More and more, businesses are turning to payroll cards as a pay option for their employees. According to Mercator Advisory Group, employers distributed over $40 billion in wages to employees via reloadable paycards in 2017, and that number is expected to eclipse $50 billion in 2021.
The reasons for paycards’ rise in popularity are pretty straightforward. Generally speaking, other forms of wage distribution, like manual checks and direct deposits, have certain drawbacks that paycards help circumvent.
Paper checks come with higher overall costs compared to payroll cards and direct deposits. Checks must be printed and delivered to employees, which is most often done manually. That fact alone means paper checks are, by their nature, costlier than other payroll options. Employees then need to cash their checks, which requires time and effort on their part.
Direct deposits offer a lower-cost alternative that also gets money to employees faster than traditional checks. However, direct deposits require an employee to have an account with a bank or credit union, and not everyone has a traditional banking relationship. In fact, the FDIC reports that 6.5% of US households are entirely unbanked—that’s roughly 8.4 million households without the ability to receive direct deposits.
Paycards offer a third option that comes with benefits to both businesses and their employees. Before we review the advantages of payroll cards, here’s a quick primer on what they are.
How do paycards work?
Paycards, or payroll cards, are plastic debit cards that employers issue to their employees. On payday, employers transfer wages to the cards rather than cut a check or deposit funds into a bank account. Employees can then use their cards directly or withdraw cash from an ATM.
Benefits for employees:
Paycards can reduce financial stress
Cashing checks can be a lengthy process. Travel, long lines, and business hours can all make it more challenging for your employees to access their money. Check-cashing businesses also charge fees, meaning your employees’ pay is effectively reduced. By giving employees immediate access to their earnings, payroll cards eliminate the costs and stresses exclusive to unbanked employees who receive manual checks.
Payroll cards are easy to use
Payroll cards can be used anywhere the card issuer is accepted. Employees can make card-based transactions without racking up credit card debt or otherwise affecting their credit score.
Many pay cards also allow for ATM withdrawals at thousands of locations, so employees can access cash as needed.
Paycards are secure
Unbanked employees may have trouble keeping their funds secure. Stolen cash, for instance, is challenging to track and recover.
Payroll cards, however, offer real-time tracking and alerts for account activity. This makes it easy to spot fraud and stop it quickly.
For stolen cards, the Electronic Funds Transfer Act limits a victim’s liability to $50 if the theft is reported within 2 days (or $500 if fraudulent activity is reported within 60 days of an issued card statement). These protections extend even further to card holders who have their card number swiped—the act dictates that victims aren’t liable for any purchases if they report the crime within 60 days of receiving their statement.
Payroll cards can encourage financial responsibility
As an employee, a payroll card can be a helpful financial tool even if you have a bank account. Given the option, some employees split their wages between paycards and traditional accounts. They then use the paycard as their primary debit card with a fixed budget. This can help promote savings and prevent overspending between paychecks.
Benefits for employers:
Reduce costs associated with physical checks
Because funds are loaded directly onto cards, paycards reduce the time and money that comes with printing and distributing physical checks.
Eliminate issues related to lost and stolen checks
When a paycheck is lost or stolen, everybody loses. Employees have to wait longer to access their wages, and employers suffer lost productivity and additional expenses from printing checks twice.
Paycards, too, can be lost or stolen, but they come with all the convenience and protection of a premium debit or credit card. Often, they can be replaced immediately at little-to-no cost to the employee or employer.
Prevent fraudulent activities like cashing duplicate checks
This is a clear-cut benefit of payroll cards. Without physical checks to alter or cash twice, bad actors can’t commit check fraud.
Give unbanked employees immediate access to their earnings
Fast access to wages is a boon to employees, which is good for your business. Removing the stress and hassle of cashing checks creates a quality of life improvement for your unbanked staff so that they can focus their energy on other pursuits (like their jobs).
Payroll card considerations
If your employer offers a paycard option for receiving your wages, you should educate yourself on that option before deciding the right path for you. Ask you employer some questions about payroll cards, including how the card can be used, what fees might be associated with the card offered, and whether or not the card comes with additional benefits like rewards programs.
Employers, too, should follow best practices when evaluating and rolling out a payroll card program.
First, paycards must be optional—as of April 1, 2019, the Consumer Financial Protection Bureau requires that employers offer at least one additional payroll method in addition to paycards. Additionally, some states have enacted specific regulations governing prepaid cards. It’s especially critical for multi-state businesses to know and comply with these varying laws.
When rolled out properly, paycard programs provide tangible benefits to employers and employees alike. If you’re interested in learning more about payroll cards in general or how to roll out a world-class paycard program, let’s chat.