What is Direct Deposit Authorization?

A direct deposit authorization authorizes a payer to deposit funds directly into a personal bank account. This method has become common to reduce paperwork and so that people can receive money more quickly. There are numerous instances where one might be asked to give a direct deposit authorization or permission for funds to be deposited directly into an account. These authorizations are used for the deposit of paychecks, tax rebates, and student loans. The opposite is granting permission for someone to draw funds from an account, and many people authorize creditors, utility companies, or others to draw on their account on a monthly basis to avoid time-consuming bill paying.

Given the variety of ways in which the direct deposit authorization is used, there may be different methods for giving authorization. For instance, when people fill out their yearly taxes and expect a refund, they simply write the routing number of their bank and the account number on their tax form. This provides the Internal Revenue Service (IRS) or a state franchise board with all the information it needs to deposit the refund in a person’s account.

Many college students now receive their student loan or grant payments via direct deposit. They authorize, usually online, a direct deposit of funds. Instead of simply receiving a single refund check, students usually authorize multiple direct deposits. This means that while they remain in school all their funds will be deposited into a designated bank account. They need to change the authorization if they change banks.

The most common use for direct deposit authorization is to deposit paychecks. The initial authorization may be slightly more involved than giving a routing number and account number. Most companies require a blank check, from which they can obtain the desired information, and a signature from the employee. They may require a savings account deposit slip if a person does not have a checking account. As with a student direct deposit authorization, employees must let employers know if they change a banking account.

Theoretically, anyone can deposit money into someone else’s account if they know the bank where the person has the account and they know the account number. An authorization is not just permission to deposit; it’s also permission to receive funds electronically. Many people find this exceptionally convenient, since they no longer have to waste time depositing paychecks or other funds. It can give people quicker access to the funds they expect to receive and they'll still usually receive a wage statement from employers so they can make sure their salary and withholdings are accurate.

Consumers may feel less comfortable with the idea of authorizing direct withdrawals from their account. Especially if monthly payments are not static, such as with utility companies, there may be concern that a company will make an error and withdraw too much. For this reason, many prefer to not authorize access to an account to make withdrawals. Arguably, this form of paying bills is convenient, too, but other options like bill paying through online banking can make paying bills fairly painless and much less time-consuming.