A small number of banks have begun offering early direct deposit — a move that will cost them revenue in the short run but could help them preserve market share and strengthen their public image over the long term.
This service, which is sometimes called early pay, lets customers access their paycheck a day or two sooner than normal to avoid overdraft fees or the need to turn to a payday lender.
Early direct deposit has been made popular in the past decade by challenger banks like Chime, Varo and One, though a few community banks have offered it for years. Many traditional banks have been unwilling to give up the overdraft fees they can reap in the days leading up to payday. But some — including Capital One Financial — have embraced early direct deposit to appeal to consumers, who are increasingly drawn to an expanding field of consumer-friendly neobanks.
Typically, for people who get paid every other Friday, banks receive payroll files from providers like ADP and Paychex on a Wednesday and make those funds available to customers that Friday. Several fintechs make the funds available to customers as soon as they receive that file. Recently, Capital One and a few other banks have begun doing the same.
Getting paid on a Wednesday or a Thursday instead of a Friday might seem like an insubstantial change. But for people barely making ends meet, “getting access to your money closer to when you earned it is an important step,” said Aaron Klein, senior fellow of economic studies at the Brookings Institution in Washington. “It will make a big difference for a small number of people.”
Nine percent of consumers account for 80% of overdraft fees, according to Brookings Institution research.
Early pay is not to be confused with
These offerings are part of a broader effort among some financial providers
Politicians and consumer activists have long criticized banks for preying on the vulnerable to bolster noninterest income.
During a recent hearing, Sen. Elizabeth Warren, D-Mass., rebuked large-bank CEOs for making billions in overdraft fees in 2020. The senator singled out Jamie Dimon for the $1.5 billion JPMorgan Chase made in 2020 from overdraft fees — more than any other bank, including Wells Fargo and Bank of America, which collected $1.3 billion and $1.1 billion, respectively, according to filings with the Federal Deposit Insurance Corp.
Dimon told Warren that his company waived the fees for customers “upon request."When asked by Warren whether the bank would return overdraft fees to customers that it collected during the pandemic,
A JPMorgan spokeswoman contacted for this article said the company is considering offering early direct deposit.
“It’s one of a number of solutions we’re considering to help with the customer experience, but it’s too soon to share more at this stage,” she said.
A Wells Fargo spokeswoman pointed to Overdraft Rewind, a service the bank launched in 2017 to help customers who have their paycheck deposited directly in the bank avoid certain overdraft charges. The bank reviews the 24 hours before the paycheck funds were made available and reverses some overdraft fees. This feature is “tremendously useful,” Klein said.
In the first quarter of 2018, Wells Fargo reported a $73 million decline in deposit service charges from the previous quarter, “driven largely by the impact of customer-friendly initiatives including the first full-quarter impact of Overdraft Rewind,” Chief Financial Officer John Shrewsberry said in an
A Bank of America spokesman did not respond to a request for comment.
The case for early direct deposit
Capital One, which is based in McLean, Virginia, in April began letting funds from certain direct deposit transactions be available for use up to two days early.
"From listening to our customers, we know that early direct deposit access and broad digital offerings are what consumers want and need to feel confident in their financial journey,” said John Durrant, executive vice president of retail and small-business banking at the $425.2 billion-asset company. “As one of the first large banks to offer early direct deposit, we've already helped over a million customers access their paychecks early and our hope is that this change will allow them to stress less about money and focus more on their financial and personal well-being."
OneUnited Bank, a $650 million-asset community development financial institution in Boston; the $4.5 billion-asset LendingClub Bank, formerly Radius Bank, which is now a unit of San Francisco-based LendingClub; Randolph-Brooks Federal Credit Union in Live Oak, Texas, which has $13 billion of assets; and the $2 billion-asset Andrews Federal Credit Union in Suitland, Maryland, also offer early direct deposit. None of these responded to a request for an interview.
These banks offer early direct deposit to compete with neobanks like Chime, Varo and One that make paychecks available within five minutes, according to Shamir Karkal, co-founder of Simple, a former BBVA executive and current CEO of the fintech Sila Money.
“People love the early direct deposit,” Karkal said. “Do you want to get your paycheck on Friday? Or do you want to get it on Wednesday at 4 p.m.? Why would I not want my money? It's a very tangible thing. Everybody who gets a paycheck gets it. And it's a big reason for people to switch accounts from a traditional bank to Chime or Varo.”
Why aren’t more banks doing this?
Banks contacted for this story declined to discuss their reasons for not offering early direct deposit. But a recent request for information issued by Nacha, the organization that runs the ACH network, stated some objections to the concept.
In that
“Nacha has asked for public comment on the balance between early funds availability and legitimate risk management needs," said Heather McElrath, Nacha spokesperson. "Once the information is collected, we will take the results of the consultation into account in deciding whether to formally propose a change to the Nacha rules in the future.”
When payroll processors like ADP and Paychex send a payroll file to a bank on a Wednesday, they stipulate a settlement date of that Friday, meaning the funds must be available to the customer by Friday morning. According to Karkal, the bank that receives that file could make those funds available immediately or wait until Friday.
“The fact that you can send the file two days ahead and say the settlement is not now but in the future, is itself an archaic leftover from the days when people used to truck big magnetic tape drives around,” Karkal said.
Large banks tend to hold the money as long as possible, Karkal said. This is not for the benefit of float, because interest rates are so low. It is, multiple industry observers say, to obtain overdraft fee income from people who struggle to pay their bills or meet unexpected expenses during the day or two before payday.
“A lot of people live paycheck to paycheck, and they’re not all low-income people,” Karkal said. Even people with large, six-figure incomes end up with $20 or less at the end of each pay period, he said.
There have always been some small banks and credit unions that didn't have the capability to store an ACH file from Wednesday to Friday, Karkal said, because their systems wouldn’t allow it, so they would just make the money available right away.
“What's the risk to them of giving access to the money early? There isn’t any,” Karkal said. “For the receiver, if Paychex or ADP sent you a payroll ACH entry on Wednesday and you post the money on Wednesday, you're going to get settlement of the funds from the Fed on Friday.”
The odds of errors or fraud in payroll files are small, Karkal said.
It’s possible that a payroll provider could make a mistake and include a paycheck to an employee who has left the company, and for that person to spend that entire amount immediately, so that when the payroll company asks for an ACH reversal the money is gone.
“But it is a vanishingly small problem,” Karkal said. His company has run hundreds of thousands of payroll transactions, and he’s never seen it happen.
In Karkal’s view, if a payroll provider made a mistake, it should be liable for the loss.
If Nacha changes its rules to make receiving banks liable for problems with ACH payments, it could cause the partner banks of Chime and other challenger banks to stop supporting early direct deposit or to charge more for it.
On the other hand, “if everybody could get their paycheck 48 hours earlier, I wouldn't be surprised if half the payday industry died right there,” Karkal said.
This story has been updated to include a comment from Nacha.
