When it comes to paying employees by paper check versus paycard, paycards can lower costs both for organizations and employees who lack bank accounts (i.e., who are "unbanked"). It also may allow employees to receive faster payments. Companies generally pay wages in three ways: paper checks, direct deposit or paycards. For employees without a traditional banking relationship, direct deposit is not an option.
The Cost of Paper Check Versus Paycard
Paper checks need to be prepared, printed and distributed, and much of this is done manually. This may mean your enterprise is paying more to pay employees than it would using paycards. Some organizations in the retail and fast food industries, for example, prefer to pay wages by paycard to unbanked employees, according to reporting by Today. Paycards give employees an additional choice in how they receive their pay. A paycard is like a debit card that the employee keeps in his or her possession, upon which the employer can load payment. Once payment is loaded, the employee has immediate access to funds. For employees who don't have traditional banking relationships, a paycard allows them to take advantage of services conventionally offered by bank debit cards. But this seemingly beneficial system sometimes comes with hidden costs: card-related fees.
Let's look at both sides of the paper check versus paycard debate.
Some Advantages of Paycards for Unbanked Employees
- Employees who lack a traditional banking relationship can use paycards to help avoid costs associated with check cashing. U.S. employees without bank accounts give an eye-opening $8 billion per year in fees to check-cashers, payday lenders and bill payers, according to the Brookings Institution. Paycards help employees avoid these type fees.
- Unbanked employees may save time since their paycard is loaded directly by their employer, so they don't have to wait in long lines at the bank or check casher in order to have their money made available to them. Organizations also don't have to invest time and human resources into manually distributing paper checks on payday.
- Employees can enjoy the benefits of using the pay card as a debit card, meaning they can use the card at point-of-sale machine, to withdraw money from ATMs, to pay bills online and more. Without pay cards, "unbanked" employees' options for paying bills are limited and may carry additional costs. According to a report by the State of Massachusetts, an employee making $26,000 per year and having no bank account would pay $750 annually in fees to check cashiers or for the purchase of money orders.
Some Paycard Challenges and Best Practices
Employees cannot legally be forced to receive their pay via paycard, according to the Consumer Financial Protection Bureau, which issued a 2013 letter telling employers it would use its enforcement powers to stop violations. Some workers, especially unbanked employees at fast food and retail chains, where paycards are often preferred by the organization, claim that their employers have forced them to receive their pay via certain paycards that bring high and hidden fees related to various uses of the card, according to Today. To avoid any problems, the National Consumer Law Center and the American Payroll Association have developed a series of best practices for employers offering paycards to unbanked employees. These best practices include:
- Allowing these employees to access their full pay in cash without fees at least once per pay period.
- Offering a payment card that's widely accepted.
- Providing employees clear information in writing about the use of the card and associated fees.
Additionally, multi-state employers must be aware of the varying state-by-state regulations in order to synchronize their payroll operations and avoid compliance penalties. The key to remaining compliant across state borders is an understanding of the fundamentals, identifying state law variations and staying on top of state regulation changes. Convenience and added services can make paycards a great option for you and your unbanked employees. But make sure that your paycard provider can offer a program that is designed to be compliant with the regulations where you operate now or may operate in the future.