While prepaid and payroll cards are demonized by much of the media these days, their adoption by consumers is increasing at a lightning fast pace. So, what's the real story are these products good or bad for society, and if the latter, why are they so darn popular? Do they exist only to produce absurd profits for the prepaid providers by taking advantage of hardworking, lower-income-earning citizens? Or has the media simply decided this story is more sensational than one that might promote the positives of prepaid and payroll cards?
I'm obviously biased, given my company is a prepaid debit card provider, but the negative media attention seems to propagate fear and discontent for a product that is clearly better than the alternatives for the unbanked. The problem isn't really evil prepaid companies and employers, but, rather, a lack of awareness and education about the products and options that are available.
The message generally voiced by consumer finance experts is "don't use this product" or "use with extreme care". These opinions are entirely unfair and simplistic. The stories seem to provide little advice aside from generally discouraging the use of prepaid cards. Consequently, consumers may decide to stick with a checking account, where they can easily be stuck with multiple $30 overdraft fees each month, or cashing checks at convenience stores charging 1% (at best) for the service.
Now, one could argue customers can simply avoid overdraft fees, which brings me to my larger point about educating the consumer. With prepaid, you can also avoid most, if not all, of these fees, but this is something most people don't know. There are plenty of prepaid products with monthly fees of $3 to $5 and many operators will waive this fee with direct deposit. There are also a handful of prepaid cards that charge absolutely no monthly fee. Competition for prepaid cardholders has created options aplenty.
Lately, writers' discussions have been centered on payroll cards and how they are purportedly being used to take advantage of our lowest income earners. Sure, we need to make sure that companies are properly communicating to employees about their options, but to outright brand the industry and any companies offering payroll cards as usurious and abusive doesn't solve this problem.
For instance, a recent article in The New York Times made many controversial and in many cases, distorted claims about the industry:
"Many employees say they have no choice but to use the cards: some companies no longer offer common payroll options like ordinary checks or direct deposit."
The statement propagates a dangerous misconception, given a company would be breaking federal law if they forced employees to use a specific card to receive their pay. According to the compulsory use provision of the Federal Reserve's Regulation E, the employee must have the option to receive direct deposit at a financial institution of their choice. This means that employees can use any bank in the U.S. to receive their pay, along with any prepaid card issued here.
The New York Times continues their hyperbole, rather than delving into the detailed reality that these employees do have a choice:
"At companies where there is a choice, it is often more in theory than in practice, according to interviews with employees, state regulators and consumer advocates. Employees say they are often automatically enrolled in the payroll card programs and confronted with a pile of paperwork if they want to opt out."
Let's be honest here: how difficult is it to contact the HR department at your company and provide them with the account and routing number of your bank or prepaid card? You generally only need two numbers, a name and maybe an address to change to direct deposit enrollment.
The problem again is more likely to be that employees simply don't understand the concept of direct deposit. Companies, in many cases, can do a better job of educating and explaining to employees that they have options. The media should highlight this as the actual problem, as opposed to scaring consumers away from the payroll and prepaid industry.
We need to let our unbanked workers know they have options in receiving their pay, shopping for the right debit card and minimizing fees. Perhaps that doesn't produce a headline that grabs readers, but it could save them some real money and make a real difference in their financial lives.
Houston Frost is CEO of Akimbo, a prepaid card provider.