If you get your paycheck via direct deposit, the funds might appear in your account a couple of days early. How’s it all work? If you’ve always wondered, we have the answer.

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.

That payment file will then travel through the automated clearinghouse system, a network that processes electronic payments. We explained ACH previously in our “I’ve Always Wondered” series.

“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.

That extra breathing room can mean a lot to the rest of us, though, and it might keep some consumers away from more predatory loans.

What have you always wondered about business, finance or the economy? Submit your question here. We answer a new one on the site every week!

Quote of the day

“These cryptocurrency miners are spreading like a cancer across the United States.”  

— Yvonne Taylor of the group Seneca Lake Guardian

New York state officials this week declined to renew an air permit for Greenidge Generation, which was burning natural gas at a defunct power plant on Seneca Lake to fuel cryptocurrency mining. The small towns along New York’s majestic Finger Lakes have become a focal point in the nationwide debate over crypto and emissions.

The other holiday this weekend  

No, not Canada Day. The other other holiday: Bobby Bonilla Day! He’s been retired since 2001, but the former Mets slugger gets $1.2 million in deferred compensation on this day every year until 2035. Here’s the story in our archives explaining how it works. “It’s a fun day,” Bonilla told an interviewer today. “It always brings a smile to my face."

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