For the Under-banked, Payroll Cards Have Two Faces

Oct 21 2013

Companies are continuing to turn to prepaid payroll cards as a means of paying unbanked and underbanked employees, even as pushback against the cards emerges.

Last year, employers put over $3.4 billion in wages onto 4.6 million payroll cards. The market is expected to more than double in the next four years, according to a November report by Aite Group, a Boston-based research firm.  In some cases, banks provide financial incentives to employers to use the cards.

“Employers are always looking for ways to improve efficiency and reduce costs,” says Karen LaCroix, president and founder of Superior HR, a consulting firm. “Pay cards are a simple, efficient and safe method to pay those who do not have bank accounts and cannot use direct deposit.”


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 workers, since a large majority of big banks will waive minimum or average balance requirements if a consumer sets up direct deposit.

The shift makes sense for businesses that want to move away from paper paychecks, which require special printing, additional security and the digitizing of signatures or getting someone to sign them. The payroll cards are stored-value debit cards that give an employee access to his or her wages via automatic teller machines. But there are issues involved with the use of the cards – and important consumer protections that are in force.

Advocates of the cards argue they’re a cheaper, more secure means of payment for employees than the check-cashing stores typically used by such workers, which can take 3 to 5 percent of a check in fees. A 2011 study by advisory firm Bretton Woods 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. Of workers who receive payroll cards, 86 percent have a checking or savings account, according to Mercator Advisory Group.

A report last year by the Federal Reserve found that 11 percent of U.S. consumers are unbanked, while another 11 percent are underbanked. These consumers are more likely than others to use alternative financial services such as check cashing services and payday lenders – services that often charge higher implicit interest rates and provide fewer consumer protections than mainstream banks.

But payroll cards are not without controversy. The Consumer Financial Protection Bureau (CFPB) recently issued a bulletin warning employers against the exclusive use of payroll cards. “Employees must have options when it comes to how they receive their wages,” said CFPB Director Richard Cordray. “Employers … cannot mandate that their employees receive wages on a payroll card. And for those employees who choose to receive wages on a payroll card, they are entitled to certain federal protections.”

 Some employees have complained about the fees associated with payroll cards when using them at ATMs, making teller withdrawals or even checking a balance.

“Not all employees like these cards. They don't want another card in their wallet,” says David Lewis, CEO and president of OperationsInc, an HR firm. “There is some pushback and litigation.”


In one case, a former McDonald’s worker in Pennsylvania is suing her former employer, claiming the franchise where she worked refused to issue her a paper check or pay her via direct deposit. The suit seeks unspecified financial damages as well as punitive damages against the company. In New York State, Attorney General Eric Schneiderman is investigating the use of such cards by employers. 

In addition to the federal regulations, most states have rules about how employees can receive pay. Most states mandate that employees receive wages free and clear. If bank fees or charges are assessed, then employees are not getting their wages in full.

Given how state laws vary regarding direct deposit, companies need a comprehensive implementation plan based on state requirements, says Felicia Cheek, global payroll leader for The Hackett Group, a business advisory and consulting firm. “Plans need to be in place for when an employee moves to another state that may have different requirements,” she says. “While the process should encourage electronic payments, in states where employees must opt in, the process needs to be clearly explained.”

Furthermore, she says employers must make the relationship with the card provider a priority in order to ensure they are receiving the best products both for themselves and employees. “Offerings change, and you should not go more than two years without exploring new offerings on the market,” she says.

The American Payroll Association and the National Consumer Law Center recommend that employers stick with a payroll card that’s widely accepted (such as those offered by Visa, MasterCard or Discover), to make it easier for employees to access cash and use the card to pay bills or make purchases online. They also recommend that employees be able to freely access account information to check their balance, monitor fees and look for unauthorized purchases.

Employers should also be aware that the fees associated with the payroll cards can effectively reduce an hourly worker's pay below minimum wage, which could lead to potential Fair Labor Standards Act violations for employers, warns Nicholas Woodfield, principal with The Employment Law Group. “The cost savings associated with the improved payroll efficiency can be quickly eviscerated by FLSA violations,” he adds.