Understanding the Direct Deposit Process

In today's economic times, many employers are constantly looking for new methods to reduce their overall costs, as well as streamline the operation of their business. Many of these businesses have begun to shy away from the old way of doing things mainly because it was slow and outdated. One of the main things that people turned their attention to was the expensive and time-consuming payroll process.

As a result, more and more employers have taken a new look at the direct depositing of their payroll as the preferred method of to pay their employees. This article will talk about the concept of direct deposit, as well as some of the legal considerations, concerns, and benefits.

What is the definition of the term Direct Deposit?

The term means the electronic transferal of a payment from one company, organization, or individual into another individual's savings or checking account. In the banking world direct deposit is sometimes termed as Automated Clearing House, or ACH for short. An ACH is an application that allows consumers to have their paycheck or other deposits electronically deposited into their checking or savings account, or any other type of account for that matter. This is done after the employer supplies its bank the necessary payment information. After this is done, the financial institution then electronically sends transactions to the ACH operator so that it can be distributed to the employee's checking or savings account. Before any of this can be done, the financial institution is required to request written authorization from the employee.

Who uses Direct Deposit?

Recent studies have shown that as many as 70% of the current workers in the United States, have opted to receive their paychecks via direct deposit. Another 80% of large corporations have now begun to offer the deposit of its employee's wages. Many of these companies employ more than 500 employees; therefore, many of them consider direct deposit to be a very important benefit.

In addition to that, it has been estimated that many educational institutions, State and Federal Government Agencies, and retirement administrators, have come to the point that they often require direct deposit. Over 90% of the people who currently receive Social Security benefits, as well as over 500,000 companies in the US alone. Direct deposit has become even more common in places outside of the United States, such as Europe and Japan.

What are some of the different uses of Direct Deposit?

The most common use of direct deposit is the handling of payroll. However, it is also used for many other deposit applications including commissions, child support, bonus payments, expense reimbursements, dividends, social security, pension payments, and tax refunds to name a few.

What are some of the advantages to an employer using direct deposit?

The main advantage is that direct deposit has the ability to greatly reduce the day-to-day costs of running a business, or administration. Studies have shown that the average cost to issue a paper paycheck is approximately $1.25 for each employee; this estimate does not include the cost associated with paper envelopes or postage stamps.

It is also been estimated that the Federal Government alone is able to save more than $100 million every year by using direct deposit. Direct deposit also cuts down on concerns about lost or stolen paychecks and the expense of stop payment charges. Many employers often experience a noticeable increase in employee productivity on paydays, because employees no longer have to leave work to deposit their paycheck. This equates to hundreds of thousands of dollars a year in the US alone.