In recent years, pay cards (also known as prepaid debit cards) have attempted to bridge the direct deposit gap by giving US employees the ability to accept funds via a prepaid debit card (rather than through a personal bank or other financial account). Theoretically, pay cards give employees a pathway to the conveniences of direct deposit and a reprieve from substantial check cashing fees.
This article explores the facts about pay cards and highlights leading employer pay card practices.
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EY - Cents and sensitivities of pay cards
1. The cents and sensitivities
of pay cards
by Debera Salam, Ernst & Young LLP
Security, direct deposit, including pay cards, is replacing
from the transition. Payers enjoy a lower risk of
payment fraud and a reduction in administrative burden
caused by lost and outstanding checks. Payees can
better predict when deposits will be available in their
accounts while saving them the time needed to cash
checks. Everyone in the direct deposit system wins by
reducing paper clutter and its environmental footprint.
According to the National Automated Clearing House Association
(NACHA) in its 2011 PayItGreen®
survey, close to 75% of employees
are paid by direct deposit. Employees cite convenience as one of
the primary reasons they like it, and increasingly, they are choosing
direct deposit to help the environment. In fact, environmental
protection is the primary marketing message of PayItGreen, which
including billings and statements.
reduction in paper transactions, but NACHA believes there is more
work to do. Its focus is on what businesses can do to convince the
remaining 25% of the workforce to give up its paper checks.
“We’re always talking about how to switch that last 25% over to
direct deposit,” said Janet O. Estep, NACHA President and CEO.
“This research shows that where state law allows, employers
may want to consider requiring employees to receive their pay
electronically. Once employees start using direct deposit, its safety,
security and convenience make them true believers. They wonder
why they didn’t do it sooner.”
“We’re always talking about how
to switch that last 25% over to
direct deposit. This research
shows that where state law
allows, employers may want to
consider requiring employees to
receive their pay electronically.”
— Janet O. Estep
NACHA President and CEO
2011 PayItGreen®
survey
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Payroll workshop
2. According to NACHA’s 2011 PayItGreen Survey, close
to 75% of employees are paid by direct deposit, with
employees citing convenience as one of their primary
reasons. Increasingly, employees, particularly Gen Y,
are choosing direct deposit to help the environment. In
fact, environmental protection is the primary marketing
message of PayItGreen, which is leading a global push
and statements.
Pay cards — bridging the direct deposit gap
One barrier to the growth in direct deposit was the population of
employees unable to obtain a checking account who had no choice
in the past but to refuse direct deposit. Without another option, these
employees often were forced to incur substantial check cashing fees.
According to e-How, in June 2010 such fees ranged from 1% to 5%
of the check amount.
In recent years, pay cards (also known as prepaid debit cards) have
attempted to bridge this direct deposit gap by giving employees the
ability to accept funds via a prepaid debit card (rather than through
give employees a pathway to the conveniences of direct deposit and
a reprieve from substantial check cashing fees.
Last year, the Aite Group reported that the volume of dollars loaded
to pay cards continues to grow at “lightning speed.” The Aite Group,
dollar volume loaded to pay cards will increase from $26.6 billion
cautioned, however, that “in the midst of this [pay card] growth, the
regulatory environment has become much more complex … requiring
extra resources and focus by all providers in the ecosystem.”
Pay cards come under scrutiny
by consumer groups and the media
Fueling the potential of increased regulation of pay cards is the
current controversy about the possible adverse effect they have
on low-wage earners.
This summer, criticism of pay cards sharply increased after
The New York Times reported that low-wage earners are being
forced to accept pay cards carrying substantial fees while, at the same
time, employers are collecting cash incentives from pay card issuers.
Within days of the initial article, The New York Times reported that
New York’s Attorney General was investigating the pay card practices
of some of the state’s largest employers. Under New York law,
EY state survey on page 6.)
By the end of July, the story unfolding in New York played out on
network television, expanding the pay card discussion to a national
audience. Some of the claims made by the media include:
• Employees are forced to accept pay cards.
• Fees eat up $30 per month of workers’ wages.
• Employees don’t receive pay statements, thereby allowing
employers to hide wage theft.
• Employer kickbacks amount to a return of the “old-time
company store.”
At the heart of the media message is a plea for additional regulatory
protections governing the use of pay cards. ( NBC News.)
“In the midst of this [pay card] growth, the regulatory
environment has become much more complex …
requiring extra resources and focus by all providers in
the ecosystem.”
— The Aite Group, November 14, 2012
3Payroll Perspectives September 2013 |
Payroll workshop
Click here for
NBC News video.
3. The facts about pay cards
Mandating pay cards
More than half of the states require that employees consent to
(See EY’s 2013 direct deposit survey on page 6.)
Pay card fees
Perhaps the most misunderstood aspect of pay cards are the fees
employees must pay to use them. NetSpend, one of the nation’s
largest pay card providers, charges $2.50 plus ATM-owner fees to
withdraw funds from the debit card account. By comparison, check
cashing fees range from 1% to 5% of net pay. For a minimum wage
worker netting $200 per week and paying a check cashing fee of just
1%, there is little cost difference between the check cashing fee and
the initial fee to withdraw funds from the pay card.
The fact is, employees are forced to leave funds in
their pay card accounts only if there is a restriction on
the amount of cash that can be withdrawn at one time.
Such restrictions are prohibited under the pay card laws
of numerous states (e.g., Colorado, Hawaii, Minnesota
and Tennessee).
However, in many states, pay card employees may be getting a
better deal than those still cashing paper checks because issuers are
required to give pay card holders the ability to withdraw funds without
stating that “any pay card plan adopted by the employer shall entitle
the employee to one withdrawal for each deposit, free of any service
charge to the employee.” (A.R.S. §23-351.) The objective of this law
is to give employees the ability to draw cash out their prepaid debit
card account in much the same way as they would exchange paper
checks for cash (minus the check cashing fee).
In arriving at pay card fees of $30 per month, the assumption is made
that employees pay a fee for every cash withdrawal and that they leave
their funds in the prepaid account, thereby incurring ongoing transaction
and even overdraft fees based on how the card is used (or misused).
The fact is, employees are forced to leave funds in the pay card
account only if there is a restriction on the amount of cash that can
be withdrawn at one time. Such restrictions are prohibited under the
pay card laws of numerous states (e.g., Colorado, Hawaii, Minnesota
and Tennessee).
The cents and sensitivities
of pay cards
Continued
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4. Leading employer pay card practices
• Comply with the law
State law may regulate not only that employees consent
to electronic pay, but that they incur no additional fees or
be subject to restrictions in gaining access to their cash.
Disclosures concerning fees may also be required and available
in different languages (e.g., Minnesota).
• Offer options
Employees should be given the option of direct deposit or pay
card, and employers should consider when paper checks might
also be an appropriate option (see the U.S. Department of
Labor’s Field Operations Handbook, 30c).
• Don’t be pushy
Pressuring employees into accepting direct deposit or pay
cards could be a violation of the law. For example, Michigan
requires not only that employees participate voluntarily, but
that their consent is obtained without intimidation, coercion or
fear of discharge or reprisal. (MCL §408.476(2).)
• Carefully choose the card issuer
In choosing a pay card provider, consider using “brands”
that employees recognize and trust and that offer them
convenient locations from which to make cash withdrawals.
of the pay card provider.
• Be mindful of card terms and conditions
Employees should be able to withdraw all of their pay once
per payday without fees or restrictions and be given free and
convenient access to their account information. Employers
should also be wary of pay card features, such as overdraft
• Provide information to employees
Information concerning the pay card, including how and where
to withdraw cash, how to make purchases, and any fees and
limitations, should be available to employees in a convenient
forum, such as a website where passwords are not required.
Where applicable, the information should be available in
foreign languages.
• Make changing payment methods easy for employees
EY insights
The movement toward paperless pay is not likely to be slowed by
the recent consumer advocate movement; however, expansion and
enforcement of employer regulations are a likely outcome. More
immediately, employers may need to consider the renewed focus on
and perception of pay cards.
In addition to complying with state rules governing pay cards,
employers should consider leading practices that foster employee and
community trust.
For the highlights of EY’s 2013 direct deposit survey, go to page 6.
For the complete survey, email Debera Salam.
More than half of the states require that employees
card arrangement.
Pay stubs
While it is true that employee pay stubs are not required under
federal law, most states impose this requirement. Some states go so
far as to require that employees given electronic pay stubs also be
able to print them without cost (e.g., Utah).
Click here for
CBS News video.
5Payroll Perspectives September 2013 |
Payroll workshop