Direct Deposit of Payroll

In order to improve customer service and reduce the customer and banking costs inherent in paper transaction processing, the banking industry has developed an electronic means of transferring funds, the central component of which is the Automated Clearing House (ACH).

The ACH is a computer facility, usually operated by a Federal Reserve Bank, which facilitates the paperless exchange of financial transactions between participating financial institutions. These ACHs interconnect, making possible the national interchange of electronic transactions.

Every participating ACH financial institution is assigned a unique number that can be found on the bottom left of a personal check or deposit slip (for checking or savings accounts). This number is the Transit-Routing (TR) number, which identifies the bank where that account is maintained. Direct Deposit is the automatic credit of a recurring payment (such as net pay) into an individual's account at a participating financial institution. Instead of distributing checks, the disbursing organization sends a magnetic tape (or in some cases, a diskette) or transmits payment data via modem to the bank, where the transactions are electronically processed and forwarded to the ACHs for distribution to the receiving depository institutions. Some of the advantages of using Direct Deposit are:

• No trips to the bank or waiting in lines;
• No lost or stolen checks;
• Deposits are made even if the employee is sick or away; and
• Savings in postage and time.

Note: Direct Deposit cannot, nor was it intended to, debit an individual's bank account. In other words, no negative net amounts can be processed through Direct Deposit (net amounts being the total of all regular, bonus, and adjusting payroll edit records' net pay for an individual).

This topic includes general requirements for using Direct Deposit, a step-by-step procedure for initializing and using Direct Deposit, and the record layouts of the bank transmission file.