A Clash Over Payroll Cards
Just as they are getting to be more popular with employers and banks alike, payroll cards are attracting both legal and legislative scrutiny.
The New York Attorney General's Office is investigating complaints about fees and some U.S. senators are calling for increased regulation.
But this business line is booming and looks poised for more growth, in part because loading the cards is cheaper for employers than issuing paper checks.
In 2012, companies nationwide put $34 million on 4.6 million payroll cards, according to Aite Group. This will grow roughly 25 percent in 2013, to $42.8 million on 5.8 million cards, Aite estimates.
Based on a separate Federal Reserve study that pegs monthly fee income per card at about $1.75, the banking industry could generate more than $120 million in payroll card fees this year.
Despite the recent negative attention, Aite analyst Madeline Aufseeser says the future is bright for the cards. Besides the cost savings, businesses find the cards appealing because they view them as benefitting employees, particularly those who are temporary and part time. Money is immediately available on the cards on payday, typically free of charge for at least one withdrawal. So there is no waiting in line to cash a check at the bank and, for those without a bank account, no need to use a check casher. Also, if the card is lost, the value on it can be replaced.
But if the cardholder doesn't withdraw his or her full pay in one transaction, fees generally apply for subsequent uses of the card, either to make a purchase or an automated teller machine withdrawal.
The attorney general is looking into whether retailers and restaurants are running afoul of state laws that give employees a choice in whether to take a payroll card and a right to access their pay without a fee. Some have complained that they were forced to accept payroll cards despite having bank accounts, according to press reports. Others have reported incurring a variety of fees tallying as much as $50 a month.
Critics complain that some banks give employers a cash incentive for each employee who signs up for a card, but Aufseeser says that's not a common practice.
Many large banks offer payroll card programs, including Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, Comerica, PNC and BB&T. Only Wells was willing to discuss the particulars of its program. The bank says it does not offer employers incentives for signing up employees. Payroll cardholders get free teller transactions at all Visa-participating banks and one free withdrawal at Wells' own ATMs. This complies with the New York law requiring that employees have free access to their pay.
Other large banks are joining the payroll bandwagon. KeyBank is scheduled to launch its Key2Payroll program in the first quarter of 2014, according to Key spokeswoman Laura Mimura. She says Key is getting into payroll cards because of demand from business customers.
Hundreds of smaller banks also offer payroll cards, many through a third party like TransCard in Chattanooga, Tenn., under the American Bankers Association Community Bank Prepaid Program.
Though none of the banks contacted for this story would discuss revenue, a 2012 analysis of payroll card usage by the Federal Reserve Bank of Philadelphia found that the median monthly revenue was $1.75 per card, versus $7.95 for general purpose reloadable prepaid cards. The analysis looked at 280 million transactions on 3 million cards issued by Meta Payment Systems, a unit of the $1.7 billion-asset MetaBank of Storm Lake, Iowa.
The study found that the average payroll card customer paid 55 cents per month in interchange fees, the most numerous of the fees collected. ATM withdrawal fees averaged $1.92 per month.
But most of the revenue that banks collect on payroll cards comes from the processing fees charged to employers, Aufseeser says.
Industry lawyers say bankers are not particularly concerned about the New York investigation. The crackdown is targeting employers, though the Attorney General's office has said it wants to review "any and all communications" with their payroll card provider or financial institution.
As a precaution, Terry Maher, general counsel for the Network Branded Prepaid Card Association, suggests that banks get proactive about making employers who use payroll cards aware of each state's laws. In the end, the bank is the issuer of the card, whether as a direct provider or through a third party.
"I don't think banks want to have the job of being the compliance officer to businesses," Maher says. "But it's important that they help their clients understand the regulations out there and help them with the appropriate disclosures."