When you have a job, the easiest way to get paid is usually via direct deposit. It’s a fast, convenient alternative to waiting for a paper cheque to arrive in the mail, and it requires no work on your end after the initial setup. When the money arrives in your bank account, you’ll be able to access it right away without any delays.
In addition to your paycheque, you can receive many types of payments through direct deposit: your tax refund, government benefits and other payments such as employment insurance (EI). While there’s no denying how useful direct deposit is, have you ever wondered how it works? Here’s what you need to know about direct deposit.
Direct deposit in Canada uses an electronic payment system to transfer funds between businesses and individuals. This system has detailed rules and procedures to ensure your money ends up in the right place — a lot is going on behind the scenes.
There are two main payment systems in Canada: Large Value Transfer System (LVTS) and Automated Clearing Settlement System (ACSS). LVTS mainly handles large-value payments that are time-sensitive. ACSS is used for retail payments, which include pre-authorized debit and point-of-sale transactions.
But all you really need to know is that direct deposit allows you to be paid electronically, which is usually more convenient than getting paid in cash or with a paper cheque.
In most cases, the easiest way to set up direct deposit is to provide the person paying you with a void cheque that shows all your banking details. If you don’t have any cheques, you can ask your financial institution for a printout of your direct deposit information.
Some employers require you to fill out a paper or electronic form with your direct deposit information. Here’s what you may need to provide:
Once you submit that information to your manager or payroll department, you’re good to go. Your payroll department will ensure that you’re paid the right amount on time. If you decide to switch banks or want your money to be deposited into a new bank account, you’ll need to update your direct deposit information.
Even though direct deposit is pretty seamless, you still need to be aware of some pros and cons.
Yes and no. You don’t pay any fees to receive your money, such as your paycheque from your employer. However, your employer will often need to pay a fee to send the money to you.
A common form of direct deposit that’s used between regular people is the Interac e-Transfer. Depending on your financial institution, you may be charged a fee when you send an e-Transfer, or your bank account may include a certain number of free e-Transfers.
Wire transfers are similar to direct deposits, and they often come with fees for both the sender and receiver.
The information you provide for direct deposits is protected under the Privacy Act. That means your employer and the government can’t monitor your bank account, nor can they withdraw money from it.
Using direct deposit is a safe and convenient way to get paid. The information you provide to the organization paying you can’t be used to harm you.
Barry Choi is a personal finance and travel expert. His website moneywehave.com is one of Canada's most trusted sites when it comes to all things related to money and travel. You can reach him on Twitter: @barrychoi.