Panizzi's company did a few things right when it started issuing payroll cards, according to the consumer advocates we consulted. First, Teamtemps scouted out a card that even those without access to a bank could use without paying hefty fees. This was a crucial step in picking a card provider, Panizzi says, since the company has many employees in rural areas who would need to rely on ATMs to access their cash. (One problem with both prepaid and reloadable debit cards is that there can be high fees for users who want to withdraw cash.) Teamtemps also got information about the card translated into Spanish so workers who didn't have English as a primary language wouldn't struggle to understand how the card worked.
Another card benefit? Howe says that they're much cheaper for employers to administer than the paper checks they replace. In addition, for those Americans who are part of what watchdog groups dub the "unbanked," they can be a less-expensive option. "We were focused on the workforce that didn't or couldn't get a bank account," Howe says of his days at Directo. "This lets get them out of the world of check-cashing fees."
While this is true, the cards can come with plenty of their own fees, a prospect that worries some people like Jean Ann Fox, director of financial services for Consumer Federation of America. While the initial purchase price of the card is often borne by the employer, workers may be subject to fees when they withdraw cash at an ATM, make a purchase in a store, call to check their balance, request a paper statement or need a card replaced if it's been lost or stolen.
Prior to the passage of the Overdraft Act this July, some cards would even let users overdraw and incur hefty fees, which is like extending a short-term loan -- at a payday loan prices. Given that these cards are specifically targeted to workers who are financially unsophisticated, this could add up to a whole lot of trouble.
A big part of the problem is the relative lack of regulation around prepaid and reloadable debit cards. "Our position is that they're legally nebulous," says Angie Wei, legislative director of the California Labor Federation. "There's no oversight or regulatory framework."
California has better laws than many states when it comes to payroll cards, but Wei says that the lack of a national framework to regulate these cards puts cardholders at risk of falling through the cracks. This legal gray area is troubling to many consumer advocates, who point out two main trouble spots with the cards.
First, there aren't many limits on the types of fees and the amounts of those fees that a card issuer can charge the user. A total of 11 states have laws on the books saying that a worker has to have the right to access their pay without paying a fee, so most payroll cards permit one free withdrawal per pay period. If the cardholder doesn't have a bank account, though, this isn't really practical; they'd be in the same unsafe situation -- carrying around piles of cash -- that you'd imagine they got the card to avoid. In reality, using the card can cost the worker his or her hard-earned money. Even Howe acknowledges, "Some of the programs out there even today are very expensive for the worker."
A potentially bigger problem has to do with FDIC insurance. Under FDIC rules, if you have a bank account with less than $250,000 in it and the bank fails, you get your money back. If an entire company's worth of payroll deposits are lumped into a single account, though, there's no legal guarantee that all the money would be returned to its rightful owners if the bank goes bankrupt.
"You and I take for granted that if your bank folds tomorrow, we're going to get our money back," says CFA's Fox. This also is a problem with general-purpose prepaid debit cards, which we've discussed before on WalletPop.