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Grow Your Business Finances

What Is a Paycard?

image for goir/Shutterstock
goir/Shutterstock
  • Paycards were introduced in the late 1990s; since then, they have become more popular as a means to get paid.
  • Employers save money using paycards because they no longer need to issue paper checks.
  • For employees, the benefits include the ability to track spending and set a low-balance alert, plus they don't have to pay check-cashing fees. 

Not everyone has a bank account, nor are they eligible to open one. According to a survey conducted by the Federal Deposit Insurance Corporation (FDIC) in 2017, more than 8 million households don't have a bank account. That same survey discovered 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. More businesses are switching to offering paycards. 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. 

Paycards first came into existence in the late 1990s. Since their inception, their use has grown. According to PaymentsJournal, published by Mercator Advisory Group, in 2019, 12 million employees received their wages on a paycard. 

It's not just individuals without bank accounts who might prefer being paid their wages with paycards. "Persons with incomes exceeding $100,000 also find payroll cards appealing," wrote C. Sue Brown in a summary of Mercator Advisory Group's report titled "The Evolution of U.S. Payroll Cards in the 21st Century." Brown is the author of the report and director of Mercator Advisory Group's Prepaid Advisory Service.

Castaneda said most employers offer prepaid cards as an option to pay employees; it might be that all you need to do to get one is to ask your boss. 

Businesses that offer paycards must have an agreement with the prepaid debit card service provider, he said. 

If your company offers paycards and you choose this method to receive your wages, the Consumer Financial Protection Bureau (CFPB) says your employer must give you a copy of the terms and conditions, which discloses the potential fees associated with the paycard. The CFPB recommends that individuals read the conditions so they understand the potential fees they can be charged by paycard companies.

Effective April 1, 2019, the CFPB enacted a rule that requires card providers make certain disclosures to employees who choose to be paid via payroll card. Because that rule has a phase-in process, employees may not see the disclosures anytime soon. The process, however, involves providing a "short" form that discloses the specific fees, while a "long" form will disclose all fees and other details about the employee's paycard.

Your employer, through the paycard provider, should provide you with training on how to use a paycard.

 

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

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For employees, paycards often come with fees, said Castaneda. 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 costlier 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." 

Some states have passed laws curtailing the fees paycard companies can charge. "New York allows employees to make one free ATM withdrawal per pay period," said Steve Shouler, owner of PayNortheast Payroll Company in Smithtown, New York. 

Fees aren't typically charged to employers, said Castaneda. However, he added, your business can be assessed fees for things like placing your company's logo on the paycard. If your company issues temporary cards to employees, your business may be charged a fee for that as well. 

Once a payroll card is loaded with the employee's wages from the most recent pay period, the employee can go online, through the paycard company's portal, to view their account details, describes 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 you see your direct deposits, retrieve account data, and set up balance alerts to help you manage your spending and achieve your financial goals. 

Those who do have bank accounts can divide their wages between bank accounts and payroll 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

Paycards benefit employers, because they offer companies a fast and secure way to pay their employees, especially those who do not have a bank account. Shouler says the employer can deposit wages onto an employee's paycard using the routing and account number associated with the paycard. 

Another benefit, Shouler added, is that companies that don't offer paycards run the risk of check fraud and the hassles that come with employees losing their paychecks. Besides, the NFIB estimates it costs businesses $3 for every paper check issued. Changing employees to paycards can save money, and for employers, reloading payroll cards is easy. 

These are some companies that can work with your company to issue paycards: 

Heather Larson

Heather Larson spent way too many years working in different finance departments. Now she writes about money along with business solutions and technology. When she's not writing, she relishes reading a good thriller with her rescue dog in her lap.