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Marketplace listener and reader Ann Kirby-Payne from New York asks:
Each week, my paycheck direct deposit is split between two accounts. Payday is technically Friday, and the portion that is deposited in my major national bank is paid into the account in the early hours of the morning. But the money that goes to my local credit union is posted 24 hours earlier, sometimes even earlier. What is the problem? Does Big National Bank earn extra interest on the overnight deposit, or does Local Credit Union give me an overnight loan? And in both cases, how does this difference affect the global economy across millions of deposits?
For some of us who woke up that Friday morning, our paychecks landed in our bank accounts in the early hours of the day.
But for others, those paychecks arrived days earlier.
Credit unions aren’t the only institutions releasing payday funds earlier than expected — major banks such as Capital One are offering a one-to-two-day advance on paychecks to attract new customerswhile Wells Fargo plans to offer the service Later this year.
Financial institutions offer it as a perk to attract or retain customers, said Glenn Migliozzi, professor of finance at Babson College in Massachusetts.
Migliozzi said advance deposits could help lower overdraft fees, an idea banks like Well Fargo are using as a selling point.
How is it possible to get your funds two days early?
“Each direct deposit payment has an official payment date. So that’s the date the employer intends to make the payment,” said Michael Herd, senior vice president of Nacha’s Automated Clearinghouse Network (formerly known as National Automated Clearing House Association). “An employer will typically send a direct deposit payroll file one or two days before payday” to the employer’s bank.
This payment file will then go through the automated clearing house system, a network that processes electronic payments.
“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. “That’s how the payments get to their destination.”
Then, Herd explained, there’s a separate process known as “settlement.”
“Settlement is when the system accounts for the movement of money between all financial institutions,” he noted.
He said settlement of most clearing house payments typically occurs at 8:30 a.m. Eastern time on payday, and that the funds must be made available to the employee at no later than 9 a.m. by Nacha’s rules.
So for people who had a direct deposit scheduled today, the transaction almost certainly settled between employer and employee by 8:30 a.m., he said.
“It’s literally when the receiving institution, bank or credit union is credited with receiving the money,” Herd said.
Financial institutions do not earn overnight interest on paycheck funds that are settled on the standard payday, Herd added, because the funds are only available in the morning. So when your paycheck is deposited before payday, banks and credit unions advance the funds to you and expect to be reimbursed by 8:30 a.m. settlement time. Herd said he doesn’t consider it an overnight loan.
Herd said financial institutions think it’s “worth the risk” to advance those funds, and that the possibility of the money not being settled is more of a hypothetical possibility.
“The settlement of these payments is routine. This happens several times during the day. And we haven’t had any recent history where there’s been a problem where that’s not happening,” he said. “I think banks and credit unions feel very comfortable.”
What this means for the economy as a whole
Migliozzi said the early availability of your paycheck could negatively impact payday lenders, which consumer advocates view as predatory because they offer short-term loans with high interest rates.
However, neither Migliozzi nor Herd think the early availability of paychecks is having a widespread effect on the economy.
“The next loan is always in seven, 14 or 30 days depending on the pay cycle. So the only advantage is the first two to three days,” Migliozzi said.
And on an individual basis, some people benefit from previous deposits.
Listener and reader Kirby-Payne said there were times when money was tight because she and her spouse were paying for their child’s school fees, so getting that money early from her credit union gave him “room to manoeuvre”.
“Or more often it gave me the satisfaction of paying a bill a little earlier,” she said.
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