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.
What Is 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.
How Does Direct Deposit Work?
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.
How Long Does Direct Deposit Take?
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.
How To Set Up Direct Deposit
To set up direct deposit with your employer or another payor, follow these steps:
Complete The Direct Deposit Form
You’ll need to fill out a direct deposit form with information including the following:
- Full name
- Social Insurance Number (SIN)
- Bank account information and bank routing number
- Deposit amount
- Signature for authorization
Submit A Void Cheque
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.
Submit The Form
The completed form will be forwarded to your company’s payroll department for processing.
Setting With Direct Deposit With The Canadian Government
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.
Setting With Direct Deposit With Your Bank
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”.
- TD direct deposit
- BMO direct deposit
- CIBC direct deposit
- Scotiabank direct deposit
- RBC direct deposit
- National Bank direct deposit
Advantages Of Direct Deposit
Having your paycheque automatically deposited into your bank account comes with a few perks, including the following:
- No delays. Automated deposits into your bank account mean there are no delays to deal with that may be more common with traditional paper paycheque payments, such as holds or processing delays.
- No need to visit the bank. You won’t have to make a trip to your bank to manually deposit your paycheque into your account.
- No holds. When you deposit a cheque in your bank account, the bank typically holds some or all of the money until it is cleared. With direct deposit, this doesn’t happen.
- It’s safe. There’s no risk of paper cheques being lost when your funds are deposited electronically.
Disadvantages Of Direct Deposit
Along with the perks of direct deposit come a few drawbacks to consider:
- The underbanked. For those Canadians who are underbanked and do not have access to a bank account, direct deposit is not a viable option to receive a paycheque from an employer or money from the government.
Can You Set Up Direct Deposit For Government Payments?
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.
Can A Direct Deposit Be Reversed?
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.
Direct Deposit FAQs
Can the payor take money from my bank account since they have access through direct deposit?
Why was I asked for a void cheque for a direct deposit request?
What are the advantages of direct deposit?
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.