The nature of employee disbursements is changing. In the past 30 years, electronic wage payments have skyrocketed to over 80% of employee payments according to the National Automated Clearing House Association (NACHA).
For business owners, it’s easy to understand why: managing electronic disbursements like direct deposit is much more simple and efficient than options like physical paychecks. But employees without traditional banking relationships aren’t eligible for direct deposits. Businesses still have to pay these employees, though, and there are pros and cons to each option.
In this article, we’ll review the options for paying unbanked employees and offer guidance for businesses looking to provide the right option for their staff.
Paying unbanked employees in cash means they will receive their full post-deduction wages, but this option comes with serious drawbacks for employers.
First, cash wages need to be calculated, withdrawn, and distributed manually. Depending on your payroll structure and individual taxes, amounts can vary greatly from employee to employee. If you only have a few employees total, this process might not involve too much extra effort. Distributing cash wages for numerous employees every pay period, though, reduces your organization’s productivity—all the time spent counting, sorting, and doling out bills and coins would be better utilized elsewhere.
Cash wages also make fastidious record-keeping a necessity (and more challenging). The IRS might become suspicious that your taxes aren’t being calculated accurately, so your records need to be airtight. Since cash payments must be recorded manually, keeping things organized can become a major headache for businesses.
Printed and hand-written physical paychecks have been a staple in employee payroll for a long time. Employees with traditional banking relationships can deposit wages easily, and unbanked employees are able to access funds using check-cashing services, making checks a universal option.
That being said, physical checks do put unbanked employees at a disadvantage. Check-cashing services always extract a fee. Typical fees range from 1-5% of the check amount, but they can be as high as 12%. The Consumer Federation of America reports that the average fee is 4.11%. The highest proportion of unbanked households in the US make under $15,000 annually, according to the FDIC, and check-cashing fees can compound this segment’s financial challenges.
Besides the costs unbanked employees take on, physical checks also create inefficiencies for employers. Printing and distribution both cost time and money, after all.
Pay cards are increasing in popularity as an electronic wage disbursement option. Employers can issue personal debit cards to employees and transfer funds on payday regardless of an employee’s banking status. The cards can then be used like any other debit card to make point-of-sale and online purchases, pay bills, and transfer money.
There are numerous pay card issuers, so it’s important to know what to look for when considering paycard options. Fees, ATM access, reporting, and software differ among providers, just like with any payroll provider.
Depending on the program, you may also be able to offer early access to earned wages. This is a huge benefit for employees who live paycheck-to-paycheck, giving them immediate financial relief when needed most and protecting them from debt traps or predatory lending practices.
It is also critical to understand the specific regulations that may be in place in states where your business operates. Because payroll cards are a relatively new option, laws governing them are still evolving.
Overall, though, pay cards can save your business significant hassle versus cash and physical checks. Automated and easy-to-manage disbursements are a boon to payroll managers, and there’s little to worry about in terms of required supplies and distribution. Implementing a modern paycard solution is relatively simple, too. All you need is internet access to get up and running. Additionally, pay cards provide enhanced security for employees’ funds, plus financial tools and rewards programs that other payroll options can’t offer for unbanked employees.
Brink’s Money Simplifies Paying Unbanked Employees
As an award-winning payroll card provider, Brink’s Money understands the challenges of paying unbanked employees. That’s why we’ve designed a program to make the process straightforward and simple to roll out. If you’re interested in learning more, reach out to our paycard specialists today.