A new trend has emerged in which low-wage employers pay their workers with unregulated, high-fee prepaid debit cards.
While Bank of America backed down in the face of public outrage against charging customers $5 for using a debit card, there's been a focus lately on the fact that big banks still charge customers for using cards -- it's just that the cards are prepaid debit cards, and the money loaded onto them is from government benefits. Janelle Ross at the Huffington Post had two hard-hitting exposes on how banks are profiting from the distribution of unemployment benefits. I followed up to point out that they also make a killing off of distributing food stamps, even more so because they make money off of both fees from customers and payments from governments for taking the work off of their hands.
Felix Salmon points out that this trend shouldn't have to be negative. Checks, he says quite vehemently, are outdated. "They're expensive, insecure, anachronistic, and dangerously reliant on the less-than-stellar delivery record of the US Postal Service," he writes. Checks are "a technology which deserves to be killed off with extreme prejudice."
Missing from the discussion of unemployment benefits and food stamps is the fact that low-wage employers are now turning to the same idea. But perhaps it would seem on its surface that employers who are similarly doling out money -- this time, salaries and wages -- without the use of paper would be a win for everyone. Wal-Mart, one of the most gargantuan of low-wage employers, announced last year that its payrolls would be distributed completely paper-free. For employees with traditional bank accounts, that means they can simply get their checks through direct deposit. But for the 17 million unbanked Americans, that won't be possible. The solution for them is the payroll card, which is basically a prepaid debit card with wages loaded onto it. According to a company spokesperson, about half of its 1.4 million employees use direct deposit. That leaves the other half, about 700,000, with no option except payroll cards. Wal-Mart isn't alone in this practice. The FDIC estimates that these cards were used to distribute $15.9 billion in wages in 2007; that number is expected to reach $60 billion by 2014. One group estimates that there will be over 17.5 million cards in use this year alone. Where Wal-Mart goes, the industry will follow.
And some will win out from this arrangement. Trees stand to benefit from the approximately 200,000 pounds of paper no longer required to process Wal-Mart's paychecks, saving 3,116 of them from being chopped down. Because of this, the company also stands to save substantial money. By eliminating 18 million paper paychecks per year (with the conservative estimate that each check costs the company $2), it will net $36 million in savings from no longer cutting the checks -- which doesn't factor in saved resources from labor and distribution.
But will the employees benefit? True, cards can be more convenient, and Wal-Mart is so generous as to allow them to load paychecks from other jobs onto the cards. But as the Consumers Union and National Consumer Law Center have pointed out, "the employer's benefit could be the employee's burden if the cards have high and numerous fees, offer payday-loan type credit features or are simply too complicated or difficult for employees to use." Just as with regular prepaid debit cards, which are almost completely unregulated and come with a host of fees, workers can face charges for ATM transactions, point-of-sale purchases, not using the card, replacing the card, overdraft transactions, live customer service, reloading the card, or getting funds by check. The Consumers Union and NCLC offer some helpful ways to protect workers, including providing written disclosure of terms and conditions (like these fees) before issuing cards, giving employees the chance to opt out of the cards, and keeping the cards from offering payday-lending type features. But while many states have enacted regulations on payroll cards, they aren't uniform, and some still have no regulations at all.
While employers benefit from the use of these cards to the possible detriment of their workers, the other players that make money from this arrangement are the banks and servicers who facilitate the cards. The banks are set to lose $14 billion this year due to new laws tamping down on how much they can charge merchants for debit swipe fees. But those rules won't apply to transactions with prepaid debit cards, whether they be for unemployment benefits, food stamps, or wages. Ross spoke with an industry analyst, who estimates that banks are aiming to recoup 30 to 50 percent of what they're losing from swipe fees through other fees such as these. But as Ross reports, "Banking experts say the real money lies in the fees the bank collects for a range of services," and it's not hard to see why when they have open season to charge consumers for anything. The potential convenience of a card is endangered by the possibility of wages being whittled away by fees.
Bryce Cover is Editor of New Deal 2.0.