Getting a paycheck on a prepaid debit card has certain advantages. It can help workers without bank accounts – the “unbanked” – access their earnings faster and more securely than they could if they were paid by check. If you don’t have a bank account to deposit a check in, you have to cash it for a fee, and then risk having your cash lost or stolen with no recourse.
If your paycheck gets deposited directly onto a debit card, you can start spending the money right away. You don’t have to pay a check-cashing fee and your money is stored securely on a card that can be reported as lost or stolen and have any fraudulent transactions reimbursed. Also, unlike cash, prepaid debit cards can be used to make online purchases and, in some cases, bill payments. In addition, employers like payroll cards because they save the money that’s associated with issuing checks.
However, for the estimated 8.6 million workers who will be paid this way in 2016, according to global research firm Aite Group, payroll cards aren’t necessarily the ideal alternative to paper checks that they at first seem to be. Here is a look at the drawbacks.
Getting Your Paycheck on a Prepaid Debit Card: Endless Fees
The catch with prepaid debit cards is that, like other types of plastic, they come with fees. Studies have shown that some workers aren’t aware of these fees because their employers don’t tell them about them. Not being warned of these fees doesn't mean that there aren’t any.
Employees might not know that they need to look through their hiring paperwork for the terms and conditions of their payroll card or contact the issuer to find out what fees are associated with the card. While employers are required to provide employees with written information about the fees associated with payroll cards, they don’t always comply.
And there are fees galore, though they vary in amount and also by provider.
Transaction and Withdrawal Limits
Some prepaid cards limit the number and/or dollar amount of transactions the cards can be used for each day. Imagine spending the day running errands, using your payroll card for each purchase, only to find out later that your last three purchases of the day cost you extra because you went over your daily transaction limit.
How do you pay the rent when you are paid via payroll card? You might withdraw the cash you need at an ATM. But if your rent is $1,200 and your card imposes a $500 per day ATM withdrawal limit, that means you have to visit the ATM on three separate days to get all the cash you need. Not only is that a hassle, it also means you’re carrying around unsecured cash for more days, which you’re at risk of losing or having stolen. And if you don’t live or work near an in-network ATM, you might also have to pay an out-of-network withdrawal fee for each of those transactions.
Some payroll cards even charge fees for more than one ATM withdrawal per pay period, even at in-network ATMs. Imagine only being able to withdraw a limited amount of cash once every two weeks at a limited number of ATMs if you want to avoid fees.
Workers who are paid via payroll card are usually hourly workers, many of whom make the minimum wage. If it costs you $3 to use an out-of-network ATM and you’re making the federal minimum wage of $7.25 an hour, a whopping 41% of one hour’s wages goes toward that fee. New regulations in states such as New York will allow workers to make free, unlimited withdrawals from their payroll cards from at least one ATM located near their home starting next year, but there’s no federal regulation to this effect.
Fees for Activity – and Inactivity
Checking your balance.Those out-of-network ATMs may also charge a fee just to check your balance, which can be a problem if you don’t have convenient access to in-network ATMs and you don’t have Internet access at home or on a smartphone. Hourly workers may not be able to afford $50 a month for home Internet service and another $50 a month for a smartphone with data. Want to call the issuing bank and ask a customer service representative for your balance instead? There’s a fee for that, too. Need a paper statement because you don’t have Internet access? You might pay a paper statement fee.
Monthly fees. These could be $5 per month. The monthly fee may be lower if you meet minimum daily balance requirements, much like a checking account. Again, for low-wage hourly workers, maintaining a minimum daily balance to avoid a monthly fee may be impossible.
Insufficient funds. What if all these fees add up and you don’t know you’ve incurred them? Try to use your payroll card to buy groceries and you could end up having the transaction declined for insufficient funds. You might have to pay a declined transaction fee or an overdraft fee. The same could happen if you purchased gas using your card earlier in the day, since gas stations sometimes place large, temporary holds on card balances.
Lost card. Should you have the misfortune of losing your card, you’ll likely be without access to your money for several days while you wait for your replacement card to arrive in the mail – which, of course, has an associated fee.
Money transfer fee. If you have another account you can transfer money from your lost card to that card. This might solve your cash-flow problem, but you might pay a money-transfer fee.
Inactivity fee. Finally, should you change jobs and fail to use up the balance on your former employer’s card, your remaining balance could be eroded by inactivity fees after several months of nonuse.
Check Out the Alternatives
By law, employers cannot require employees to be paid via prepaid debit card instead of a paycheck. The reality is that many employers do. Not surprisingly, low-wage workers might fear losing their jobs if they try to assert their rights, or their employers might simply refuse to comply.
On the other hand, an employer may be happy to pay workers who request it by check or direct deposit instead of a card, since employers have been sued for paying workers with cards that proved problematic. It's worth trying. However, it generally means that the employee will need to have a bank account; not everyone does.
One way to start at minimum cost if your income is low: Check online or visit a local bank and ask for a lifeline account or "basic banking account." (Click here for New York State's advice on these accounts; in that state you only need a $25 deposit to open one and can't be charged more than $3 per month.)
The Bottom Line
If you've never used a debit card before finding a job that pays you this way, do careful research before you start using it. If it's a teen's first job, parents may need to help with the process – it could be a useful first lesson in managing finances in the real world.
Ultimately, as with everything else in the financial world, no number of regulations or lawsuits will provide complete protection and transparency for consumers. Individuals have to take the initiative to learn how the financial products and services they use work, what fees are associated with them and what their alternatives are. (Also see Three Prepaid Debit Cards with No Monthly Fee and How to Find the Right Prepaid Debit Card.)