Payroll cards offer convenience at lower cost

By James A. Ambrosio • Bankrate.com

For most of the last century, employers paid their employees in one of two ways: either they issued paychecks or they gave workers an envelope of cash.

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Those payroll basics didn't change much until the 1980s and the advent of electronic deposits from an employer directly to an employee's bank account.

Now employers in the 21st century are eagerly adopting another tool: payroll cards.

Instead of issuing a check or cash, the employer deposits a worker's wages into an account it establishes tied to a payroll card, which is a type of debit card that can be used at an ATM to withdraw cash or at any merchant that accepts debit cards for purchases. The result is that employers can eliminate costly and cumbersome checks, and workers, especially those who don't have bank accounts, have the convenience and safety of debit cards.

The advantages for "unbanked" employees is that they don't have to patronize costly check-cashing outlets or carry large amounts of cash after cashing their paychecks.

According to Visa USA, Americans without bank accounts spend about $1.5 billion annually in check-cashing fees. Plus, if the card is lost or stolen it can be more easily replaced than a check and at lower cost to the issuer. Visa estimates that 4 million checks are lost or stolen each year and generating a replacement costs employers an average of $8 to $10 per check.

The unbanked and payroll cards:

For the majority of Americans with bank accounts, the notion of going through life without one might seem strange, but there are many people who do. The Pew Research Center estimates that approximately 25 million Americans do not have bank accounts.

There are many reasons why they don't. They may have had previous problems maintaining and managing their accounts. In some immigrant communities, people harbor a distrust of the banking system due to poor experiences in their native countries. Another common factor is that lower-wage employees are often unable to maintain the minimum balances banks require to avoid paying monthly fees.

While employers are attracted by payroll cards' low cost compared with checks, and employees benefit from convenience and safety, the banking industry views the paycards as a way to reach the unbanked and hopefully convince them to use other bank services.

Payroll cards are also a cheaper way for workers to get their money than current methods. The Comptroller of the Currency estimates that a worker who earns a $400 paycheck every two weeks and who pays at least three bills each month using a money order would pay nearly $250 annually in fees at a check-cashing agency. A basic bank account with a $100 minimum deposit would cost the user $5.95 a month without direct deposit and up to $80 annually, which could go higher if the bank charges for overdrafts, negative balance or excessive phone inquiry fees, and other such costs. Payroll cards, on the other hand, would cost users about the same as the bank account; less if the card issuer doesn't charge users a monthly fee.

Next: "Payroll cards ... deliver choices to employees. ..."

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