These days, just about everyone gets paid from their employers via an automatic bank deposit. But what exactly is involved in direct deposit? How does it work, and what are the perks and potential drawbacks to this form of payment?
Let’s get to know a little more about direct deposit.
Direct deposit is an automated way to transfer funds from one party to another. With this type of transaction, the payor sends the payee an electronic payment that is automatically deposited into the payee’s bank account.
Direct deposits are convenient for both parties: the employer doesn’t have to spend any time or money sending out physical paycheques, and the employee can expect their pay on time with every pay period.
In order to facilitate a direct deposit, the employer must first collect the bank account information from employees. The employer will then send payment instructions to their financial institution regarding how much to deposit and the exact days of deposit. The employee’s bank will then process the payment, and the account will reflect the added funds.
In Canada, direct deposits are managed by Payments Canada, which is a non-profit organization. Members include the Bank of Canada, all major Canadian banks, and other institutions like insurance companies and loan companies who wish to be members.
Typically, a direct deposit transaction can take two days to complete. While that may seem like a long time, especially when you can go to the bank and deposit a cheque in less time. Direct deposits don’t come with 5 day holds like cheques, and usually, employers started the deposit process two days early, so you get your money on the right day.
To set up direct deposit with your employer or another payor, follow these steps:
You’ll need to fill out a direct deposit form with information including the following:
A cheque will have the bank account and routing number on it. Even though this information is already on your direct deposit form, you may need to attach a void cheque along with the form for accuracy.
The completed form will be forwarded to your company’s payroll department for processing.
Most government agencies, for example, the CRA and Service Canada, no longer issue cheques. This means that you likely have already set up direct deposit to receive tax refunds or any government assistance. If you have not already done so, you will need to set up a My CRA Account or a My Service Canada Account.
Canada’s major banks all offer direct deposit so that their clients can easily send and receive money. It’s very easy to set up direct deposit with your bank, typically you will need to sign in to our online banking portal and navigate to the section called “direct deposit info” or “void cheque info”.
Having your paycheque automatically deposited into your bank account comes with a few perks, including the following:
Along with the perks of direct deposit come a few drawbacks to consider:
In addition to receiving your pay from your employer through direct deposit, you can also use this automated payment system with government payments. In fact, government assistance or benefit payments are commonly made through direct deposit.
The process to sign up for direct deposit to receive your government payments automatically is the same as the steps outlined above.
If a direct deposit was made in error, it can be reversed within 3 days after the funds show up in an account. That said, if the payee believes a reversal is unfounded, they may refuse the correction within 90 days. It’s best to communicate with the payor or bank in a situation like this.
It’s also important to understand that keeping funds that have been mistakenly deposited into your account leaves you vulnerable to potential litigation.
There’s no denying the convenience of having funds deposited directly and automatically into your bank account. It’s fast, secure, and helps ensure that you always get paid on time.
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Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.
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