Thanks to a combination of public scrutiny and competition, the worst of the worst prepaid debit card fees have been pushed to the fringes of the financial world. But a recent lawsuit and reports from regulators and consumer advocates suggest that some of the most abusive fees are being forced on those least able to protect themselves: low-skilled workers in retail and restaurant jobs.
Remember that a big reason many people use prepaid cards in the first place is that they’re unable to establish the credit history required to get a conventional credit card, that they can’t afford the fees that many banks charge for checking accounts with a debit card privileges, or both. Because these customers — often referred to as the “unbanked” — have so few alternatives, many financial companies saw an opportunity to take advantage of the situation by tacking on fees for everything from overdrafts to simply using the card for purchases to closing an account. But as financial heavy hitters like JP Morgan Chase and American Express got into the business, drawing more scrutiny and bringing competition into the market, the most abusive of these practices have become less common.
But that hasn’t been the case with so-called payroll cards, a kind of prepaid debit card that employers are increasingly using to pay low-wage workers rather than cutting checks or direct deposit. In this market, combination of minimal competition and employers who are unwilling or unable to demand fewer fees for their workers, has created a product ripe for exploitation. Employees are often automatically enrolled in payroll card programs and forced to jump through bureaucratic hoops to opt out, as the New York Times recently reported.
“This is, in some ways, a hidden market. It’s not a card that’s offered to the public, so it doesn’t get scrutinized by the public,” says Lauren Saunders, managing attorney at the National Consumer Law Center. “Employees have no say in negotiating the fees.”
For their part, employers maintain that many employees can’t accept direct deposit because they don’t have checking accounts — and that the fees associated with prepaid cards are smaller than what employees would have to pay to a check cashing service. But those arguments haven’t satisfied worker advocates or many employees, who at least want the option to avoid fees. In June, Natalie Gunshannon, a former McDonald’s employee in Pennsylvania who had been earning just over the minimum wage of $7.25 an hour, filed a class-action suit against the franchise owner, claiming she was required to take her pay via a JP Morgan Chase prepaid debit card that was loaded with fees, according to Philly.com. According to the complaint, the fees included a $1.50 charge for ATM withdrawals, $5 for over-the-counter cash withdrawals, $1 per balance inquiry, 75 cents per online bill payment, and $15 for lost/stolen card.
Saunders adds that some cards charge a $7.50 “inactivity fee” after only 60 days of dormancy; $10 to close an account and receive any remaining funds on a check; and $25 for overdrawing the balance. (“We think overdraft fees are totally inappropriate on payroll cards,” she says.) Even trying to avoid some fees can trigger others: Some cards charge users when they make a purchase using their PIN, which is usually the best way to avoid ATM fees.
Why do employers force payroll cards on workers? It appears that payroll debit cards are essentially a way for companies to shift the cost of payroll processing to employees. Card providers promise big savings for companies that use them. A calculator on Visa’s payroll card webpage for businesses says a company with 250 workers getting paid biweekly could save more than $10,600 a year. Some employers are also promised a bonus for every worker they sign up. The New York Times found that the city’s Housing Authority contract with a payroll provider says the agency “stands to receive a dollar for every employee it signs up to Citibank’s payroll cards.”
“That could lead them to inappropriately steer people to the payroll card,” Saunders says.
The pitch appears to be working. “We added approximately 200 new corporate clients, bringing our total count to more than 1,400” companies, Daniel Henry, CEO of Netspend, one of the industry’s biggest providers, told investors earlier this year. (Netspend, which also offers general purpose reloadable debit cards, was recently acquired by Total System Services.) Netspend said in a March SEC filing that nearly three-quarters of its revenue in the first quarter of the year came from service fees, a total of nearly $85 million.
It seems some government agencies are starting to question the claims that these cards are a win-win for everybody. The New York Times reported last week that the New York state attorney general’s office launched an investigation, asking 20 large employers, including McDonald’s, Walgreens, and Wal-Mart, to provide information about their payroll debit card policies and practices. And The Times-Tribune of Scranton, Pa., reports that the McDonald’s lawsuit has prompted the U.S. Department of Labor to look into the issue.