Payroll cards benefit employers and employees
Prepaid cards in general, and payroll cards in particular, are an undoubted win for individuals and families
A recent story in this newspaper told of the bad press that prepaid payroll cards have gotten lately and the effect this has had in New Hampshire, where a bill to restrict their use is being considered in the House (“Payroll cards can’t gain traction in N.H.,” Feb. 21-March 6 NHBR). While I can understand the desire of policymakers to protect their constituents, my own experience has led me to believe that increased use of prepaid payroll cards could do a great deal of good in New Hampshire.
I confess that four years ago I too looked upon these cards as a potential problem. Since then, studying and working with prepaid cards has convinced me of the opposite: Prepaid cards provide access to mainstream financial services for families who otherwise would be shut out. They are a solution, not a problem.
According to the Federal Deposit Insurance Corp., nearly 15 percent of New Hampshire households are not fully served by the traditional banking system, and among these, many do not have a bank account at all. That means that they must cash their paycheck with a check-cashing firm, which can cost up to 3 percent of the value of a check. Once a check is cashed, unbanked individuals can incur additional fees of around $1.50 per bill for paying in cash. On top of this, they must spend time waiting in line to pay bills and their cash is always vulnerable to loss or theft.
When I was introduced to this set of problems during my second year at business school, my initial reaction was that employers should work to “bank” their unbanked employees. The more unbanked people I spoke to, however, and the more research I did, the more I realized that the reasons for not having a bank account were as diverse as the unbanked population itself – from not being able to qualify for an account, to not being able to afford the minimum balance requirements for free checking.
The message was clear: a bank account does not suit everyone’s needs.
At that point, I learned about payroll cards: prepaid debit cards onto which an employer could direct deposit an employee's pay. Employees can then access their funds by swiping their card at checkout (for no fee) or through an ATM (often for no fee).
As with all financial products, consumers must understand where charges apply and use their cards in ways that ensure they are minimizing fees and maximizing their benefits. But when properly utilized, these cards are an undoubtedly cheaper alternative to the status quo. In fact, it is estimated that the average unbanked payee will save a week's worth of salary over the course of a year by switching from paper checks to direct deposit.
Prepaid cards in general, and payroll cards in particular, are an undoubted win for individuals and families, but they also benefit employers, who can replace expensive, inefficient and costly paper-check systems.
I am not the only one who has woken up to the immense potential of prepaid cards in easing the burden on unbanked individuals and families. In New Hampshire, state government is using prepaid cards to provide unbanked benefit recipients with cheaper, safer and more convenient access to their benefit payments. Likewise, the U.S. Treasury is accommodating the needs of unbanked benefit recipients through its Direct Express prepaid card and is actually negotiating preferred rates on behalf of its prepaid cardholders.
Instead of focusing on the negative, we should celebrate the fact that employers and financial institutions are supporting a more inclusive payments ecosystem and focus our energy on supporting their efforts. When properly utilized, prepaid payroll cards hold the potential to generate extraordinarily positive outcomes – and the biggest benefit of all is to the unbanked family.
Arlyn Davich is the CEO of PayPerks, a financial capability and rewards program for financially vulnerable Americans based in New York City.