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 refers to when a payment is sent electronically straight from the payer's bank account into the payee's bank account, rather than requiring a paper cheque.

In the UK, Direct Deposit is more commonly referred to as Direct Credit. You’re probably already familiar with Direct Debit payments, which are withdrawn directly from your bank account. Direct Deposit is closely related in that it is also an account-to-account payment, but in this case, funds are deposited directly into a bank account rather than withdrawn.

Direct credit payments in the UK typically use the Bankers Automated Clearing Services (Bacs), which also powers Direct Debit.

In the US, Direct Deposit payments are transferred electronically using the Automated Clearing House (ACH) network.

Examples of Direct Deposits

Direct Deposits are used for recurring electronic payments going out to regular recipients. This means that common use cases are employment, state support, and pensions, etc.

• Employee salaries

• Pensions

• State benefits

• Tax credits

For example, employers often use Direct Deposit to electronically deposit a salary directly into an employee’s bank account at prescribed intervals. The employee provides their bank details for the first payment which the employer uses to set up the Direct Deposit. After this, no additional admin is needed unless either party needs to make a change.

In short, Direct Deposit refers to a secure, electronic transaction enabling any business or organisation to make direct payments into a bank or building society account. The main benefits for both payer and recipient are that the process is automatic and reliable.

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).

How long do Direct Deposits take to complete?

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.

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 is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.