Why prepaid cards are replacing paychecks

Retail and restaurant employees are getting increasingly frustrated with debit payments that save employers money at workers' expense.

By Jason Notte Jul 1, 2013 3:43PM
Image: Cash machine (© Compassionate Eye Foundation/Getty Images/Getty Images)American workers are increasingly getting paid with plastic, but they're just as unhappy about swipe fees as their employers are.

Employees at a McDonald's (MCD) outlet in Shavertown, Pa., recently filed a class-action suit against the fast-food giant for issuing paychecks through a prepaid debit card laden with various fees. The suit claims that fees on the card, issued by Chase, include 75 cents for online bill payment, $1 for balance inquiries, $1.50 for ATM withdrawals, $5 for teller-assisted cash withdrawals and $15 to replace a lost or stolen card.

While even government unemployment programs have begun issuing debit cards instead of printing checks, the standard complaint from recipients is that the fees chip away at their allotted take and are just a way for companies and government agencies to pass on check-printing costs to employees and the unemployed.

On Monday, The New York Times reported that debit card use among cost-conscious U.S. payroll departments is rising steadily. Yum Brands' (YUM) Taco Bell, Walgreen (WAG) and Wal-Mart (WMT) are among the larger users of prepaid paycheck debit cards, along with many others in the restaurant and retail industries. Last year, $34 billion was loaded onto 4.6 million active payroll cards, according to the research firm Aite Group. That group said that amount should reach $68.9 billion and 10.8 million cards by 2017.

Card issuers including Bank of America (BAC), Wells Fargo (WFC) and Citigroup (C) are feeding into companies' fears about shrinking margins by presenting payroll cards as a cheaper, more efficient payroll alternative. A calculator on Visa's (V) website, for example, estimates that a company with 500 workers could save $21,000 a year by switching from checks to payroll cards.

But why target retail and restaurant workers? Well, as Citigroup points out, they're the group least likely to have bank accounts and most likely to simply cash their checks. A Citigroup spokeswoman told the Times that "someone cashing a payroll check for $500 would end up paying $15 at a 3% check-cashing fee."

The numbers of unbanked Americans backs up that assertion somewhat. About 10 million households in the United States do not use a bank at all, up from 9 million four years ago, according to estimates from the Federal Deposit Insurance Corp. And 24 million households that do have a bank account still use expensive financial services like prepaid cards, the agency said.

With retailers like Home Depot (HD) and Limited Brands (LTD), the parent company of Victoria's Secret, offering employees a choice between direct deposit and prepaid card to cut check costs, bank-free employees lack other options. That leaves them wide open to the fees charged by companies, including NetSpend of Austin, Texas, the largest payroll card issuer in the country.

On some of its payroll cards, NetSpend charges $2.25 for out-of-network ATM withdrawals, 50 cents for balance inquiries via a representative, 50 cents for a purchase using the card, $5 for statement reprints, $10 to close an account, $25 for a balance-protection program and $7.50 after 60 days of inactivity. While some banks have similar fees, bank customers have the option to shift their money to institutions with less onerous stipulations.

With payroll cards, employees are forced into the bank or financial provider of their cost-cutting employer's choice.

More on moneyNOW

Jul 1, 2013 4:31PM
If someone handed me a plastic card as payment, I'd hand it back and demand they turn it into actual currency.
Jul 1, 2013 4:44PM
I do payroll as my profession and in Oregon the law requires employees to have access to their money with no fees attached. This would be highly illegal and the employers would be responsible for paying any fees to get their initial cash out off of the card. I once cashed my check at my companies bank and got charged a fee for doing so and my company had to reimburse me for it because the law states"The employee must be able to make an initial withdrawal of the entire amount without cost." Oregon law also states that to receive wages on a payroll card that the employee has to voluntarily agree. 
Jul 1, 2013 4:21PM
The drive to convert the public from tangible  "money" to an electronic credit system is a dangerous idea and just more of the trend toward central control by some $#@# in Washington, DC.... it really is time to repaint the barn, folks......
Jul 1, 2013 5:02PM
"This Note is legal tender for all debts, Public and Private". I have yet to see that printed on any "Debit" cards. Big Brother does not want you using cash, how can they spy on your discretionary spending otherwise?
Jul 1, 2013 5:42PM

Welcome to the new form of slavery.  This is very similar to what the coal companies did back in the late 19th through mid 20th century.  Coal miners were paid in coal company script.  Essentially, it was a company IOU that could only be redeemed that the coal company-owned store.  The goods there were over priced.  Hence, the coal miner was always in debt to the "company store."  Miners were forbidden to leave town if they owed money to the "company store" and could be arrested and imprisoned for 'theft.'  I'll bet that the companies issuing these debit cards in lieu of pay have either a direct or indirect ownership in the company handling the transactions and charging said employees for these transactions. 


Many of the same retailers who are looking at implementing such a debit card system are the same ones who buy a great percentage of their products from the unsafe and slave-like conditions of Bangladesh!


Hey folks!  Better read your American History of the 19th and 20th century.  What the hell do you think gave rise to labor unions? 

Jul 1, 2013 6:05PM
I think states should make it illegal for employers to pay their employees by any other methods than payroll check, cash or direct deposit, and the choice of payment should be up to the employee.
Jul 1, 2013 6:00PM
no way do I want my money on a debit card...the banks are only doing this because then they can tack on as many fees as they want.  I don't even like gift cards for that reason.

It's the sign of the mark of the beast people


beware the end is coming

Jul 1, 2013 6:03PM
If there were no fees, this would be OK, but to have fees, makes it illegal as far as I am concerned. I have had my pay in direct deposit for 30 years. There were no fees of any type. It made it easy to withdraw cash if I needed it. I still received all retirement monies as direct deposit. .   The ATM card is free and there are no fees so I enjoy getting money  without having to worry chasing a check. At some time ( under 50 years, I'd guess ) we'll probably not even have ATM or checks. Just run your hand over a sensor and money ( Credits ??  ) will be transferred>
Jul 1, 2013 4:37PM
OR, they could just open an account at a local financial institution.  Go in on payday and remove all the cash if you wish.....
Jul 1, 2013 6:42PM

Many folks in the mid- to upper strata of "99%" do not realize how difficult it is for those at or below the poverty level in the United States to establish a checking account with "mainstream" banking institutions.  Many of us become upset when we see the vast array of 'fees' tacked on to our various bank accounts, but still grudgingly pay them as a cost of having these accounts and the 'convenience' they allow us, as it is nearly impossible to conduct our personal business in any documentable fashion otherwise.


For the folks at the lower end of the "99%", these fees are nearly insurmountable and may mean the difference between keeping the bank account or purchasing necessities for themselves or dependents - read meals, clothing, medication. 


I think the "1%" is hell-bent on re-establishing an oligarchy. 

Jul 1, 2013 7:25PM
Jul 2, 2013 12:22PM

Two words: this sucks. Parasitical, opportunistic banking institutions feeding like income draining ticks on the working poor. Pathetic (this last is the third word).

Jul 1, 2013 9:14PM
Banks act like the proverbial no-good relative who bounces from one person to the next until they find an easy mark. They (banks) will do what ever it takes to improve the bottom line.
Jul 2, 2013 1:32AM
Employers should give you an option on how you'd like to receive your pay. It's great if you don't have a bank account, but for those of us who do, there is a thing called
direct deposit, I can't go to the ATM without being charged a $4 fee, if i transfer from the card to my bank account I have to wait the extra 4 days. It's friggen stupid
Jul 1, 2013 7:02PM
That sounds wrong to me.  Our company requires direct deposit, but we don't have minimum wage employees. 
Jul 1, 2013 7:17PM
It is simple - employers should demand direct deposit just like the government requires and avoid all this debit card BS.  I think it is already criminal that a bank require an account to honor payment of  a check written by a client of the bank without charging a check cashing fee.  We should demand that banks honor their checks without fee (or better yet - force the client to pay the fee - after all they wrote the check) - they should honor it without causing the receiver to pay a fee to get the money you the check writer promised to provide.  

Hey I've got a good way to cut costs; slash CEO beanies and pay by 75%, and or, import the CEO people from China; hum...what a great idea, then pass the saving to your overworked employees....


I hear a CEO from China, India makes far less than $100K;, hum no more over paid underworked American CEO whom all just bankrupt the companies anyway; maybe the China ones can makes profit and keep their employees happy...worth a try...


Jul 1, 2013 7:47PM
Why would someone *not* have a checking account?
Jul 2, 2013 9:43AM
This article is factually wrong: the lawsuit is against the franchisee, not against McDonald's. In all states where direct depositing of salaries can be mandated by an employer, the entirety of the wages must be available to the employee, whether the money is directly deposited in a checking account or a prepaid card. The Chase payroll card complies by providing free ATM withdrawal at least once per pay period. 

For many people, payroll prepaid cards are a better deal than checking accounts, because most checking accounts impose that a minimal balance be maintained in the account, while prepaid cards impose no such limit. 
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