Why do banks love direct deposit so much?
November 20, 2012 8:33 AM   Subscribe

Why do banks require direct deposit to waive monthly fees?

I keep seeing info about bank accounts where monthly service fees are waived if you do a monthly direct deposit.

I'm self-employed, so I don't have a paycheck I can set up for monthly direct deposit. However, it appears that for many banks, ANY direct deposit will do - so a monthly automatic transfer of $25 from some other account qualifies (even one at the same bank!).

This appears to be true of credit unions, too.

But why is this? It seems like extra work for no obvious reason. Of course I understand that - if you're getting a regular paycheck anyway - it's less work for them to process it via direct deposit instead of in person with a teller. But if you're NOT getting regular direct-depositable checks, why do they push this?

posted by kristi to Work & Money (13 answers total) 1 user marked this as a favorite
If you have direct deposit set up, it pretty much guarantees them a regular influx of your money and business.
posted by sarahnicolesays at 8:37 AM on November 20, 2012 [4 favorites]

Quid pro quo. You want no fees. They want your money. They give you banking with no fees if you set up a regular infusion of cash. They do not want you to set up an account for free but not put any money into it, as they would get nothing out of it; they're either going to charge you a fee or make money from the regular (automatic) deposits you make.
posted by davejay at 8:39 AM on November 20, 2012

Just a guess: Direct deposit is a more durable and predictable deposit stream for the bank. (Durable in the sense that it takes some effort to cancel a direct deposit, so people are less likely to do so)

on preview: pretty much what saranicolesays says.
posted by qxntpqbbbqxl at 8:39 AM on November 20, 2012 [1 favorite]

It's also a pain to switch direct deposit and similar services (bill pay, etc.), so you're likely to stay their customer even when they do something to tick you off.
posted by Blue Jello Elf at 8:47 AM on November 20, 2012 [1 favorite]

Direct Deposit is processed in batches electronically. Deposits you do in the ATM or in the bank are handled by people.

People cost WAY more than robots.

It's not a difference for you, but for those of us who are wage-slaves, think about how neat it is for all of our checks to be automatically dealt with, goverment, industry, etc.

The onsey-twosey checks, meh, but the bulk, direct-deposit is awesome for banks.
posted by Ruthless Bunny at 8:48 AM on November 20, 2012 [4 favorites]

All the answers above are correct. Direct deposit is a benefit for the institution because

1. Automated services help lessen work on the teller line. Time that used to be spent waiting on customers depositing checks can be used elsewhere or eliminated. This is the same reason institutions will push debit/ATM cards and Internet/mobile banking.

2. Direct deposit builds customer attachment to the institution. The more attachment a customer has, the less likely he is to switch institutions. Part of this is because, as Blue Jello Elf explains, switching direct deposit is a pain.

3. The guaranteed stream of deposits also helps boost an institution's balance books.

I'd add that the reason that any direct deposit will give you the bonus (including transfers from your account at another institution) is because the ACH file comes to the institution in one big file (or files) from the fed. Spending time to check through to see if a direct deposit is payroll, social security, or a transfer from an account elsewhere may use up work resources at the institution, eating up the benefit gained.
posted by Dr-Baa at 9:02 AM on November 20, 2012 [1 favorite]

This appears to be true of credit unions, too.

Not all. Not mine.* But in general anything that can be automated is cheaper, more secure, and less vulnerable to error than human-handled transactions. And once you have accounts set up to be automated somewhere, you're more likely to stick with that institution, set up your bill-pay there, etc.

So right now there's kind of a scramble to get the mobile customers and online customers and general non-branch-using customers, because once they're locked in, they're not going anywhere. People don't even look for competitive rates much once they're settled with a bank, and it's really not that complicated to switch.

*I work for one CU and have my mortgage with another. Credit unions are the best.
posted by headnsouth at 9:05 AM on November 20, 2012

Direct Deposit is a "sticky product"; it makes it harder for you to leave the bank. Their willingness to waive the monthly fee is convince you to get direct deposit so you are "stuck" to that bank.
posted by spaltavian at 9:33 AM on November 20, 2012 [1 favorite]

Another factor may be the way direct deposit is handled on the bank's end. When I submit payroll through my bank's direct deposit system, the money comes out of my business account on the same day-- but it doesn't get deposited into my employees' bank accounts until three business days later. Which means the bank gets to hold onto my money for three days free and clear to do with as they see fit, including hang on to the interest.

This isn't to say that your employer banks with your bank specifically, but if all banks encourage direct deposit then they all win. So this is probably a long shot answer, but there may be something to it as well.
posted by mireille at 9:36 AM on November 20, 2012 [1 favorite]

My credit union does not require direct deposit to waive fees either. About a year ago when everyone was switching away from the big banks, I pulled all my accounts from BofA and found this awesome credit union, and have been kicking myself for giving BofA dumb money for years and years.

It's a lot easier to join credit unions than it used to be! I found mine by asking around among friends.
posted by ambrosia at 10:09 AM on November 20, 2012 [1 favorite]

Joining the chorus of people telling you to look at a credit union as many don't do this. (If you need help finding a good one in your area, let me know.)

Banks do this for two main reasons:
  1. It creates "stickiness" - you're much less likely to move your account if it involves moving a direct deposit because it takes longer.
  2. It discourages people that the bank views as a poor customer from having their account there. Banks break people down into profitability stratas based on a number of factors. One of those factors is whether direct deposit exists. All those hoops mean more non-interest income and the people that are a drain on the bank's finances are likely to go elsewhere.
There are other reasons, but everything else is ancillary. Studies show that people with direct deposit aren't less likely to visit the branch, so that line of reasoning sort of falls through. It may lessen branch traffic, but the impact is actually less than expected.
posted by stoneweaver at 10:37 AM on November 20, 2012

If I'm remembering it correctly*, this one is generally not true: 3. The guaranteed stream of deposits also helps boost an institution's balance books.

As it turns out, deposits show up as liabilities, not assets -- because a member/customer can withdraw them at any time.

But the points about saving money, "stickiness", and discouraging bad customers seem in line with what I remember.

* Worked in a marketing job at a credit union for 5 years. My boss made a point of trying to help us understand how our balance sheet worked.
posted by epersonae at 1:05 PM on November 20, 2012 [1 favorite]

As it turns out, deposits show up as liabilities, not assets -- because a member/customer can withdraw them at any time.

This is true but banks have a cap on their maximum outstanding loan balance based on their deposit balances. Higher deposit balances = more loans (and more profit).

This usually isn't the limiting factor at large banks though.
posted by VTX at 6:25 PM on November 20, 2012

« Older Are there any Sandy-related volunteer efforts...   |   Question about artistic skills Newer »
This thread is closed to new comments.