Payroll Cards Gain Wider Adoption — and New Regulations
In the not-so-distant past, employers hand-delivered paychecks to employees. Employees then cashed their checks or deposited the money in checking accounts. Today, most employers use direct deposit, or, in a more recent development, payroll cards (or paycards).
In January 2019, the Consumer Financial Protection Bureau (CFPB) finalized regulations governing prepaid accounts, including payroll cards. Notably, the CFPB has modified earlier regulations about error resolution and liability limits when financial institutions haven’t successfully completed consumer identification and verification procedures. These new regulations take effect April 1, 2019.
What Do the Numbers Say?
In 1986, only 8% of workers were paid through direct deposit, according to the National Automated Clearing House Association (NACHA). By 2000, that number exceeded 50%, and it reached 82% in 2015. This upswing mirrors a broader economic trend of increasing use of electronic payments.
As recently as 2017, consulting firm Aite Group, estimated that 5.9 million active payroll cards around the country were loaded with wages of $42 billion. Those figures are expected to skyrocket to 8.4 million cards, with $60 billion loaded by 2022. In contrast, approximately 2.2 million workers currently receive wages by paper check.
How Do The Cards Work?
Payroll cards, similar to prepaid debit cards, act like portable bank accounts. With each weekly or bi-weekly pay period, employers deposit employees’ wages directly onto cards. Employees can then use their card for purchases at retail outlets and for cash withdrawals and online bill payments.
The funds are “located” elsewhere, in a bank or other financial institution account. Typically, funds are protected by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA).
Younger workers and employees in lower tax brackets are the demographics most commonly compensated with payroll cards, according to a 2018 study from the Center for Financial Services Innovation (CFSI). And the retail, manufacturing and fast-food industries are the most likely to pay workers using payroll cards.
What Are the Benefits?
Payroll cards can provide some distinct advantages over paper checks to both employers and employees. The most obvious advantages for employers are ease and convenience. Businesses save time and money because they no longer have to print and deliver checks to employees. They also don’t have to worry about misplaced or stolen checks.
Employees who don’t have bank accounts typically welcome payroll cards. They can make purchases wherever their card’s issuer (such as Visa or Mastercard) is accepted and don’t have to pay the high fees charged by check-cashing services. Employees who do have bank accounts can also benefit. With payroll cards, there are no monthly or bounced check fees or overdraft consequences.
Unlike with traditional credit cards, payroll cardholders don’t need a good credit history to qualify. They’re also protected by liability limits and error-resolution procedures in the event their cards are lost or stolen.
Are There Drawbacks?
Fees are the major downside of payroll cards. For example, employees may be charged fees to:
- Participate in their employer’s payroll card program,
- Check an account balance at an ATM,
- Use certain customer service features,
- Make point-of-sale transactions in retail stores or online,
- Request an initial card or replacements, and
- Close the account and request a refund of remaining account funds.
In addition, fees can be assessed if a cardholder keeps too low a balance or doesn’t use the card often enough.
How Do Regulations Protect Cardholders?
In 2016, the CFPB began developing the rules that will take full effect this year. Payroll card providers must adhere to cardholder disclosure requirements and document fees and conditions on a short or long disclosure form. The short form is standardized and generally easier for users to understand. The long form provides more comprehensive information about the card program.
The CFPB requires that the number and types of fees charged to cardholders are prominently disclosed to employees before they enroll in a payroll card program. This includes fees for ATM balance inquiries, customer service requests and inactivity.
Before You Adopt
Payroll cards are popular with certain employers and employees for good reason. If you’re considering adopting a payroll card program, carefully weigh the benefits and drawbacks and familiarize yourself with regulations governing their use. Questions about adopting a payroll card program in your business? Contact your Maloney + Novotny representative or use this online contact form.