Direct deposits provide tremendous benefits to time and money-conscious people.
Often utilized for paychecks from employers, direct deposits are also used for social security benefits, unemployment benefits, tax refunds, investment-related dividends, and child support payments.
One of the great things about direct deposit is that it eliminates the need for paper checks that can get lost and require more time to write and deposit at the bank.
However, direct deposits can take a long time to process, up to three to five days.
Though it is an electronic transaction and should go faster, there is a lot of digital infrastructure to ensure that the deposits are valid.
Longer wait times may also provide added profit benefits to the banks.
Read on to find out why your direct deposit may be taking so long.
1. Federal Funds Are Sent Out Unpredictably And Slowly
Direct deposits may come from the federal government in the form of social security benefits, unemployment benefits, tax refunds, and most recently, stimulus checks.
It is a daunting and lengthy process to apply for and qualify for these federal payments, which adds more time to wait for a direct deposit.
Covid-19 took a toll on the economy.
As a result, the U.S. government opted to give eligible adults economic impact payments to help them financially recover and put some of that money back into the marketplace.
The first payment was up to $1,200, the second was up to $600, and the third was up to $1,400.
People received their checks at varying intervals, and many wondered if they were going to get their checks at all.
In fact, many people who had been claimed as dependents in 2018 but were independent in 2019 did not receive their 2020 economic impact payments until 2021.
The reason these direct deposits took so long didn’t have much to do with the banks at all, but more with the federal government.
Since the federal government is all publicly funded with antiquated technology and procedures, many of these deposits took longer than they should have.
There was a feature on the Internal Revenue Service (IRS) website to check the status of these payments, but the lack of information available did not quell the anxiety of citizens awaiting their money.
Many of these federal direct deposits take a long time because it takes a while for the government to process each person’s economic background and determine if they are eligible, especially when these payments are being distributed en masse.
2. Banks Only Process Deposits On Business Days
Direct deposits are only processed on business days (Monday to Friday).
If a deposit is submitted to a bank late on Friday, it will not resume processing until the following Monday.
If there is a holiday, the deposit will be delayed even more.
Bank holidays include Christmas, Memorial Day, Martin Luther King, Jr. Day, and other days throughout the year that warrant businesses and schools to be closed.
Since banks can keep deposits for three to five days before they are cleared, the funds might not be available for use until a full week later.
It is wise to ask payroll managers to submit paychecks well before a holiday, to ensure that the direct deposits have enough processing time before the banks and ACH systems close for the holidays.
3. Batch Transfers Can Delay The Process
A “batch transfer” is any deposit that is made in a group.
Payroll managers at companies often file direct deposits in batches for all employees on payday.
Contrary to popular belief, the funds don’t go straight from bank to bank.
They go through an automated clearinghouse (ACH).
Originating banks send transactions to the ACH.
The ACH evaluates and sorts the payments and then sends those out in a smaller batch to the recipients’ banks.
The employer’s bank must click a “send” link, which must be verified by the ACH and the employee’s banks must also click a “receive” link that also must be verified.
Since it takes time for the ACH to verify these parts of the process, the deposits can be delayed.
The National Automated Clearinghouse Association (Nacha) is the governing body for these ACH conglomerates.
Nacha stipulates that the funds deposited one day must be available by the end of the next business day.
However, this expectation is often not met.
If these delays occur repeatedly, though, there could be grounds to contact Nacha and issue a fine to the bank.
4. It Depends On The Banks
Some banks take a longer time to process direct deposits, depending on the services they subscribe to.
Often, smaller regional banks might outsource direct deposit processing to larger institutions.
For example, T.D. Bank, which is mostly located on the East Coast of the USA, outsources international deposits to Bank of America, which has many more branches throughout the world.
This can cause further delays because the process must first reach the recipient’s intended bank, and then must be outsourced to an intermediary bank to verify the deposit.
It is then sent back to the recipient bank to be deposited into the recipient’s account.
Larger banks often have faster processing times to accommodate more customers.
They have the funds and the technology to verify more complicated transactions quickly and effectively.
Different banks subscribe to different services.
Some of these services include more customer service representatives, faster proxy servers, and quicker technology—all of which impact the speed of a direct deposit.
5. Mismatched Details Or Incorrect Information
Banks require the information of the deposit to exactly match the name on the account.
If there is a slight discrepancy in these details, the bank will hold onto this money for some time and then probably return it to the initiating bank.
For example, if the transfer includes a person’s first, middle, and last name but the recipient bank account doesn’t include the middle name, there is a high chance that the deposit will be rejected.
Since direct deposits are often cleared electronically, it can take a long time for the system to figure out the error, and sometimes a backlog of errors must be reconciled by a human representative.
This delays the process several days and often results in an entirely new transfer to be made with details that match the recipient’s bank account.
This especially occurs in direct deposits from foreign banks, where there is a lot more information that needs to be filled out and matched such as a swift code, bank address, and other details.
Banks often charge fees to send deposits, to receive them, and then to send them back again if an error occurs.
Therefore, it is financially wise to verify information with your bank before giving information to an employer or an initiating bank for payroll.
6. Banks Participate In Lengthy Fraud Detection
One of the main reasons direct deposits take so long is that the banks are trying to ensure that the transfers are not fraudulent.
Many financial institutions go by the “Three Days Good Funds Model” which says that deposits may be held up to three days to ensure that it is legitimate.
Even though fraud makes up a very small percentage of transactions, it’s still a big problem.
About 2 billion dollars’ worth of debit fraud and check fraud happens each year.
The Three-Day Good Funds Model gives the banks time to evaluate transactions, ensure that they have valid sources and destinations, and then process them to the correct recipient.
On the receiver’s end, though, this may be perceived as an unnecessary and inconvenient delay.
According to Nacha, funds are supposed to be received by the end of the next day, but this is often not the case in practice.
7. Proxy Servers Stall Checks
Finance networks are typically slow because they use three proxy servers to vet checks and deposits and ensure that they are safe and valid.
These servers are essential to private banking because they improve the customer experience by avoiding fraud and data overload, require less information from senders and recipients, reduce the risk of identity theft, and increase the speed of the banking process.
Since quite a few servers participate in several processes, it is quite common for some checks to get stalled at one of the proxy servers and get hung up in the system.
If this happens, payroll managers should be made aware so they can trace the check and find out where the problem lies.
Small errors can result in proxy servers stalling the checks, so it is essential to ensure that all information is correct before payroll managers submit their payments.
8. Banks Make Money When They Stall Checks
When banks stop checks, they can charge fees of approximately $35 to the sender or the receiver.
Checks are often stopped for minor errors, or if it is a first-time payment that may not be recognized and therefore needs to be vetted further.
Since banks can make money on these fees, they have a habit of not allowing the checks to be deposited on time.
Sometimes these stalls can take up to 24 hours and result in a long wait time.
PayPal has been especially accused of stalls and responded to this by offering an instant transfer system.
The instant transfer system comes at a cost, though, at one to three percent of the transfer amount, so the company is still able to make money on its previous inconveniences.
Free transfers take one to three business days.
9. Banks Allow Direct Deposits To “Float” In The System
Another reason your direct deposit might be delayed is that the bank allows the direct deposit to float in the system.
When a deposit floats, that means it is not necessarily being vetted for fraud but is not being deposited either.
The reason for this is that the bank can invest this money and earn interest on it until it has to be deposited in the account.
At some financial institutions, like Charles Schwab, customers can only receive deposits in their brokerage account.
The funds in the brokerage account are invested by the bank.
Some of the profits from these investments go to the financial institution, and some go to the account holder.
However, if those funds haven’t been deposited in the bank yet, the financial institution has total rights over that money and has time to invest the earnings and receive a profit without having to split the interest with the account holder.
The longer the bank keeps the funds, the longer they’re able to invest the money and keep the unearned profit.
Though it might serve as a disadvantage to the customer to not receive their money on time, it comes at an advantage to the bank.
10. Not All Banks Use The ACH System
The ACH system is electronic, which means that deposits can be vetted and verified without human labor.
However, not all banks use the ACH system.
For the banks that do not use ACH, they must review and clear all deposits manually.
This takes quite a long time to do, for every transaction sent and received through the bank.
It creates a lot of lengthy delays in receiving direct deposits.
This is not a common practice amongst most banks in the United States, but it is possible in some smaller local institutions.
To ensure that you receive your money quickly, it could be wise to set up an account at a bank that uses an ACH system.
If you are doing work with a foreign bank in a developing country that does not utilize as much online banking, it is very possible that the direct deposit will take a longer time due to the human labor required.
There are several other ways to ensure that you receive your deposit as quickly as possible.
For example, it is wise to ask the payroll manager at your company to submit the deposits as early as possible on payday.
This ensures that the receiving institution has as much time as possible to examine the deposits and hopefully allow the funds to be available to the employee the same day.
Also, it is favorable to have paydays fall as far from the weekend as possible.
Monday is the best payday because it allows the full week for your bank to process and receive the payment.
Whereas if payment is received on Friday, it might not be processed until the following Monday.
It is helpful to open a checking account at the same bank as your employer or sending institution.
This way, the bank does not have to send the deposits to a third-party ACH, and all the money can be examined instantly, in-house.
This helps deposits occur much faster and often instantly.
If the funds still are not credited quickly, it is advisable to complain to the initiating bank.
Violations of deposit time can be reported to Nacha.
This can result in fines to the bank.
If a scheduled deposit does not appear in the bank account, do not get upset.
It is highly unlikely that the money has been deposited into the wrong account.
It is much more probable that there was a small error on the initial check and the money was rerouted back to the originator.
It is important to contact the people responsible at your receiving bank in addition to your employer’s payroll department to ensure that this does not happen again.
All information on the check must match the account holder’s information exactly, so it is wise to understand the exact reasons for the errors.
Usually, the payroll manager can fix the errors and resend the payment, or at least track the location of the deposit in the banking system.
However, this is not a likely occurrence within the domestic banking system, as there is a reliable direct deposit system that makes payments and banking convenient.
Do not fret if you do not receive your money, as there are systems in place to respond to erroneous deposits.
Direct deposits can certainly take a long time, but mostly because the banks are trying to protect their senders and receivers from fraud.
Sometimes, the banks can make more money the more time they keep account holders waiting.
It is important to hold your bank accountable and ensure that you are waiting no more than three to five days for your deposits.