What Is a Major Disadvantage of Payroll Cards?

Payroll cards serve as a method for employers to disburse wages to their employees, functioning as an alternative to traditional paper checks or direct deposits into a bank account. Employees receive their earnings loaded onto a card, which can then be used for purchases or cash withdrawals, similar to a debit card. This system offers a streamlined approach for companies to manage payroll distribution, particularly for workers who may not have traditional banking relationships.

Understanding Payroll Card Fees

Payroll cards, while offering convenience, can come with various fees that may reduce an employee’s take-home pay. For instance, ATM withdrawal fees are common, particularly when using out-of-network machines. Some cards might offer a limited number of free in-network ATM withdrawals per pay period, but exceeding these limits or using a different ATM network will incur charges.

Beyond ATM charges, other fees can quickly accumulate. Balance inquiry fees can be assessed for checking an account balance at an ATM, especially after a certain number of free inquiries. Inactivity fees may be charged if the card is not used for a specified period. Fees for replacing a lost or stolen card can also apply.

Less common fees include point-of-sale transaction fees or charges for calling customer service. The collective impact of these individual charges can significantly erode an employee’s earnings over time.

Managing Cash Access and Financial Tracking

Accessing the full amount of wages can present practical challenges for payroll card users. While cards allow ATM withdrawals, these often come with daily limits, which can make it difficult to withdraw an entire paycheck at once. Users may also face difficulties locating surcharge-free ATMs. Some payroll card programs allow for free over-the-counter cash withdrawals at participating banks, offering an an alternative to ATM use.

For individuals who rely solely on payroll cards without a traditional bank account, managing finances and tracking spending can be less straightforward. Paying bills that do not accept card payments, such as rent or certain utilities, often requires alternative methods like money orders. Establishing automatic transfers or setting up recurring bill payments can also be challenging or limited compared to the functionalities offered by online banking platforms. While some cards offer online portals or mobile apps for balance inquiries and transaction history, the comprehensive financial management tools available with traditional bank accounts are often lacking.

Differing Consumer Safeguards

Payroll cards are generally subject to federal consumer protections, primarily under the Electronic Fund Transfer Act (EFTA). These regulations provide safeguards for cardholders, including disclosures of terms and fees, limitations on liability for unauthorized transactions, and procedures for resolving errors. The Consumer Financial Protection Bureau (CFPB) has also issued rules to enhance these protections, requiring clear disclosures of all fees before an employee chooses a payroll card.

However, a notable difference from traditional bank accounts is the Federal Deposit Insurance Corporation (FDIC) insurance status. While some payroll card accounts may be FDIC-insured, this coverage is not universal across all payroll card programs. This means that funds on some payroll cards might not be protected in the event of the card issuer’s financial failure, unlike deposits in FDIC-insured bank accounts. State laws also play a role, with some providing additional protections or requiring free access to wages.