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Should I Use a Pay Card?

December 16, 2019

This release was featured on Yahoo News

When you start a new job, it’s customary for your employer to request your checking account information so you can activate direct deposit for your paycheck. Or, in some cases, you’ll receive a paper paycheck.

But some companies offer a third option: a pay card or payroll card where paychecks are loaded. This method is easier for employers than producing paper checks and can benefit employees as well, although there are potential drawbacks.

What Is a Pay Card?

A pay card is a reloadable prepaid card that allows employers to electronically load employees’ wages or salary onto the card. Employees who receive their paycheck on a pay card can save, withdraw or spend the money just like they’re using a debit card.

The company works with a bank or other financial institution to supply the card and get employees’ pay transferred onto the card. The cards are often made and backed by major card producers such as Visa and Mastercard, which allows the cards to be used like most debit cards for in-person and online purchases and at ATMs and banks.

Federal regulations require employees to have at least one other option, such as direct deposit or paper paycheck, in addition to a pay card.

Why Do Employers Use Pay Cards?

Employers can increase efficiency and cut expenses using a pay card system instead of distributing paper checks once or more per month.

“For the employer, it’s very clear it’s saving money,” says Bill McCracken, president of Phoenix Synergistics, a marketing research company that serves the financial services industry. “It’s the main advantage to them.”

Small business owners are often strapped for time, and opting for the digital pay card arrangement instead of using paper checks can help them concentrate on building their business, says Caton Hanson, co-founder and chief legal officer of Nav, which helps business owners manage credit.

“Better technology should always lead to less overhead, so if you have a more automated process, there are not as many people involved,” Hanson says.

Employers can also save time and money by avoiding other paper paycheck-related hassles, such as reissuing a check if it’s lost or stolen and issuing stop payment orders, as well as monitoring whether checks are cashed, says Glen Sarvady, managing principal of 154 Advisors and a payments expert working with credit unions, banks and financial technology companies.

Pay cards can make it easier for employers to provide payroll even in unusual conditions, such as if an employee is away from the office due to illness or in natural disaster situations.

How Does a Pay Card System Work for Employers?

A payroll card system works essentially like a direct deposit arrangement — the funds are electronically loaded onto each employee’s card, and the employee is then responsible for the funds.

Although employees can now request that their direct deposit transfers be loaded onto a general purpose reloadable card that can be bought at a retail store, pay cards are different. A payroll card is specifically geared toward payroll distribution and is subject to state and federal regulations as a result.

Although states have differing regulations on payroll cards — some have specific rules allowing them as a method of payment while other states don’t regulate payroll at all — the American Payroll Association says it is not aware of any states that prohibit pay cards as a method of payroll distribution.

Why Are Pay Cards Good for Employees?

Pay cards provide the most benefit for employees who do not have a banking relationship.

About 8.4 million U.S. households were “unbanked” in 2017, which means no one in those households had a checking or savings account, according to a Federal Deposit Insurance Corp. survey. In addition, about 24.2 million more U.S. households were considered “underbanked,” which means someone in the household had an account at an insured financial institution but also went to an alternative financial services provider, such as a check-cashing business, in the previous 12 months.

If you don’t have a bank account, it’s better to get your money immediately on a payroll card rather than get paid with a paper check and go to a check-cashing company, says Lauren Saunders, associate director at the National Consumer Law Center, which works on consumer-focused issues for low-income and other disadvantaged people.

Other advantages for employees include:

No overdrafts. You can’t take out any more money than the amount on the card, so you won’t be penalized — as you likely would through a checking account — for overdrafts. “You can just go down to zero and not owe anything,” McCracken says.

Possible flexible pay. The pay card could open the door for a company to offer a more flexible payment system, making it easier for employees to get a payroll advance or even get paid every day once their hours are approved.

“From the employee perspective, it gives additional options rather than on traditional two-week or weekly cycle,” Hanson says. “Money can be available immediately. That’s pretty powerful, especially if you’re living check to check.”

Multiple withdrawal options. Depending on the card company’s network, you may have plenty of free ATM options. Also, if a bank accepts the card, which is more likely if it’s a Visa- or Mastercard-backed product, you could get a bank teller withdrawal.

Avoid check-cashing fees. By getting your paycheck on a card with the opportunity to use it immediately, instead of a paper check, you can avoid fees that might be associated with a using check-cashing service.

Should You Have a Pay Card if You Have a Bank Account?

It might seem like needless duplication to get a payroll card if you already have a bank account where you could get a direct deposit, but there are ways you can make both work.

“There may be a few people who, for some reason, want to have their paycheck segregated from a banking account, but it’s not appropriate to push people with a banking account to get these cards,” Saunders says.

If the check is directly deposited into a bank, it will make it easier for you to use a suite of financial services, including savings accounts, Saunders says.

“It’s a very niche product,” Sarvady says. “If you have a bank account and it’s in good standing, I don’t see what the benefit (of a pay card) is.”

However, if you’ve had a less than positive experience with a bank because of problems with overdraft fees, you might decide it’s easier to have the money delivered entirely or partially to a pay card.

In fact, a 2017 report from the American Payroll Association showed that 46% of employees with payroll cards have a bank account as well. Employees can use their pay card to send automatic deposits to checking and savings accounts, which can allow them to segregate the amount of the paycheck that is readily available for purchases.

However, it can be more difficult to manage your expenses if the money is split up in different places, Saunders says.

What Are Some Potential Downfalls With Pay Cards?

You need to be careful when using pay cards because, depending on the card, you might end up paying fees for a common transaction or inquiry.

For example, you might be charged for cash back at point of sale, receiving paper statements and ATM balance inquiries. One major national pay card provider charges $3 for ATM balance inquiries and out-of-network ATM withdrawals, although state regulations might prevent the provider from charging some or any fees.

When you get your card agreement, make sure you look at the fee schedule and compare it with other payroll options, such as direct deposit to a bank, Saunders says.

“It’s really important to know what the ATM network is because you might pay a fee if the ATM you use is out of network,” Saunders says.

Employers are required to provide certain disclosures before you decide whether to use a payroll card, according to the Consumer Financial Protection Bureau’s prepaid rule. Disclosures include two forms: a “short form” that highlights key fees and a “long form” that provides more information, including all fees.

In their disclosures, the companies might detail how you can avoid fees, such as letting you know how you can access cash, make purchases and check your balance for free.

If you do choose to use the payroll card, know the fees and how to avoid them.

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