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What to watch out for with payroll cards

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Payroll cards can help avoid check cashing costs, but can have nasty fees of their ownIf you’re currently getting a paper paycheck and your employer hasn’t already tried to get you to switch to a payroll card, they probably will at some point.

Last year businesses loaded paychecks onto 4.6 million payroll cards, and that’s expected to grow to 7.1 million cards by 2014, according to Aite Group, a financial services consulting firm.

It’s easy to understand why employers love payroll cards, which work like prepaid debit cards. They cut down on the cost of cutting paper checks and eliminate losses to payroll check fraud, which is so easy a 16-year-old could do it a lot and and not get caught for a really long time.

Why an employee would like them isn’t as clear.

For those with a bank or credit union checking account, opting for a direct deposit is generally the best paperless option. For those who can’t get or don’t want a checking account, the average payroll card is probably better than getting a paper check and cashing it at a storefront check-cashing place, which usually charge a pretty good chunk of the check for the privilege.

But payroll cards can also include some pretty big pitfalls for workers, says Tom Feltner, director of financial services at the Consumer Federation of America.

Overdraft

Some payroll cards allow users to spend more than is on the card, temporarily extending credit and charging a large overdraft fee in the bargain, which will eventually take a big bite out of the user’s next paycheck.

“The value proposition of prepaid cards is that you put money on and then you take money off, and when you associate credit products with that, it undermines the value proposition,” Feltner says. “At that point you’re looking at the same concerns that we’ve raised with traditional checking accounts.”

Lack of choice

While most businesses offer payroll cards as one of a couple of different choices, some employers have gotten in hot water recently for allegedly forcing employees to sign up for payroll cards. In response, the Consumer Financial Protection Bureau issued a bulletin clarifying that workers should have a choice about how to receive their paychecks, Feltner says.

“There are a wide variety of cards on the market and not all payroll cards are consumer-friendly and not all payroll cards are low-cost,” Feltner says. “Consumers should have the ability to seek out the account that’s most appropriate for them and use that account to receive their pay.”

High fees can eat away at your paycheck

Fees on payroll cards can vary widely, Feltner says. While there are some that have very low fees, others will charge for ATM usage, reloading the card, and other transactions.

“That’s something that consumers should always be on the lookout for,” Feltner says.

If their employer’s payroll card has one of these red flags, unbanked consumers can always seek out one of several prepaid debit cards out there with no monthly fee and no or low transaction fees, Feltner says.

What do you think? Would you ever opt in to a payroll card? Have you ever gotten one?

(Photo: Daniel Lobo)

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One Response to “What to watch out for with payroll cards”

  1. Chris says:

    The CFPB issued a bulletin on September 12, 2013 that will restrict an employer’s ability to force employees to be paid by payroll cards. The bulletin is available at http://files.consumerfinance.gov/f/201309_cfpb_payroll-card-bulletin.pdf. Here is the news release http://www.consumerfinance.gov/newsroom/cfpb-bulletin-warns-employers-against-exclusive-use-of-payroll-cards/.


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