Payroll and Prepaid Debit Cards
Eileen St. Pierre, The Everyday Financial Planner
A few weeks ago, I received a FedEx envelope at my door. It contained a check for some training I completed last month. At first I mumbled under my breath how delivering the check cost almost as much as the check itself. Then I began to appreciate the dignity shown towards the paper check. Paper checks are going extinct. The only time many kids growing up today have ever seen one is in their birthday cards from their grandparents.
Payroll and prepaid debit cards have been growing in popularity. Government agencies, businesses and other organizations have increasingly relied on these cards as an effective and cost efficient method of payment. According to the New York Times, nearly $77 billion was loaded on prepaid debit cards last year, and industry experts believe that number will double by 2015.
There is also a growing trend of people using them in lieu of a checking account.
- Both federal and state governments have moved away from paper checks and issue refunds on preloaded debit cards to taxpayers without bank accounts for direct deposits.
- There is a segment of the population who are suspicious of the banking system. Others may not qualify for traditional checking accounts, while some are just seeking to avoid overdraft fees and other associated charges.
- Using preloaded debit cards is safer than carrying around lots of cash. For anyone who distrusts banks, perhaps getting comfortable with the technology of the debit cards will lead them to feeling more confident about checking accounts and electronic banking in general.
Prepaid debit cards have their advantages. Unlike regular bank debit cards, preloaded cards are not tied directly to a bank account or personal information such as a Social Security Number, which affords a measure of security against identity theft or consumer fraud.
- These cards give users the ability to control the outflow of money. After all, you can only spend what is available on the card without adding more funds, which makes them a viable option for parents who want to teach their kids to budget and use money wisely.
- Because the cards generally provide the same flexibility of regular debit cards, you can do your grocery shopping, make online purchases, pay bills and even access ATMs with the preloaded cards.
- They can be good alternatives to cash, regular debit cards or credit cards when you are traveling, including overseas.
[Read my Travel and Money column for financial tips for travelers.]
On the flip side, the main complaint against prepaid debit cards is the fees for using them.
- Depending on the card, users could be charged for services such as activation, reloading and maintenance, and those fees can come in higher compared to those linked with traditional checking accounts.
- In its July 2013 issue, Consumer Reports ranked 26 prepaid debit cards in four categories: Value, Convenience, Safety and Fees.
- Consumer Reports found that while all prepaid cards in its survey claim to offer some form of loss or fraud and recredit policy, these protections are often vaguely defined. In addition, card issuers include these protections voluntarily and can revoke them at any time. This can leave consumers vulnerable.
- Because the cards function like cash, frequent users of prepaid debit cards do not have a chance to build a relationship with a bank or establish a credit history.
On September 12, the Consumer Financial Protection Bureau (CFPB) issued a bulletin reminding employers they cannot require their employees to receive wages on a payroll card. Employees must be given options. Payroll cards fall under the CFPB’s jurisdiction, while state law would govern other payment options the employer must offer.
Important Employee Consumer Protections:
- Disclosure of fees must be clear, in writing, and given to employees to keep.
- Access to your account history, including fees imposed for fund transfers, must be provided. You should be able to check your balance by phone and online.
- Limited liability for unauthorized use if such use is reported within a certain period of time.
- Know your error resolution rights – if you report a payroll account error, the financial institution much respond so long as the report is received within a certain period of time.
Electronic transfers of funds are here to stay. I do have to admit that I get that same feeling when I see money directly deposited into my account that I did when I used to pick up a paycheck. I love using PayPal. Not giving up my purse, though. I don’t care how old-fashioned I look.