For some American workers, accessing their hard-earned wages comes with a price, according to a report this morning from The New York Times about a growing trend among employers to pay hourly workers via prepaid cards, which often carry high fees.
Last year, employers put more than $34 billion onto 4.6 million worth of payroll cards. That’s a market expected to more than double in the next four years, according to a November report by Aite Group.
One former McDonald’s worker in Pennsylvania is suing her former employer, claiming the franchise where she worked refuse to issue her a paper check or pay her via direct deposit. The suit seeks unspecified financial damages for the worker as well as punitive damages against the company.
Bankers and employers favor using payroll cards because they’re often more efficient and cheaper than issuing paper checks or paying employees with cash. In some cases, banks even provide financial incentives to employers for using the cards. Proponents argue that the cards are less expensive for unbanked consumers than alternatives like check cashing services. Of those workers who receive payroll cards, 86 percent have a checking or savings account, according to Mercator Advisory Group.
A September report by the Federal Reserve found that 11 percent of U.S. consumers are unbanked, while another 11 percent are underbanked. Such consumers are more likely than other consumers to use alternative financial service providers such as check cashers and payday lenders. These services often charge higher implicit interest rates and provide fewer consumer protections than mainstream banks.
But for many consumers living paycheck to paycheck, payroll cards may be the least expensive option available, says Michael Flores, chief executive officer of advisory firm Bretton Woods. A 2011 study by the firm found that payroll card consumers paid an average of $83 per year in fees – compared to $256 by those who use check cashing and money orders and $273 by those who use low-balance checking accounts.
The Times article found that some workers pay far more than that. One worker who earns $7.25 per hour told the paper he paid $40 to $50 per month on fees.
An October 2012 study by the Consumer Federation of America found that only 25 percent of the lowest income workers used direct deposit, compared to more than 80 percent of the highest income workers. That means banking often costs more for lower-income consumers, since a large majority of big banks will waive minimum or average balance requirements if a consumer sets up direct deposit.
The Consumer Financial Protection Bureau urges employees to evaluate a paycard’s terms and conditions before signing up. In some states, you can’t be charged a fee to get your pay, the bureau says.
Often, workers rack up added fees because employers do a poor job of teaching them how to best use the cards without facing additional charges, says Ben Jackson, a senior analyst with Mercator Advisory Group.
“We stress this to the employers we work with,” Jacksons says. “If you hand out a debit card with 20 pages of terms and conditions in 6-point font, and don’t provide any additional education, you’re going to have people who stumble into fees they can avoid.”
Bottom line: Look into the fees before swiping a payroll card.