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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.

Gail Hillebrand, financial services campaign manager at Consumers Union, says employees further need to be aware that the rules are very different between an employer-provided payroll card and reloadable debit cards onto which workers elect to have their pay transferred. The Electronic Funds Transfer Act gives a holder of a payroll card the same liability protections as a holder of conventional bank debit cards. So they have the same safeguards if the payroll card is lost or stolen, and the same rights to dispute unauthorized charges and to get their money back if the card is used fraudulently.

However, there's a big catch: These protections don't apply if workers go out on their own and pick a card that they want to use as a payroll card, in the absence of a formal program from their employer. In other words, if you like the idea of a payroll card and your company doesn't offer it, talk to human resources about starting a program rather than trying to create the equivalent on your own. Your money isn't nearly as well-protected otherwise.

One final wrinkle with payroll cards is that they can be limiting or inconvenient to use for some purchases. When a vendor puts a "hold" on a card purchase -- such as for a gas station fill-up or a hotel booking -- the cardholder could find his or her funds essentially frozen for days.

An employee with a payroll card instead of a bank account also might find it hard to pay rent, since most landlords won't accept card payment. The user would be forced to get money orders every month at his or her own expense. Fox says that some employers are now working with payroll card issuers to offer specialized products that function like checks for this very purpose, but it's still the exception rather than a rule.

Consumers Union has drafted a "model law" that's intended to cover all the ifs, ands and buts surrounding payroll cards, their protections and their fees. Unfortunately, it's not set to become law anywhere, anytime soon, so it's up to consumers to remain vigilant and -- if your workplace offers you a payroll card -- read the fine print before signing up.

The bottom line, Hillebrand says, is if you have a bank account, stick with direct deposit if you want to ensure the safety of your money while incurring the least amount in fees. "If your employer is offering the card, the first question is, why not get a bank account?" she advises.

Readers, what do you think? Have you been offered a payroll card at work? Do you use one now or have you in the past? Was it convenient, and did you have to pay fees? Tell us about it in the comments section below.






Fed Proposes Dramatic Cuts to Debit Card Interchange Fees
Martha C. WhiteMartha C. White RSS Feed
Dec 16th 2010 at 4:30PM
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Filed under: Banking, Shopping, In the News
a hand holding a debit card - debit card feesThe Federal Reserve Board proposed rules Thursday that may dramatically cut the interchange fees that banks charge merchants for debit card transactions.

The Fed suggested capping the fees at 12 cents a transaction. Currently, banks charge merchants 1% to 2% of the dollar value of the transaction.

Small banks would be exempt, as would issuers of government benefit debit cards and prepaid cards.

The proposed changes are likely to be welcomed by merchants and railed against by banks. (The American Bankers Association has already fired off an angry retort.) Stores say they're more or less forced to pay whatever fees the banks set, and it's a lucrative source of income: Fed vice chairman Janet Yellen observed in the meeting that banks earned a whopping $16 billion in interchange fees in 2009.

What does this mean for consumers? Fed rulemakers acknowledged that it's impossible to predict exactly how this will impact cardholders, but there are a couple of likely possibilities: Banks are likely to cut back or eliminate their debit rewards programs, and they may add fees or create less favorable terms for accountholders who have and use debit cards.

While this may sound onerous, itmay not actually be so bad. Right now, all of us -- whether we pay by card, check or good old cash -- bear the brunt of high interchange fees because merchants pass them along to all of us in the form of higher prices. With the new fee rules in place, only the people who want the convenience of using a debit card will pay for it.

It's also worth noting that banks predicted they'd raise fees and cut cardholder benefits when the CARD Act was passed, but in reality, this didn't actually happen. Banks want to keep their customers, so they're going to be forced to be competitive with their rates, terms and reward programs.

The Fed voted to open the proposal up to public comment and set a target date of April 21 by which new rules must be set; banks will then have another three months before it goes into effect on July 21 of next year. The meeting also addressed debit transaction routing, a thornier issue the Fed aims to have a new set of regulations for by July 21, 2011.

The Fed acknowledged that its proposals still let banks profit from interchange fees, since the financial reform legislation that led to this round of rulemaking only specifies that fees have to be "reasonable and proportionate," not that banks can't still earn money from them. However, the structures of both of their suggested options have built-in incentives for banks to conduct their debit transactions more cost-effectively.



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