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How Does Direct Deposit Work?

When it comes to receiving or sending payments, businesses have plenty of options. Online or electronic payments are prized for their convenience, and Direct Deposits fall under this category. What is Direct Deposit, and how does it work exactly? Keep reading to learn more about this type of electronic payment.

What is Direct Deposit?

Direct Deposit is more commonly referred to as direct credit within the UK. You’re probably already familiar with direct debit payments, which are withdrawn directly from your bank account. The Direct Deposit meaning is closely related, but in this case, funds are deposited directly into a bank account rather than withdrawn. The term simply refers to any electronic deposits made directly into a bank account.

Within the US, Direct Deposit payments are transferred electronically using the automated clearing house (ACH) network. Direct credit payments in the UK typically use the Bankers Automated Clearing Services (BACS), which works in a nearly identical way for bank-to-bank electronic transfers.

For example, employers often use Direct Deposit to electronically deposit a salary directly into an employee’s bank account.

Apart from salaries, Direct Deposit is used for regular electronic payments including:

  • Pensions

  • State benefits

  • Tax credits

In short, the Direct Deposit meaning refers to a secure, electronic transaction enabling any business or organization to make direct payments into a bank or building society account.

How does Direct Deposit work?

Imagine that you’re a business owner who wishes to make a first direct cheque deposit for a new employee. You can set up automatic payments with your own bank to credit the employee’s account each month.

To set up the first direct cheque deposit, you will need to provide the following information:

  • Payee’s name

  • Payee’s bank account number and sort code

  • Payee’s bank account name

From the recipient’s end, the bank account will automatically increase as the payment arrives via Direct Deposit. There is no need for your employee to accept this payment or make a deposit as they would with a paper cheque.

Within the UK, BACS payments are most used for Direct Deposits. BACS is managed by the BACS Payment Schemes Limited, which includes 16 of the UK’s main banks. Over 2 billion direct credit payments were issued in 2020 alone through BACS. However, it’s also possible to issue bank-to-bank payments using the real-time Faster Payments system or through Clearing House Automated Payment System (CHAPS).

For BACS Direct Deposit processing, it typically takes three days for funds to clear from the payer’s account to the payee’s account. Here are the stages it goes through:

  1. The payer places a payment request which is submitted to the appropriate banks.

  2. The bank processes payment data and prepares to respond by debiting the payer’s account.

  3. The payment is accepted, debited from the payer’s account and credited into the payee’s account.

Both Faster Payments and CHAPS speed up this process if you’re in a hurry, but transactions do cost more as a result for speedier processing. 

Direct Deposit debit cards can be automatically topped up with Direct Deposit payments. The payment is electronically transferred to a prepaid Direct Deposit debit card rather than into a bank account. However, in most cases Direct Deposit involves a bank-to-bank transaction.

Advantages of Direct Deposit

There are several benefits to using electronic payments like Direct Deposit.

  • It’s more convenient because there is no need to visit a bank in person for a physical cheque deposit.

  • It can be more secure because there is no risk of physically losing a paper cheque.

  • The processing time is faster without a traditional clearance period.

  • Going paperless is more sustainable for the environment.

  • It’s easier for businesses to automate the payment process to save time.

  • It’s available to anyone with a UK bank account.

Disadvantages of Direct Deposit

At the same time, Direct Deposits won’t be the best payment option in every situation. One relates to cyber security. While online banking systems are secure, you must take care to only use secure devices for your transactions and choose strong passwords.

The other disadvantage is that while Direct Deposit processing times are faster than paper cheques, they can still take up to three working days for clearance. For same-day payments, you can expect to pay higher processing fees.

As you can see, there are far more pros than cons. Direct Deposit provides a convenient way to pay employee salaries, receive automatic tax credits, and more.

We can help

GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.

GoCardless is used by over 55,000 businesses around the world. Learn more about how you can improve payment processing at your business today.

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