Advantages & Disadvantages of Electronic Paycheck Bank Deposits

Your state may have pay stub laws regarding direct deposit.
i Comstock Images/Comstock/Getty Images

Electronic paycheck bank deposits are also called direct deposit. The process requires an employer to put employees’ pay into their bank accounts by payday. Most states forbid employers from making direct deposit mandatory. However, due to its advantages, many employers encourage their employees to sign up for the service. As an employee, consider the pros and cons of direct deposit before you accept it.

Time Saver

If you receive a live check rather than direct deposit, you likely cash it in person at a financial institution. Depending on the day, you may have to stand in line at the bank for a long time, which can disrupt your schedule for the rest of the day. With direct deposit, no trip to the bank is needed. Further, you do not have to make arrangements to obtain your paycheck if you are on vacation or absent from work due to an illness.

Money Saver

If you have a bank account but not direct deposit, you likely deposit your paycheck into your bank account in person. It can be tempting to make a withdrawal simply because you are at the bank making a deposit. Direct deposit limits the desire to make cash withdrawals. Direct deposit transactions are typically safe and reliable, while cash is susceptible to being stolen or lost.


Direct deposit allows you to set up multiple accounts and to allocate funds accordingly. For example, if you are married and split bills with your spouse, both of you can allocate a percentage or flat amount of your paychecks to go toward your bill payment account. This helps to ensure proper budgeting while giving you control over the amount of money that goes into the account that you share with your spouse.

Early Pay

If you receive a live paycheck, you likely don’t receive it until payday. If the payday falls on a holiday or weekend, you must wait until the next business day to cash it. Direct deposit is processed ahead of the payday. Therefore, if the payday falls on a weekend or holiday, you’re paid early, on the prior business day.

Paperwork Completion

One of the downsides to direct deposit is the paperwork that must be completed for the service to take effect. Your employer likely has a standard form that employees must fill out. If improperly completed, you may not receive your first direct deposit on time. The process requires you to write your bank account and routing number on the form plus attach a voided check for checking accounts. Your employer performs a pre-notification on your account, which serves as a test prior to the actual direct deposit transaction. This pre-notification must be done days in advance of the payday. Because of this, it can take one or two pay periods for your first direct deposit to occur. During this time, you must be careful about automatic bill payments from your account. If your direct deposit doesn’t happen as planned, you may incur fees.

Third-Party Access

If you have lenders that you pay via automatic drafts on your account and if you are unable to make your payments on time, those lenders can draft your account because they have your bank account information. This puts you in a tough spot because you run the risk of depleting your finances.

Third-Party Reliance

Direct deposit largely depends on the reliability of your financial institution. Therefore, if your bank undergoes system glitches, it can affect your finances and whether you are paid on time. For this reason, use a financial institution that you are satisfied with prior to making direct deposit arrangements.

the nest