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What is a Direct Deposit Account?

Jim B.
Jim B.

A direct deposit account is an account that accepts payment for its owner directly from the source of the payment. Instead of the payment going first to the person to whom it is owed, who then deposits it into the account herself, direct deposit eliminates the middle step. This type of payment is commonly used for such instances as paychecks, income tax refunds, and social security payments, among many other possible uses. In most cases, a direct deposit account is held by the bank of the person who is receiving the payment.

For a long time, pay from employer to employee came in the form of a check that was handed out on pay day. The employee would then have to take the check and deposit it into his account at the bank, which required some time for the check to clear before the money within it could be used. Technological advances have made it much easier for employers to pay their employees via a direct deposit account, which eliminates the need for checks and streamlines the process.

Direct deposits eliminate the use of paper checks.
Direct deposits eliminate the use of paper checks.

Direct deposit also allows the employee to immediately have access to the money within, usually by midnight the day before pay day. Not only does this allow the employee faster access to the money she is owed, but it also eliminates the chance that a check can be lost or stolen. With a direct deposit account, the person receiving payment doesn't have to make a physical trip to the bank to make a deposit. The money automatically appears within the account at the time of payment.

To set up a direct deposit account, both the employee and employer must make arrangements and sign off on the decision. Most big businesses offer the service to their employees, and some even require that the employee receive payment via direct deposit. It is a cost-saving measure for many businesses, since the simple digital transfer of funds saves them the money used on paper for checks, which can be considerably large if a lot of employees are involved.

In many cases, an employee with a direct deposit account will be able to go online to check the status of his payments or get a look at his digital pay stubs, which he can then print if he wants them for record-keeping purposes. Direct deposit accounts can be used as well by senior citizens or other society members who get regular payments from the government. Investors may also set it up so that money made off investments is directly deposited into their brokerage account.

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    • Direct deposits eliminate the use of paper checks.
      By: JohnKwan
      Direct deposits eliminate the use of paper checks.