Charles Read, CPA, USTCP, IRSAC
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Is direct deposit instant? No. It flows through multiple hands and institutions.
Direct Deposit Process
After processing the payroll and making any necessary changes, the company or organization, or their payroll service bureau, create the ACH file that contains all the direct deposit information.
What is ACH? ACH stands for automated clearinghouse and is an electronic network for financial transactions.
They then deliver it, usually by electronic transmission, CD-ROM, or diskette, to their financial institution. It becomes the Originating Depository Financial Institution (ODFI) for the ACH transactions.
The ODFI strips out any transactions that are to remain in that institution.
The ODFI sends the remaining file to the ACH system operator, which is the Federal Reserve System.
It is processed there and the pieces going to the various Receiving Depository Financial Institution (RDFI) for each employee’s account are created along with all other transactions going to that institution.
The RDFI picks up the file electronically and loads it into their internal system which makes the direct deposit available for the employee.
The Schedule Between the ODFI and the RDFI for Direct Deposit
The ODFI and RDFI have a schedule – or “window” – when they send and receive files to/from the system operator. The largest institutions have the most, as well as the latest in the day “windows” to send/receive files. If the employer or service bureau misses the ODFI’s last window the file “waits” until the next day to go to the system operator. It takes the system operator as much as four hours (or more) to have the data assembled into the outbound file. The file waits for the RDFI’s next window to be picked up.
Some RDFI’s only have one window late in the day. Credit unions use a correspondent bank, not the system operator to get their files because they are not a bank. Credit unions usually pick up from their RDFI correspondent bank once a day in the afternoon.
If the direct deposit for the employee is not yet at the RDFI, it won’t be picked up that day and available for the employee.
So, lots of fingers and deadlines in the pot. If the ODFI is a large institution and sends early in the day, and the RDFI is a large institution with a late pickup window the direct deposit may well only take one day to move through the system. Therefore if the ACH file gets to ODFI early Monday it may be available for the employee at the RDFI at the opening of business Tuesday. Any delay or time slippage or having a credit bureau in the mix or dealing with smaller ODFIs/RDFIs will cause the direct deposit to not be available until the second business day.
What holds true for direct deposit movement of funds also hold true for debit/pay cards.
Direct Deposit Posting Date
Direct deposit of an employee’s payroll takes two banking days. A good rule of thumb to have payroll on-time for payday is to transmit payroll two days before the date of the paycheck. If the pay date falls on a non-banking holiday, the direct deposit will be completed on the next day. Don’t forget to communicate with your staff, or include in your employee manual, the holidays where adjustments in pay will be made.