: Many people set up direct deposits to automatically allocate a portion of their income into a savings account. This helps to make it easier to build savings since you can set it and forget it, instead of having to manually transfer funds into savings.

Paperless: Direct deposit is environmentally friendly, reducing the need for paper checks, envelopes and postage.

Cons

Requires a bank account: To receive direct deposits, you need a valid bank account

Time adjustments: Since deposits are dependent on payroll processing times and banking schedules, there may be occasional delays due to weekends or holidays

Difficult to make immediate changes: Changing your direct deposit information (e.g., switching bank accounts) requires a few steps, and the transition may take a couple of pay periods

Is direct deposit right for you?

Direct deposit, such as Citi’s Enhanced Direct Deposit option, is an excellent choice for most people, but whether it’s right for you depends on your personal financial habits. If you prefer to manually handle your finances through checks or cash, you may find that direct deposit doesn’t align with your preferences. But direct deposit can also be convenient and allow you quick access to your money. Check with your employer to see if they offer direct deposit and decide whether it meets your needs.

Disclosure: This article is for general educational purposes. It is not intended to provide financial advice. It also is not intended to completely describe any Citi product or service. You should refer to the terms and conditions financial institutions provide for various products.