What’s the Deal with Early Direct Deposit?

You rarely hear about someone receiving a physical paycheck anymore. In fact, many of us have never waited for a paper check on payday and personally deposited it into a checking or savings account. We’re so used to our paychecks automatically showing up in our online accounts every payday that we depend on it.

Now, some financial institutions are advertising that you can get your paycheck one or two days sooner with early direct deposit (or FIVE days early with early access to direct deposits?) How is that possible? Let’s find out.

A Quick Tutorial on Direct Deposit and Your Paycheck

Before you can understand how early direct deposit works, you need to know the ins and outs of direct deposit, which is a type of electronic funds transfer called an ACH. That stands for Automated Clearing House (ACH) network, the platform used by financial institutions to settle direct deposits like your paycheck and direct payments like those you schedule through online bill pay.

To get a better idea of how this works, we’ll walk through the route your paycheck takes from your employer’s account to yours when direct deposit is involved.

During onboarding at your current job, you most likely agreed to receive your paycheck via direct deposit (because … it rocks) by providing your employer with your financial institution’s routing number and the account number(s) of the checking and/or savings accounts in which you want your pay to go.

Prior to payday (typically one or two days), your employer prepares a payroll file that lists the pay amount and deposit instructions (routing and account numbers) for every employee and sends it to Nacha, the organization that manages the ACH network.

That payroll file also indicates the date employees are to be paid, i.e., your payday. On that scheduled date, Nacha uses the ACH network to move the appropriate funds from your employer’s account to individual employee accounts as instructed, a process called settlement. And voila, you can see your direct-deposited paycheck when you log in to online or mobile banking.

How does early direct deposit work?

Financial institutions typically receive notice of upcoming deposits from an employer when it sends its payroll file to Nacha. Upon that notification, some financial institutions (including Quorum!) have recently started making these payroll funds available right away even though they aren’t required to until the designated payment date.

Hence, the name early direct deposit: The financial institution is basically advancing the funds to you before the money actually settles through the ACH network.

Why are financial institutions willing to offer early direct deposit?

The financial institutions offering early direct deposit are willing to risk the very remote chance that the funds won’t settle through the ACH network in order to provide a perk to their bank customers or credit union members.

Depending on the institution, it may have some eligibility requirements for early direct deposit. For example, only certain types of accounts may qualify for it. Additionally, an institution may require a minimum deposit threshold before they are willing to make the funds available in advance of their settlement date.

Many institutions offering early direct deposit provide it as a free service, and eligible customers or members are automatically enrolled in it. However, some institutions charge a fee for the service, so you have to opt into it.

What is 5-Day “early access to direct deposit”? Is it the same as a traditional “early direct deposit”?

You may have heard about Quorum’s revolutionary new checking account called QPlus Checking. It’s different from a traditional 2-day early direct deposit in that Quorum will make direct deposit funds available five days early regardless of when payroll/funding information is received. This “early access” works as a credit, or an advance, from Quorum. Once payday officially rolls around, Quorum then adjusts the account by deducting the advance. You can learn more about QPlus here.

How does early direct deposit (and early access to direct deposit) benefit you?

The primary benefit of early direct deposit and five-day early access to direct deposit is that your paycheck gets in your hands ahead of schedule. This is a boon for anybody who’s running short on cash as payday approaches. Instead of risking a late fee on a bill coming due by postponing your payment until after payday, you can go ahead and pay it. Likewise, you avoid any overdraft fee that you might otherwise incur by paying that bill before payday.

Here’s an example: Say you get paid every other Friday, and your credit card payment is due on the first of the month along with your mortgage payment. Some months, the first will fall on a Friday. If that’s the month when your budget is tight, maybe due to an unforeseen emergency expense, you might not have enough before payday to pay both your mortgage and credit card payment on time.

Yet, paying one or both late can negatively impact your credit score and potentially lead to a late fee. If your financial institution offers early direct deposit, you have room in your budget to make both payments on time without the help of overdraft protection, which should only be used when absolutely necessary because of the typical fee associated with it.

If you’re unsure whether your financial institution offers early direct deposit, ask! They’ll also be able to tell you about any eligibility requirements and/or fees associated with this offering.