I’ve seen a number of tv ads for bank debit cards that promise direct deposits get credited to their accounts 2 days earlier than other cards. how do they do that? If payday is Friday, how can a particular bankcard make it on Wednesday?
Direct deposit transactions happen in batches, several days early. Some banks choose to hold on to that money until “payday”. I don’t think its necessarily to just be vindictive. They have to process the batch and distribute a huge amount of money in the proper proportion to the intended recipients. I’m sure a computer does all this, but it still needs to be processed in some way. Others offer the “benefit” of processing the funds faster and releasing them to the customers earlier.
Suppose your employer uses Bank A, and you use Bank B. In that case, Bank A will lump together your paycheck and the paychecks from other companies who use Bank A and have employees using Bank B. All of that money is sent to Bank B in one lump sum with instructions on how to distribute it and to whom. Bank B then needs to process that to make sure everyone gets their money. Bank B is given this batch earlier enough to process it by pay day. Some banks knock this out early and give it to the customers right away. That’s how my bank explained it to me, anyway.
Thanks, Bear_Nenno. It still doesn’t make sense unless the company payroll bank checking account has payroll funds in it 2 days before payday. My understanding was that employers all managed cash such that payroll bank checking accounts are not funded until “just in time”, that is, on payday, however, it could very well be that the accounts are funded 2 days before payday.
I which case I want my pay funds as earlier as possible, like everyone else. Why should I wait until Friday, just because I happen to use the wrong bank for my personal use?
Do those debit cards actually promise two days earlier than other debit cards? The ads I’ve seen impress me that they’re just promising two days earlier than an old-fashioned paycheck. This particular debit card makes it pretty clear that the magic comes from direct deposit, not from some special relationship with your employer.
OTOH, this card says it’s two days faster than standard direct deposit but says in the small print that’s, “subject to your employer submitting paycheck information to the bank before payday. Your employer may not submit paycheck information early.”
Direct deposits are submitted to the ACH processing network as individual records called “credit entries.” Each “credit entry” is one paycheck being deposited to one employee’s bank account. The batch of entries can be to hundreds (or more) of different banks and thousands (or more) of different accounts all mixed together. It is the job of the ACH clearing house to sort all the entries from the banks of different employers and send them to the correct bank.
Each entry has a field called the “effective date.” The effective date for an ACH credit can be up to two days prior to the settlement date (the date on which the funds are transferred from the employer’s bank to the employee’s bank).
That means that the employee’s bank can receive notification of the impending transfer up to two banking days before the funds are actually transferred. Per NACHA (North American Clearing House Association) rules, the bank receiving the credit entry does not have to make the funds available in the employee’s account until the beginning of the business day on the effective date of the credit entry – the bank will actually receive the funds at 8:30 am ET on that day. Most banks make the funds available to the employee some time the morning of the settlement day.
For competitive reasons, the banks that advertise this way will actually make the funds available when the day they receive the credit entry rather than the settlement date (the day they receive the funds). They are effectively extending two days free credit to the customer and taking a small risk that the employer’s bank will not be able to settle with good funds on the settlement date. They think it’s worth the risk.
Notice that the bank does not guarantee that all direct deposits will be available two days early. What they don’t tell you is that it only applies to credit entries (direct deposits) that are submitted to the ACH processor before their effective date.
Money doesn’t have to physically be anywhere. The bank doesn’t wait to remove money from each account before sending out batches. Its why there is often a float period of a few days even with individual transfers. If I transfer funds to my account at one bank from an account at another, I will have that money availble immediately in that account. It will be a day or two before the money is removed from the originating account. Technically, I could transfer money I dont have. But I better ensure the money is deposited in that originating account before that bank processes the debit. Or else, I will incur NSF fees and lose trust with those banks.
And your paycheck on Friday is usually for work you did tje week prior, or two weeks ago. Your employer knew well in advance how much they were going to pay you. That direct deposit request could have gone out much earlier than 2-3 days. The transfer request can go out before the funds are actually in the account.
Awesome Thanks for the clarification and details, Alley.
Yes,
they do promise two days earlier than other debit cards. Chase or BofA won’t make the funds available in your account until the settlement date. They don’t have to. These prepaid debit card operators will make the funds available as soon as they receive the credit entry your employer’s bank sent to the clearing house. NACHA rules allow that credit entry to be sent up to 2 days in advance (before the funds are settled).
Glad to help.
As a small business owner, my payroll that goes out on a Friday is due to be submitted on Wednesday. The money comes out of my account on Wednesday and appears in my employees’ accounts on Friday morning when they wake up.
I have no familiarity with the bank cards that the OP mentions, but I am sure that there is some business model that can take advantage of the fact that I paid on Wednesday.
I once (over 20 years ago) worked for a company that happened to own a small bank in a rural town an hour away. But they had a branch office for that bank in the ground floor of their building. They offered pay either through physical paychecks (delivered on Fridays) or direct deposit (delivered 2 days earlier, on Wednesdays – but only to accounts at that bank), Many employees switched checking accounts to that bank, just to take advantage of getting paid 2 days earlier (and the convenience of a bank branch at your job site – tyhis ws pre-ATMs).
That company was eventually shut down by the government. It was corrupt in many ways. Their ‘owned’ bank was involved in many of their schemes.
This is a peculiarly USAan thing. Over here nearly every employee is paid monthly and the money appears in your account at just after midnight on the due day.
I am a pensioner and my State pension is paid weekly at just after midnight on Monday morning. They spread payment days according to the last 2 digits of the National Insurance number.
Some State Benefits are also paid weekly and in some places, you might see a queue of people waiting for midnight at an ATM. It’s likely that the neighbourhood dealer in illicit substances is waiting round the corner.
This reminds me of midnight at Walmart on the first of the month.
Walmart, as you may know, is the largest retailer in the United States and the place many (most?) poor people buy their groceries. Most US stores are open 24 hours. In many states, Electronic Benefits Transfer (EBT) cards are reloaded at midnight on the first of every month. This results in the phenomenon large mobs of people with full grocery baskets checking out when the clock strikes midnight at Walmart stores all across the country.
That’s how it normally works in the US as well. My pay is deposited about midnight on payday, unless it falls on a holiday or weekend, in which case it’s deposited on the business day before.
A little off-topic, 20 some years ago when direct deposit wasn’t so common, I remember a call on Bruce Williams’ radio show (a travel/business/financial advice call-in show.) A guy was wanting to know how to get his employer to reimburse him for a returned check fee. He said that his boss (a small business owner) was going to be gone on payday and gave him his check a couple of days early, with instructions to wait until payday to deposit it. However, he went straight to the bank to deposit it, and the check bounced. Bruce stopped him there and said “Of course it would.” He went on to explain that payroll accounts normally aren’t funded until payday, and that’s why the boss said to wait until payday to cash it.
I switched from a credit union to a regular bank. I get paid every two weeks. The bank made my pay available on Saturday, whereas I had had to wait til Monday at the credit union.
Some of those are held until after payday as well; in general, the rule is not a matter of “when is this due” but of having set delays of N days. In any case, for several days the bank has some money it’s holding that doesn’t really belong to it but which it gets to use. It’s not a matter of “the bank can’t process it faster” but of “the bank has more benefits from processing it slowly”.
Many thanks for the helpful replies Bear and Alley!
I don’t know about the cards the OP mentioned- but I do know that I’ve seen the following
- Company wants to stop paying by check/cash and wants to pay all employees by either debit card or direct deposit.
- Company can’t legally require payment by direct deposit or debit card- they are required by law to have a cash or check option.
3)Company makes arrangements with its own bank to motivate employees to agree to direct deposit.
In step 3, I’ve seen everything from the company’s bank offering employees accounts with no monthly fee to making the funds available at 12:01 AM the day before payday. So that if payday is Friday, the money is in your account 12:01 AM Thursday, while those who get paychecks won’t be able to cash them until lunchtime Friday.