Prepaid payroll cards have come under fire recently. Earlier this month, reports surfaced that New York Attorney General Eric Schneiderman was investigating large companies' use of the cards to pay employees. On Friday, the New York Times reported that 16 Democratic senators had written a letter urging regulators to similarly examine the use of the cards for payroll purposes. The news follows criticism from consumer advocates who feel the cards force employees to pay unnecessarily high fees to access their wages and benefits.
Critics, however, often fail to acknowledge that the payment method can serve as a viable alternative for consumers without bank accounts. In the past, unbanked and underbanked consumers would receive a check, go to a check casher, pay a fee to get their wages and then buy money orders to pay rent, bills and utilities.
This process is very costly. According to a 2010 study by the Massachusetts Division of Banks, an employee would pay between 2.4% and 3% to cash their payroll checks with a check casher. The study found an unbanked employee earning $26,000 a year would spend approximately $750 in check-cashing and money order fees to pay their bills, or about 2.8% of their annual earnings.
The alternative of heading across town to pay bills in person with cash can be very time-consuming. Packed with inconvenience, security risks, and the possibility for fraud and loss, a cash-based system is probably the most expensive way to handle personal financial services. As such, plastic payroll cards, which provide immediate, secure, low-cost access to funds, are an important and innovative option for paying America's workforce.
There is little doubt that these products are almost always better for consumers than carrying around a lot of cash. For starters, the funds are protected if lost or stolen. Like traditional debit cardholders, payroll cardholders have the protections of Regulation E, as well as the zero-liability policies of the card brands. Cardholders are protected against lost or stolen cards, or unauthorized transactions.
Typical state laws provide that employees have to consent to receipt of wages by a payroll card, after full disclosure of the applicable terms and fees, with the option to be paid by direct deposit or by check. Additionally, many states require that employees be provided with a convenient means to access their full pay at least once per pay period without charge. This access enables the employee to use the prepaid account either to safely store and access their funds over time or use it like a "plastic paycheck" by drawing down the full amount in cash, which can be used in lieu of the card.
Similar to traditional debit card users, prepaid consumers can control the costs of their account by using it a certain way. For instance, it is cheaper to use in-network versus out-of-network ATMs. Customers can also bypass ATM fees by getting cash back at the point of sale; they can use electronic messaging to check their balance.
Payroll cards also make bill payments and online purchases easier and provide access to the financial payments system. The economy is increasingly shifting from paper to digital currency because of the security and convenience it provides. For the past several years, state and federal governments have been migrating consumers to electronic government benefit payments (direct deposit or prepaid cards) from paper checks in order to reduce fraud, save money and improve the overall customer experience of receiving benefits.
No payment method is perfect and we acknowledge that there will always be outlier programs that do not lead to a positive consumer experience. However, the cost savings and consumer protections are undeniably positive with the vast majority of payroll cards.
Network Branded Prepaid Card Association members continue to work with regulators to ensure that American consumers have access to these life-changing products that can uniquely help consumers access the financial mainstream, and transact in the safe, secure, budget-friendly way available to those with traditional bank accounts.
Kirsten Trusko is president and executive director of the Network Branded Prepaid Card Association.