News

Concerns about payroll cards grow along with popularity

January 7, 2004

WASHINGTON, D.C. - Introduced in the late 1990s, the popularity of payroll cards has grown in the past two years, especially as Visa and MasterCard started offering branded versions, enabling workers to cash their pay wherever major credit and debit cards are accepted.

But as use of the cards grows, so do concerns about the lack of consumer protections that go with them, because the cards are unregulated.

"Payroll cards offer all the problems of a bank account without the benefits -- all the fees and costs without the opportunity to save and build wealth," said Ed Mierzwinski, consumer program director for the consumer advocacy group U.S. PIRG, in a Washington Post report.

About 2.2 million payroll cards are in use, double the number in circulation a year ago, said Aaron McPherson, research manager at Financial Insights, a Massachusetts market research firm. By next year, 3.5 million cards will be in use, he said, predicting that number will double by 2006.

The list of employers offering the cards includes United Parcel Service Inc.; Blockbuster Inc.; Sears, Roebuck and Co.; Coca-Cola Co.; McDonald's Corp.; and Domino's Inc.

The card is primarily designed for what the financial services industry calls the "unbanked" -- those nearly 14 million households that don't have bank accounts. As such consumers have become increasingly accustomed to using plastic gift cards, the acceptance of plastic payroll cards has become more widespread, according to the Post report.

"We're in the infancy of the way these cards can be used," said Michael Brewer, spokesman for Comdata Corp., one of the nation's largest providers of gift and payroll cards. Companies also are using plastic to reward commissions, pay up-front for travel and relocation expenses, and issue royalties or year-end bonuses.

For companies, the primary benefit is cost savings. The cost of writing a check ranges from $1 to $2, compared to about 20 cents for making an electronic payment -- either to a bank account through direct deposit or to a payroll card.

U-Haul spokeswoman Joanne Fried said that 3,000 of the company's 17,500 employees have payroll cards; the rest are on direct deposit -- a move that in total saves the company about $500,000 annually.

Amazon.com Inc. began its paperless conversion in March and figures it will save $150,000 to $200,000 annually by eliminating paper checks. "I got a lot of opposition initially" from employees, said Douglas Houser, Amazon's treasury analyst, noting most opted for direct deposit.

The first week of Amazon's program, in March 2003, Houser got about 180 calls, many complaints about bank tellers who wouldn't cash the card for its total value. Houser said that was because tellers were unfamiliar with the card and because employees didn't realize they didn't need to cash out the entire value at once.

The second week, calls dwindled to 18; the next week, only three. "Over time, employees started using the card as it was supposed to be used -- as a debit card," withdrawing a little at a time, he said in the Postreport.

Some card-issuing financial institutions charge employees a monthly maintenance fee, ranging from $1.50 to $4, although the fee is often waived for the first year. Many firms set up the cards to allow employees one free ATM transaction per pay period, with regular ATM fees charged for each additional withdrawal. Some cardholders also incur a small fee, 25 to 50 cents, every time they use the card at a store checkout.

Sometimes the fees can total more than it would cost to have a bank account, or even cash a check at a store -- a concern of consumer advocates.

"There are no controls on how these cards operate," said Ronald Reiter, a supervising deputy attorney general in California and chairman of the Federal Reserve Board's Consumer Advisory Council.

Reiter believes the cards can benefit employees. But because financial firms are marketing these programs to employers as a way to reduce costs, companies might tend to exclude consumer-protection provisions that add to those costs, he said in the Post report.