New Payroll Card Regulation: A Pathway to Adoption?

Dollar Sign

Sometime this summer, the Consumer Financial Protection Bureau (CFPB) is to release final regulations governing the use of prepaid financial products, including payroll cards. Over the past 25 years, payroll cards have developed into a legitimate wage-payment method increasingly used by companies to augment the primary method of pay now used in the U.S., which is direct deposit. Ideally, with payroll cards as an option combined with direct deposit, employers would be able to perform completely electronic wage-payment transactions.

For some context, prior to the late 1990’s digital boom (and later bust), payroll departments had been focused on migrating as much of the workforce as possible to direct deposit, as this payment method was not only much less expensive to administer than issuing paper checks, but also generally more secure.

Employers had little leverage to force direct deposit on employees as federal and state requirements dictated that employees have an option of payment methods. The inability to require employees to be electronically paid caused employers to attempt to convince workers that direct deposit was the best way to get paid.

By the early 2000s, despite the best efforts of payroll professionals, the American Payroll Association and the National Automated Clearing House Association, which is a network of regional clearinghouses focusing on electronic monetary transactions, a percentage of employees who refused to use direct deposit remained.

There were various reasons for employees to not accept the offer by employers to deposit pay, sometimes before the regularly-scheduled pay date, directly into their bank accounts. A key reason that some employees did not accept the offer was that they could not get a bank account.

The costs to start and maintain an account were prohibitive for some workers living close to the margin of being able to sustain housing and food requirements. Some employees were prohibited from establishing bank accounts at institutions because they had prior convictions for financial crimes. Others preferred to avoid banking because they did not trust the institutions or they in some way were not legal in the U.S.

Whatever the reasoning, a significant portion of U.S. workers remain “unbanked,” i.e. without a bank account, and employers still are required to pay them. Without bank accounts, these employees often have been paid with paper checks.

Enter payroll cards as a solution. While not as inexpensive to set up and maintain as direct deposit, payroll cards cost less and are more secure than paper checks. Employers have found that payroll cards can be convenient not only for paying those who refuse, for whatever reason, to use direct deposit, but also for situations such as same-day final wage payments.

However, surveys have shown that while the use of payroll cards is growing, the method has not been embraced by most employers. Why?

First, administration of the cards can vary. Depending on the arrangement with the institution facilitating the cards and payments, there is a potential for workers to be charged for some transactions. Communication of the proper use of the card to avoid charges is necessary, and sometimes the message does not get through. This has created a backlash of sorts, including at least one high-profile lawsuit, despite the fact that the so-called “unbanked” employees easily can be charged a fairly high percentage to cash their paper checks at a payday loan or check-cashing facility and those charges are legal.

Second, while the federal government prohibits certain charges from being assessed and requires wages to be paid in full, some states have enacted more restrictive laws and other states are just beginning to address payroll cards as method that needs regulation.  The lack of consistency on the payroll card issue is counterproductive to efficient payroll operations.

Direct deposit has developed the same way, however. Some states are restrictive on the ability of employers to require this method, some are not. The payroll card method appears to be following a similar path.

Another issue hindering the use of payroll cards is, at setup, the fact that the employees being paid are not account holders, per se, at a financial institution yet they are the recipient of a “prepaid financial product” that has many attributes in common with a bank account. Determining who is responsible for the account used on the card sometimes is difficult. The employer does not own the account, or does it? The employee has the card, but no real account. The financial institution is required to make good on the amounts, but what other role should the institution play in the facilitation of this payment method?

The CFPB rule is intended to address who is responsible for communicating limitations of payroll cards and who will facilitate the ability of cardholders to check balances and get monthly statements.

According to one CFPB official, the federal rule that governs payroll cards and similar prepaid cards, Regulation E, is being modified to affirm that employers can require direct deposit as a wage payment method as long as another valid method of payment also is made available.

Some employers are hoping to hear that payroll cards could be that second option and that the era of totally electronic wage payment can begin in earnest.  

Bloomberg BNA’s Payroll Library in the early 2000s began covering the development of payroll cards as a wage payment method.

You can learn more about implementing payroll card programs and the upcoming CFPB rule by attending a Bloomberg BNA webinar June 22, 2016: Offering Payroll Cards: Promises and Pitfalls.

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