In many countries, bank account numbers work only in one direction. If someone has your bank account number, they can put money into your account but they can’t draw money out of it. Under this design, people who want to get paid happily give out their bank account numbers.
Here in the U.S., bank account numbers work in both directions. If someone has your bank account number, they can both put money into it (direct deposit) AND draw money out of it (direct debit). This makes people reluctant to give out their bank account information, even though the routing number and the account number are printed in plain view on their checks.
Third-Party Transfer Services
Because bank account numbers in the U.S. have no built-in protection for unauthorized debits, banks control who can access the Electronic Funds Transfer (EFT) system to do direct deposits and direct debits. Businesses can sign up for access, but in general, individuals can’t. This makes it difficult for individuals to pay another person electronically. I can’t easily pay someone directly even if they give me their sensitive account details.
Some third parties stepped in. They act as a middleman to facilitate person-to-person payments. You pay the third party and the third party pays the other person. PayPal, Venmo, Cash App (Square), Apple Pay, Google Pay, and Facebook Pay all work to a degree. It’s free to send money and receive money using one of these online services or their associated mobile app when it doesn’t involve a credit card (debit cards work).
Both the sender and the recipient must be on the same third-party system. It doesn’t work if you use Venmo and the person you’re paying uses Cash App. Either you also have to sign up for Cash App or they also have to sign up for Venmo. It gets unwieldy if you need to pay multiple people using all different third parties.
These third parties are private businesses. They have their agenda and they also must protect themselves from high-risk transactions. When you receive money in the third-party system, the money stays in the third-party system. It doesn’t go to your bank account. If you want to move the money to your bank account, you may have to take a manual step to transfer it. The transfer may be subject to scrutiny and restrictions, and it can take several days.
Bank-to-Bank Transfer with Zelle
Banks also got into the game. They funded their own middleman Early Warning Services, which created Zelle. Zelle provides the infrastructure but it leaves the customer-facing parts to the financial institutions. Both the sender and the recipient interact with Zelle primarily through their online banking or their mobile banking app. When both parties’ banks support Zelle, money leaves the sender’s bank account and lands directly in the recipient’s bank account almost instantly (in minutes).
Banks can choose to charge a transaction fee for Zelle transfers but most banks make it free to both send and receive. It works much better than using those tech companies because the money goes from one bank account to another bank account. It doesn’t stay in a third-party system.
All large banks support Zelle (Chase, Bank of America, Wells Fargo, Citi, U.S. Bank, SunTrust, PNC, …). Some smaller banks and credit unions signed up as well. See the full list on Zelle’s website.
You need to do a one-time enrollment in Zelle before you send or receive money for the first time through Zelle. You enroll with an email address or a mobile phone number, and you tell Zelle which bank account the money should go into when you receive money through Zelle. It can be either a checking account or a savings account.
To send money through Zelle, you get the enrolled email address or mobile phone number from the intended recipient. You tell Zelle to send money to the recipient’s account using that email address or mobile number. Zelle sends a payment notification by email or text message to the recipient when it processes the payment. The recipient will see the money in their enrolled bank account.
This came up when I needed to set up rent payments to my landlord. If I use my bank’s bill pay service, the bank will mail a paper check. My landlord lives in different places at different times of the year. If I pay him electronically, it goes into his bank account no matter where he’s at. Because I have everything else on autopay, I’d like to schedule the rent payments to go out automatically on a set date every month.
To my surprise, finding a bank that can do this was a challenge. Each bank sets its own policy on what it makes available through Zelle. Not all banks chose to support scheduling recurring Zelle payments. Those that support it have a low limit on how much you can send.
For instance, Navy Federal Credit Union allows sending a maximum of $2,500 every 30 days, and some banks allow sending only $500 per day. Bank of America allows sending up to $3,500 per day and up to $20,000 every 30 days through Zelle, but it doesn’t support scheduling automatic monthly payments. These limits aren’t inherent with Zelle. Different banks chose to impose different restrictions.
If your recipient’s bank supports Zelle, it works well for one-time payments, such as paying friends for shared expenses or paying a gardener, a personal trainer, or a babysitter. The low limits set by banks and their inconsistent support for scheduled payments make it more difficult to use Zelle for paying rent. Because Bank of America has a higher limit but it doesn’t support scheduling recurring payments, I have to set a calendar reminder and pay manually each month. It’s not the end of the world but I really wish it could be automated.
One important caveat for using Zelle and other third parties for person-to-person payments is that you have to be absolutely sure you’re paying to the correct email address or mobile number. If you mistype the recipient’s email address or mobile phone number, the money can go to the wrong person and it’s difficult or impossible to get the money back.
Some banks maintain a list of people you paid before. It helps for repeated payments but you still need to be extra careful when you’re paying someone for the first time. Some banks require typing the email address or phone number of the recipient every time. Doing it right last time doesn’t guarantee you’ll do it right this time. If you have a choice between different banks, use one that maintains a list of payees (Bank of America does).
Say No To Management Fees
If you are paying an advisor a percentage of your assets, you are paying 5-10x too much. Learn how to find an independent advisor, pay for advice, and only the advice.
I manage a couple of rental properties. And I ask my tenants to pay their rent direct my management account through a commercial rent payment service. Has worked well for them and for me. $3 per payment fee. But tenants enjoy having their good payment history reported up to the credit bureaus.
I am a landlord and do all of my rent collection electronically and without fees through cozy.co. It pulls from my tenant’s bank account (or credit card, for a fee) and deposits to my bank account, with similar delay to an ACH transfer. For tenants it allows flexible payment scheduling, including across multiple roommates, as well as one-time payments. For landlords it not only collects payment but has nice tracking of when/if full rent is paid, allows adding credits or one-time charges, and can even levy late fees (though hopefully nobody is doing that right now…). Very nice free service.
I’m a landlord too and have used Cozy, but it was bought and assimilated into Apartments.com. Not the end of the world; however, as of Jan 1, 2022, you have to give your tax info to Apartsments.com, presumably so they can report income via rent to the IRS. I said bullsh*t and decided to stop using Apartments.com and switched to Zelle.
I’ve used cozy.co to collect rent automatically via scheduled payments. It’s free to tenants if they pay from their bank account. It’s also free for landlords if they’re willing to wait 5 business days for payout; otherwise $2.99/month/unit gets payment in 3 days. I took the free option.
Thanks for the informative article.
My wife is the trustee for her parent’s trust, which includes a condo that has been rented out. We settled on Zelle with the tenant. They had to break it down into multiple payments because of the daily limits, but it worked well and since we only had the one rental, the split payments weren’t a problem, though I can imagine that with multiple properties it would get confusing pretty quickly.
Thanks for answering the question of why the USA system is so different from what we experienced living in Australia for a year. As you said, people were quite free and open with their BSB (routing) and account numbers. The one-way flow explains that. I wonder why our system has evolved the way it has. I like the convenience of pre-authorized automatic reoccurring debits. And we were able to arrange automatic payments in Oz, but the process was a little different and at times confusing. Perhaps there is a better way.
One caveat is the transfer limitation on using Zelle. I tried sending money to my brother and it limit to $2000/day. We were both using Chase. Something to keep in mind if you need to transfer larger amount
A landlord’s perspective: Some landlords may be hesitant, as they cannot pick and choose who can send a payment to them once set up. In some states (such as California, where I am a landlord), if a tenant is being evicted for nonpayment of rent, if the tenant makes ANY payment the eviction is halted. My legal expertise is limited to California, so your experience in other states may vary.
For example, if a tenant has a landlord’s bank information and can deposit $1, or send $1 by Zelle, it can invalidate the eviction process and delay it by another couple of months and cost hundreds of dollars more, and thousands more in unpaid back rent.
This isn’t an issue with more traditional payment methods. Once the tenant has expired their “3 day notice to pay rent or quit” (actually 15 days in California now), the landlord can refuse to accept cash. If a check is mailed, the landlord can refuse to deposit it and return it. No such control exists with Zelle or a direct deposit to the bank.
Through a service like Cozy.co (which we use), the landlord may turn off receipt of funds from a tenant. Our tenants like cozy.co as they can set up automatic schedules or reminders.
I’ve used both Cozy.co and Zillow to collect rent payments before. They both work very similar and you can also see the payment history. Cozy sends out rent payment alert to the tenants. I’m not sure if Zillow does that too. The only thing I don’t like about them is it takes a long 5 business days to actually deposit the money into my account. One of my tenants refused to arrange the auto payments ahead of time so I could receive my payments earlier.
I’m considering using Zelle to collect my rent next time if it is OK with the tenants.
Chase Bank has great set up with Zelle payments. You can schedule your auto rent payments on a certain date(s) of the month. It has a $2,000 daily limit but if I have to split a $4,500 rent 3 times it seems to be a bit too much and too confusing. However, the daily limit is there for the protection so …..
Roy Mitchell says
Who cares? The point is to do recurring, automated transactions to individuals WITHOUT BEING CHARGED. That’s what Zelle is supposed to be for, but most banks have restricted using Zelle for recurring charges. The only way to do it is to set up a recurring bill pay payment but the banks will only send a check. That way the banks get out of the business of the hassle of dealing with people making mistakes. With a check, the recipient has to cash it which adds a whole level of security and safety. It’s a pain for customers but banks much prefer customer pain over their pain. Simple as that. Your silly fee charged solution is worthless. Venmo and Paypal can be used instead of that and they are free. But the hassle is you have to move money in and out of these 3rd party app accounts which adds a layer of complexity which is more of a hassle than just having the bank send a paper check and then depositing it on a mobile app.
Paypal was not free when I was getting paid through it, they took 3% of everything I was sent!
Mark S says
There is a way to set up automatic electronic payments through Bank of America. You would just need to know the recipient’s routing number and account number, if they are willing to provide it. In Bank of America you go to “Transfer” and “To someone else or a business”. Then select “using and account number”.
Harry Sit says
Bank of America’s fee schedule says they charge $3 for delivery in three business days, or $10 if you want next business day delivery.