Fed Adds Payroll Cards to Reg E

  Regulation can stifle a new product, or it can help it flourish. A case in point is Regulation E of the Electronic Funds Transfer Act enacted in 1979, which many believe helped rev up the debit card market by limiting consumer liability for lost or stolen cards.
  Now, the Federal Reserve Board is proposing a new rule effectively extending Reg E protections to payroll cards. The rule is scheduled to take effect July 1, 2007.
  Under Reg E, consumers who report their debit cards lost or stolen within two business days of noticing them missing are liable for no more than $50; those who wait up to six months are liable for no more than $500. Liability is unlimited for transactions occurring more than 60 days after an account statement shows the unauthorized card use.
  Many issuers built their programs to comply with the expected regulations, so the proposed rule contains nothing they found alarming. "From our perspective, it's a welcome clarification," says Nora Arpin, first vice president of commercial card products at Comerica Bank in Detroit. "It gives banks a framework for compliance and how we should (provide) our product."
  The major concession to issuers was to not require that each payroll card holder receive a paper statement in the mail each month. Instead, the rule requires issuers to provide various ways workers can check their payroll card balances and transaction histories. That includes by telephone or via a Web site. A cardholder also can request a paper statement.
  Karen Glessner, vice president of marketing at Irvine, Calif.-based prepaid card processor Card Express, says the company complies with the new rule by providing a Web site where payroll card users can check their balances. She notes the company soon will launch a new line of Visa-branded payroll cards. Visa provides payroll cardholders zero-liability protections against unauthorized use.
  A few questions about payroll card rules may still remain unanswered.
  For instance, the new rule does not specify that payroll card users must be provided with a toll-free telephone number to use when checking their balances, says William Dunn, manager of the American Payroll Association. The rule just states that the phone number must be made available to the card user. A cardholder could face fees to call the bank or be charged by their own phone company for making the call.
  "If somebody is calling a bank every day, those fees can really rack up," Dunn says. He did not know if the Fed would revisit that issue.
  Overall, the rule appears to put few roadblocks before the expected growth of payroll cards. Research firm Aite Group has projected that spending on payroll cards will grow from $2.7 billion in 2004 to $27.1 billion in 2009.
  Behind that growth are expected savings for both employers and employees from payroll card programs. Mercator Advisory Group has estimated that employers can cut their payroll costs by 50% by moving away from paper checks that cost $1 to $2 apiece to issue and process.
  Visa cites studies that show it costs 20 cents to issue an electronic payment through a payroll card.
  Workers without bank accounts who use check-cashing stores to cash their paper checks also can realize savings from payroll cards, according to a report by another federal banking regulator, the Office of the Comptroller of the Currency.
  The OCC estimated in 2003 that an employee making $12,000 annually would pay $72 in payroll card fees, saving $174 from the $246 he would pay in check-cashing fees.
  Regulators like the OCC and the Fed like those kinds of efficiencies, and they also prefer traceable electronic transactions to the anonymity of cash. It thus comes as little surprise that they would place no major roadblocks to the proliferation of payroll cards.
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