What Is a Pay Card?

How does a payroll card work for the employer?

Pay cards first came into existence in the late 1990s. Since their inception, their use has grown. According to Patriot Software, there were 5.9 million active pay cards in the U.S. in 2017, and that amount is predicted to reach 8.4 million by 2022. 

There are several benefits to compensating employees using a pay card. Pay cards offer employers a fast and secure way to pay their employees, especially those who do not have a bank account. Steve Shouler, owner of PayNortheast Payroll Company, said employers can deposit wages onto an employee’s pay card using the routing and account number associated with the pay card. 

A second benefit, Shouler added, is that companies that don’t offer pay cards run the risk of check fraud and the hassles that come with employees losing their paychecks. 

The NFIB estimates it costs businesses $3 for every paper check issued. Other benefits, therefore, of transitioning to pay cards are the savings (both money and time) for employers, plus reloading payroll cards is easy. 

It’s important, however, to choose a card with fewer fees that offers account history access, limited liability for unauthorized transactions/transfers and error resolution rights. 

Here are eight companies you can work with to issue pay cards: 

• ADP Aline
• Branch Banking & Trust Company
• Comdata
• Global Cash Card
• Money Network
• Rapid PayCard
• Skylight Financial Netspend
• US Bank Focus

Offering payroll cards for employees

Not everyone has a bank account, nor are they eligible to open one. According to a survey conducted by the Federal Deposit Insurance Corporation in 2017, more than 8 million households don’t have a bank account. That same survey reported than another 24 million households had a bank account but still used other financial products outside of the banking system. 

Some people don’t even want a checking or savings account. As a result, more businesses are switching to offering pay cards. Instead of issuing paper checks to pay employees, an employer loads the employee’s wages each pay period onto a card, according to Bob Castaneda, director of Walden University’s accounting and finance programs. 

“The payroll card generally uses a national credit card issuer like Visa or MasterCard, enabling the card to be used for cash withdrawals at ATMs, automatic bill payments and at businesses where credit cards are accepted,” said Castaneda. 

Castaneda said most employers offer prepaid cards as an option to pay employees. This is an especially attractive offering to employees without bank accounts, as they can use the cards to pay their bills and avoid check-cashing fees. 

However, it’s not just individuals without bank accounts who might prefer being paid their wages with paycards. 

As an employer, you can’t require your workers to accept this payment method; you must offer other payment options in addition to prepaid cards, such as paper checks or direct deposits, and make those options known to every employee.

Editor’s note: Considering a payroll service for your business? Fill out the below questionnaire to be connected with vendors that can help.

What are the fees involved in using a pay card?

If, after reviewing their options, an employee chooses to receive their wages on a pay card, the Consumer Financial Protection Bureau (CFPB) says you, the employer, must provide them with a copy of the terms and conditions, which discloses the fees associated with the pay card. The CFPB recommends that individuals read the conditions so they understand the fees they can be charged by pay card companies. Employers should also provide training on how to use the pay card, so there are no misunderstandings. 

Additionally, the CFPB enacted a rule requiring card providers to make certain disclosures to employees who choose to be paid via a payroll card. The process involves providing a “short” form that discloses the specific fees while a “long” form discloses all fees and other details about the employee’s pay card. Some examples of fees employees can incur include an activation fee, inactivity fee, purchase fee, customer service fee and reloading fees. 

Some card issuers charge a fee for every purchase made using the card or when the cardholder checks their balance at an ATM. Other charges include monthly maintenance fees, a charge to replace lost or stolen cards and ATM fees (for those ATMs outside the bank’s network,) which can be more pricey than checking account fees. 

“The estimated annual cost to an employee for a payroll card can be as high as $72 a year just for maintenance fees,” Castaneda said. “This excludes ATM withdrawal fees, which can cost up to $5 per transaction.” 

It’s not just employees who pay fees. Employers pay some fees, too, for things like placing the company’s logo on the pay card or issuing temporary cards. 

Make sure you review the laws and regulations in your state before choosing to offer employee payroll cards. Understand any fees you – and your employees – might have to pay, and disclose these fees to your employees.

Using a pay card

While it might seem like payroll cards only benefit employers or employees who don’t have a bank account, there are some advantages to using a pay card. For instance, once an employee debit card is loaded with the employee’s wages from the most recent pay period, the employee can go online, through the pay card company’s portal, to view their account details, said Shouler. “You can access balance information, view transactions and dispute charges, just like you would with a credit or debit card,” he said. 

Visa lets employees see their direct deposits, retrieve account data, and set up balance alerts to help employees manage their spending and achieve their financial goals. 

Those who do have bank accounts and use a pay card can divide their wages between bank accounts and employee debit cards as a way to manage their finances. According to the American Payroll Association, a split deposit is a good way to build one’s savings. 

Whether you choose to offer pay cards to your employees is up to you. Speak with your employees to understand their preferences and research service providers to find the right one for your business. 

Additional reporting by Heather Larson. Source interviews were conducted for a previous version of this article.