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After many years, my employer is offering direct deposit.

I've used direct deposit before at other jobs.

Are there any downsides or cons to using direct deposit?

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    You don't get to flirt with the tellers at your bank :-) – jamesqf Mar 2 '15 at 18:29
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    Some people in the US still get paid their salaries in cash or by cheque? Really? I've been working for thirty years, and I've never been paid that way. – Mike Scott Mar 3 '15 at 9:34
  • @Mike-Scott - I have (in the UK), for a while before the employer concerned went into receivership. Normal procedure was to take the cheque into a bank in town immediately in case it bounced later. I wouldn't recommend it.... – armb Mar 3 '15 at 10:18
  • @MikeScott I worked at a US job last year which staunchly refused to make use of direct deposit, despite years of ongoing requests for it by employees. No reason was ever given. – VGR Mar 3 '15 at 15:27
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    Some employers are forcing employees to use direct deposit. If you don't provide the banking information the money is put onto a debit card they give you. – mhoran_psprep Mar 4 '15 at 10:24
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The only problem, besides having to update your information if you change banks, has been an unintended issue.

I have noticed that people don't look at their pay stub when getting direct deposit. The stub is frequently only available on a third party site. The harder it is to see, the less often it is checked. I have run into instances of coworkers who didn't notice that the 401K amount was wrong; or that dental insurance wasn't being withheld; or taxes were being sent to the wrong state. The error went on for months or years before they noticed. You have to be proactive to make sure that the items are correct.

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    but the pro is that you can split up your direct deposit as many ways as you want into as many bank accounts as you want, if you want free checking everywhere! – CQM Mar 2 '15 at 19:21
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    I wasn't asked about the benefits only the drawbacks. – mhoran_psprep Mar 2 '15 at 19:23
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    That's not even a universal benefit -- I've had employers that restricted their direct-deposit offerings to a single account. – Eric Lloyd Mar 2 '15 at 19:41
  • @mhoran_psprep I know, thats why I didn't make my own separate answer and just upvoted yours instead – CQM Mar 2 '15 at 19:59
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    One additional drawback: I've known at least one rare individual who quit because direct deposit was required. I got the feeling he moved job to job and would prefer to be paid in cash - he seemed to be trying to avoid wage garnishment. – DoubleDouble Mar 3 '15 at 22:11
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The only downside I can think of is if you change banks (or change accounts), you need to remember to notify your employer.

5

I've seen an issue once before where my employer's payment authority (a 3rd party provider who managed the direct deposits and paystubs) issued double-payment. This appeared on my bank statement as two deposits followed by a withdrawal, all for the same amount. I can't imagine this being (ab)used for a truly nefarious purpose, but it does prove that your employer or the payroll provider has the authority to withdraw as well as deposit funds. If your funds are legitimately stolen, I would imagine your bank or the FDIC would have you covered.

This could get you into some trouble, however, if you are in a paycheck-to-paycheck situation and get into a wage dispute with your employer (or various governments, unions or anyone who has legal authority on your wages). Perhaps they discover you've been overpaid, or they were collecting an improper amount of tax, etc. If they decide to 'help' you by automatically 'correcting' the problem and withdrawing funds from your account, you could be caught unawares and get stuck with some overdrafts, even if you resolve the underlying dispute in your favor and get your funds back.

This boils down to how much you trust your employer, their payroll contractor, your bank and your government. I view direct deposit as a convenience that will save me days of time over my professional career. Weighed against what I assume is a very low risk, I would not give up direct deposit without clear evidence of malfeasance by one of the parties I mentioned above.

(I am not a lawyer and this is not legal advice, or even necessarily plausible in reality. I just thought it worth pointing out.)

  • (Most of) this is easy to work around by having a separate account that is used only for payment deposits. Label it clearly as "Wage $EMPLOYER" or whatever if your bank allows that, and as soon as you know the exact date and amount to be paid, enter a transfer order set for that date and amount into online banking, transferring the money to your regular checking/transactions account. If you get into a dispute about money with the government, I have a feeling you'll have problems regardless of the method of payment of your wage. – a CVn Mar 3 '15 at 14:50
  • @MichaelKjörling I don't think separate accounts would help. Maybe I've been with less forgiving banks than you have, but when I was banking with the big national US banks, I got the distinct impression that once they collected a fee I was never getting it back. So as a 'for instance', if my "Wage EMPLOYER" account has $1000 deposited on payday, I transfer $1000 to "My Savings" leaving only the minimum balance $m behind, then EMPLOYER reverses $x from "Wage EMPLOYER" leaving a balance $m - $x = -$y, "Wage EMPLOYER" account is overdrawn and BANK charges me $Z for the convenience. – Dacio Mar 3 '15 at 16:19
  • Additionally, the bank woulld probably withdraw $y from "My Savings" in order to cover for the "Wage EMPLOYER" deficit, @MichaelKjörling – Ángel Mar 4 '15 at 17:55
  • @Ángel That would be overdraft protection. Some banks provide it by default and some banks require you to explicitly opt into it when you create or link the accouts. Some banks even charge a fee for it, but usually less than the overdraft fee. – Dacio Mar 5 '15 at 17:54
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Direct deposit is a two-way street. If your employer is able to deposit money directly into your account, it is also possible for them to withdraw money from your account. Errors with this happen every so often.

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    As a European, this is confusing to me -- anybody (including my employer) can transfer money to my account, but only I can withdraw from it. Is something that basic really different on the other side of the pond? – RemcoGerlich Mar 3 '15 at 8:51
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    @RemcoGerlich: are you absolutely sure that your employer can't reverse a payment made in error? Because if they can, they can take money from your account. Granted, not more than they put in, but that can still be bad if you've spent some of it. But anyway, I'm not in the US but I do get the impression that their banking arrangements are in some respects a bit... erm... simplistic. To be fair, a direct debit in the UK is also a pretty crude tool, but here your employer doesn't need that in order to deposit and so doesn't get it. It's an issue of authorisation granularity ;-) – Steve Jessop Mar 3 '15 at 10:51
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    @RemcoGerlich - Both direct deposit and direct debit (used for automated bill payments, etc.) run through the same system (ACH) and use the same entry code. Turning a deposit into a withdrawal is basically just a matter of flipping the sign. – Compro01 Mar 4 '15 at 2:58
  • @Compro01: Maybe, but if someone does a direct debit on your account that you don't agree with, it takes roughly two clicks in the online banking interface for you to undo that direct debit - you don't even have to contact the bank (it's usually a fully automated process) or pay any fees (the entity that did the unwanted direct debit in the first place will be charged with the cancelling fees), right? – O. R. Mapper Mar 4 '15 at 11:07
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    @RemcoGerlich As I've been lead to understand this is a known limitation of the way the US banking and routing system is designed. US bank account numbers should be kept as confidential as possible since fraudulent charges or forced withdrawals are apparently possible when you know an account number. European bank accounts offer a great deal more security. Companies require explicit consent (via SEPA) to make automated charges on an account. I'm not sure if payment reversals are handled similarly throughout the Eurozone. – Lilienthal Mar 4 '15 at 11:54
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It does provide a paper trail of where you deposit your money. If your wages are garnished or you get into some other form of legal trouble, this means that anyone who contacts your employer can directly freeze your accounts or set them to funnel into child support or the like. It also means that various people at your company will have your banking information, creating an additional source of vulnerability for loss and exploitation of financial information.

That said, neither of those are really major issues. The odds are that the government already knows where you bank or can get that information easily. And you probably already have so many places where your financial data is available that a presumably secure records vault is the least of your worries.

Additional potential problems:

  • As has been mentioned in previous answers, you'll have to update your information with your employer when you change jobs.
  • Confusion over when your direct deposit goes into your account (sometimes complicated by differences between your company handing you your paystub and when the deposit clears) could lead to overdrafts. Having a check in-hand makes it clear when you get your money.
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    You're assuming your employer would be able to freely produce that information? Why would that be legal without a court order (in which case there are other ways to do this)? – Joe Mar 2 '15 at 20:59
  • @Joe: Yeah, I assume that employer would freely produce that information when confronted with a government official. Maybe that's the pessimist in me. – Sean Duggan Mar 2 '15 at 21:01
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    A government official would likely have a court order, and could find the same information from simpler sources through that court order. – Joe Mar 2 '15 at 21:03
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    Actually, check in hand can make it less clear when you get your money, at least in my experience. Mainly because when a direct deposit is made, funds are available immediately, whereas with a check you are at the mercy of how long it takes the bank to make the funds available to you. – Michael Mar 3 '15 at 20:01
  • I'm completely guessing, but I believe its actually the bank tied back to the employer that becomes the problem - since the employer is more difficult to track down and is the actual source of income. If you had the money in your bank account it would just be taken it from there. – DoubleDouble Mar 3 '15 at 22:43
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By providing your employer with your account information, your employer can later withdraw an amount it feels it paid in error. While you may ultimately win the battle, "possession is 9/10ths of the law."

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    They are only allowed to withdraw to reverse a transaction, and only within a few days of a transaction. They could do the same thing by closing the account the check is written on or by not putting in sufficient funds. – mhoran_psprep Mar 4 '15 at 10:18

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