The Risks and Rewards of Payroll Cards

a woman swipes a card into a machine - payroll cardsThe era of receiving a paper paycheck is rapidly becoming as distant as the days when we relied on landlines for all our communication needs. To make things easier on workers -- and save a bundle on administrative costs in the process -- companies increasingly have been relying on electronic payment methods. Many workers now are paid via direct deposit to a checking or savings account.

But for those who don't have, can't get or don't want a traditional deposit account, the option increasingly comes down to a single choice: a payroll card, which is a reloadable debit card onto which a worker's funds are loaded. According to the nonprofit organization Consumers Union, nearly $16 billion was loaded onto payroll cards in 2007, and it's very likely that the numbers have climbed since then.

"With the advent of technology surrounding gift cards and prepaid cellphones becoming so prevalent, individuals are more comfortable accepting payroll cards," says Bob Howe, former CEO of payroll card company Directo. These cards can be helpful in that they're safer than carrying around potentially hundreds of dollars in cash and may help users avoid as much as a 3% fee charged by a check-cashing storefront. But they're not perfect, and the legal gray area in which they exist has some consumer watchdogs worried.Sean Panizzi, branch manager at Teamtemps Personnel Staffing in Valdosta, Ga., says payroll cards were a lifesaver at his business, which employs around 700 temporary staffers who work for clients in several Southeastern states. Paper checks got lost in the mail or were sent to the wrong addresses, and they sometimes needed to be canceled, reissued and overnighted -- at considerable expense -- when a client submitted the temp worker's hours incorrectly. About a year ago, Teamtemps started offering the Global Cash Card, issued by MasterCard, to workers who didn't opt for direct deposit. Panizzi says that workers loved the option, so much so that about 50% of them now opt for the cards.

Panizzi's company did a few things right when it started issuing payroll cards, according to the consumer advocates we consulted. First, Teamtemps scouted out a card that even those without access to a bank could use without paying hefty fees. This was a crucial step in picking a card provider, Panizzi says, since the company has many employees in rural areas who would need to rely on ATMs to access their cash. (One problem with both prepaid and reloadable debit cards is that there can be high fees for users who want to withdraw cash.) Teamtemps also got information about the card translated into Spanish so workers who didn't have English as a primary language wouldn't struggle to understand how the card worked.

Another card benefit? Howe says that they're much cheaper for employers to administer than the paper checks they replace. In addition, for those Americans who are part of what watchdog groups dub the "unbanked," they can be a less-expensive option. "We were focused on the workforce that didn't or couldn't get a bank account," Howe says of his days at Directo. "This lets get them out of the world of check-cashing fees."

While this is true, the cards can come with plenty of their own fees, a prospect that worries some people like Jean Ann Fox, director of financial services for Consumer Federation of America. While the initial purchase price of the card is often borne by the employer, workers may be subject to fees when they withdraw cash at an ATM, make a purchase in a store, call to check their balance, request a paper statement or need a card replaced if it's been lost or stolen.

Prior to the passage of the Overdraft Act this July, some cards would even let users overdraw and incur hefty fees, which is like extending a short-term loan -- at a payday loan prices. Given that these cards are specifically targeted to workers who are financially unsophisticated, this could add up to a whole lot of trouble.

A big part of the problem is the relative lack of regulation around prepaid and reloadable debit cards. "Our position is that they're legally nebulous," says Angie Wei, legislative director of the California Labor Federation. "There's no oversight or regulatory framework."

California has better laws than many states when it comes to payroll cards, but Wei says that the lack of a national framework to regulate these cards puts cardholders at risk of falling through the cracks. This legal gray area is troubling to many consumer advocates, who point out two main trouble spots with the cards.

First, there aren't many limits on the types of fees and the amounts of those fees that a card issuer can charge the user. A total of 11 states have laws on the books saying that a worker has to have the right to access their pay without paying a fee, so most payroll cards permit one free withdrawal per pay period. If the cardholder doesn't have a bank account, though, this isn't really practical; they'd be in the same unsafe situation -- carrying around piles of cash -- that you'd imagine they got the card to avoid. In reality, using the card can cost the worker his or her hard-earned money. Even Howe acknowledges, "Some of the programs out there even today are very expensive for the worker."

A potentially bigger problem has to do with FDIC insurance. Under FDIC rules, if you have a bank account with less than $250,000 in it and the bank fails, you get your money back. If an entire company's worth of payroll deposits are lumped into a single account, though, there's no legal guarantee that all the money would be returned to its rightful owners if the bank goes bankrupt.

"You and I take for granted that if your bank folds tomorrow, we're going to get our money back," says CFA's Fox. This also is a problem with general-purpose prepaid debit cards, which we've discussed before on WalletPop.

Gail Hillebrand, financial services campaign manager at Consumers Union, says employees further need to be aware that the rules are very different between an employer-provided payroll card and reloadable debit cards onto which workers elect to have their pay transferred. The Electronic Funds Transfer Act gives a holder of a payroll card the same liability protections as a holder of conventional bank debit cards. So they have the same safeguards if the payroll card is lost or stolen, and the same rights to dispute unauthorized charges and to get their money back if the card is used fraudulently.

However, there's a big catch: These protections don't apply if workers go out on their own and pick a card that they want to use as a payroll card, in the absence of a formal program from their employer. In other words, if you like the idea of a payroll card and your company doesn't offer it, talk to human resources about starting a program rather than trying to create the equivalent on your own. Your money isn't nearly as well-protected otherwise.

One final wrinkle with payroll cards is that they can be limiting or inconvenient to use for some purchases. When a vendor puts a "hold" on a card purchase -- such as for a gas station fill-up or a hotel booking -- the cardholder could find his or her funds essentially frozen for days.

An employee with a payroll card instead of a bank account also might find it hard to pay rent, since most landlords won't accept card payment. The user would be forced to get money orders every month at his or her own expense. Fox says that some employers are now working with payroll card issuers to offer specialized products that function like checks for this very purpose, but it's still the exception rather than a rule.

Consumers Union has drafted a "model law" that's intended to cover all the ifs, ands and buts surrounding payroll cards, their protections and their fees. Unfortunately, it's not set to become law anywhere, anytime soon, so it's up to consumers to remain vigilant and -- if your workplace offers you a payroll card -- read the fine print before signing up.

The bottom line, Hillebrand says, is if you have a bank account, stick with direct deposit if you want to ensure the safety of your money while incurring the least amount in fees. "If your employer is offering the card, the first question is, why not get a bank account?" she advises.

Readers, what do you think? Have you been offered a payroll card at work? Do you use one now or have you in the past? Was it convenient, and did you have to pay fees? Tell us about it in the comments section below.
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