Posted on: Sunday, January 11, 2004
Companies go paperless with electronic payroll cards
By Caroline E. Mazzzyer
Washington Post
Payday used to be a logistical challenge for Anthony Barnes.
With no bank account, the U-Haul employee couldn't have his pay electronically deposited overnight. So he'd wait four extra days to get a paycheck, then pay high fees to cash it at a store.
Sometimes he avoided fees by depositing his check in his mother's bank account. But then he'd have to wait another week for the check to clear to get the cash.
Now Barnes uses an increasingly popular innovation: the payroll card. U-Haul electronically credits his pay to a special debit account, and Barnes then uses a plastic card to gain immediate access to his funds — either withdrawing cash at automated teller machines or paying for goods at store checkouts, swiping his card like any other debit or credit card.
"I use it every way I can. I love it," said Barnes, 20, general manager of U-Haul Storage Intown in Washington.
Introduced in the late 1990s, payroll cards have taken off in the past two years, especially as the two major credit card companies, Visa and MasterCard, started offering their own branded versions, enabling workers to cash their pay wherever major credit and debit cards are accepted.
Payroll cards are just one of the many ways employers are trying to turn the entire pay system into a paperless process. And most of the growth has been prompted by companies eager to trim payroll costs, not by workers' demand.
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 of 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.
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 companies offering payroll cards includes such well-known corporate names as 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 almost 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, industry officials say.
"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 are also using plastic to reward commissions, pay up-front for travel and relocation expenses, and issue royalties or year-end bonuses.
For companies, the cost savings make the cards attractive. The cost of writing a check ranges from $1 to $2, while the cost of making an electronic payment — either to a bank account through direct deposit or to a payroll card — runs about 20 cents.
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 that most opted for direct deposit. After an initial period of confusion about the payroll cards, "employees started using the card as it was supposed to be used — as a debit card," withdrawing a little at a time.
Some financial institutions that issue pay cards to companies 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 also allow employees one free ATM transaction per pay period, with regular ATM fees charged for each additional withdrawal. Some employees 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 and state regulators.
"There are no controls on how these cards operate," added Ronald Reiter, a supervising deputy attorney general in California and chairman of the Federal Reserve Board's Consumer Advisory Council.
Reiter has no doubts that these cards can benefit employees, by cutting the time and expense of getting paychecks cashed and often making it easier for immigrants to transfer money abroad.
But because financial firms are marketing these programs to employers as a way to reduce costs, companies may tend to exclude consumer-protection provisions that add to those costs, Reiter said. As a result, he worries that some programs may have high fees, limited access to money and inadequate disclosure — particularly to workers who don't speak English.
Additionally, with no state or federal regulations, it's unclear what happens to an employee's money if the card is lost or stolen.
"It's all so unregulated that anything can happen," he said.
Reiter has urged the Fed to make it clear that electronic-banking rules that apply to bank and debit cards also cover payroll cards. So far, the Fed has not done so.
