We got an interesting question recently from Marketplace listener and reader Ann Kirby-Payne in New York.
She gets paid via direct deposit, split between accounts at two banks. The portion going to a big bank shows up early Friday morning, but her local credit union always has it at least a day early.
“Does Big National Bank earn extra interest on the overnight deposit, or is Local Credit Union giving me an overnight loan?” Kirby-Payne asked.
To figure out how direct deposit works, we called up Michael Herd, a senior vice president at Nacha (formerly known as the National Automated Clearing House Association).
“Every direct deposit payment has an official payment date. So that’s the date on which the employer intends payment to be made,” he said. “An employer typically will send a payroll file of direct deposits one or two days before payday” to the employer’s bank.
“The ACH system sorts and sends each of the individual direct deposit payments to the correct bank or credit union where each employee has their account,” Herd said. “So that’s how the payments get to the destination.”
Then, Herd explained, there’s a separate process known as settlement, when payment actually occurs. Settlement for most ACH payments happens at 8:30 a.m. Eastern time on payday, and Nacha rules say funds have to be available to the employee no later than 9.
“That’s literally the moment when the receiving institution, the bank or the credit union, is credited with receiving the money,” Herd said.
Financial institutions don’t earn overnight interest on paycheck funds that are settled on the standard payday, Herd added, because the funds aren’t available until the morning. So if you get your paycheck before payday, banks and credit unions are advancing the funds to you, and they expect to be reimbursed at the 8:30 a.m. settlement time. Herd said he doesn’t consider this an overnight loan.
It’s “worth taking the risk” for banks to advance the funds, Herd said, because it’s unlikely they won’t be settled in the next day or two.
“Settlement of these payments is routine. It happens numerous times throughout the day. And we haven’t had any recent history where there’s been a problem where that doesn’t occur,” he said.