Direct Deposit Definition
The direct deposit is a technique of sending money from the payer’s account to the payee’s account digitally, without any usage of paper checks. Companies commonly use it to transfer the salaries into their employees’ accounts or any other accounts. There is no delay in the clearance of payment as the funds are transferred electronically.
Direct deposit is a way of transfer of funds from one account to another electronically with the help of a direct network known as an automated clearing house (ACH). It helps in the transfer of money without having to wait for the money to clear. When a payer transfers the money from his or her account to a payee’s account, the balance in the account of the payer decreases while the same amount of fund increases in the account of the payee instantly. This technique of digitally sending money is safe as well as it saves time.
Example of Direct Deposit
Suppose, an employee of XYZ Company wanted to receive her salary for April 2018 into her bank account electronically. The salary of the employee with XYZ Company is $600 per month. So, the employer will ask the employee about her bank account information which is required to send payment. Once the employee gives all the necessary information to the employer, the employer will transfer $600 to the account of the employee which results in a decrease of $600 in the account of the employer and an increase of $600 in the account of the employee.
How Direct Deposit Works?
The first step is to provide information about the bank account to the payer. They may ask the payer to provide a voided check. The payee may sometimes have to provide bank account information online. The following are the bank account details which are to be provided to the payee:
- Routing number
- Bank account number
- Type of account
- Bank name and address
- Name of the account holder, and so on.
Most of the information is found in the personal check. Once everything is done, the payee will receive the payment.
The direct deposit proves to be very crucial in sending or receiving the payments since it makes it easier to receive or send payment even being far away from each other. It saves time as there is no need for a paper check which leads to fewer complications. It is safe also to transfer money electronically from one account to another as there is no possibility of fraud. It infers deposit of funds into a bank account electronically instead of physical, paper check mode.
Sending Payments with Direct Deposit
If a payer or an organisation wants to send money to the payee, the payer must have an account with the financial institutionFinancial InstitutionFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. providing an automated clearing house (ACH) payment. Such services are offered by bank accounts, payroll providers, or bookkeepingBookkeepingBookkeeping is the day to day recording of financial transactions such as purchases, sales, receipts, and payments, and it is the first step in the accounting process. It can be prepared in two ways: single-entry and double-entry; however, the double-entry approach is more widely used and recognized in most countries. services, etc. The payer needs to ask the payee about the bank details, and once the payer has all the required information, the payer can send payment to the account of the payee. The payer will get a digital receipt of payment which can be used for future references.
- Receiving Payment: The most important use of direct deposit is that a person can receive payments electronically.
- Sending Money: Sending money is also the main use as a payer or an organisation can send money to any person’s bank account just by having their bank details.
Besides these uses, there are some other important uses such as:
- Payments to independent contractors
- Managing child support and maintenance
- Pay bills
- Receiving tax refunds
This article has been a guide to Direct Deposit & its Definition. Here we discuss the example, how to set it up along with uses and need. You can learn more about from the following articles –