Are Payroll Cards the Right Solution for Your Business?

Small businesses are on the constant lookout for ways to streamline operations and reduce expenses. Often overlooked is the payroll function, which can be a drag on operations and invariably costs more than it should, especially with new payroll technologies and methods. For many businesses, direct deposit provides a cost-saving solution that benefits both the business and it employees; but for the businesses that employ unbanked or underbanked employees, direct deposit is not an option. That’s why an increasing number of businesses are looking to payroll cards as a win-win solution, saving both the business and employees time and money.

Why Payroll Cards?

With the cost of administering payroll increasing – averaging about four to five dollars per employee to issue a paycheck – businesses have been looking for alternatives that can not only reduce costs, but also provide employees with a better way to receive and access their pay. Many businesses have implemented direct deposit solutions which bypasses all of the machinations involved in printing checks, stuffing envelopes, and delivering them. However, businesses which employ workers who do not utilize the banking system, must consider other alternatives.

It’s estimated that there are over 60 million workers who don’t utilize the banking system. Some have opted out due to concerns over the cost of banking, while others don’t have access due to credit issues or a poor track record with banking. When issued a paycheck, they are forced to use a check cashing service which can be very expensive and time consuming; and it doesn’t offer an effective way for them to manage their money.

Payroll cards, which function like a bank debit card, enable employers to pay these employees as quickly and safely as with a direct deposit to a checking account; and employees have instant access to their pay with a card that can be used anywhere a debit card can be used.

How does a Payroll Card Work?

Instead of direct depositing employees’ wages to a bank checking account, the employer direct deposits them to a debit card. The card is actually issued through a Visa® or MasterCard® institution, so it is accepted anywhere their credit or debit cards are accepted. The cards can be used for any point-of-sale purchase, make bill payments, transfer funds to others or to access a cash withdrawal at an ATM.

Because the employees actually own their payroll cards (in a direct relationship with the issuer), employers are not liable for lost cards which are replaced by the issuer. In addition, payroll cardholders enjoy the same level of security as debit card holders with PIN code access, and, in some cases, fraud protection.

Payroll Card Advantages for Employers

It’s estimated that a small business can reduce their payroll expense by $223 per employee by converting from paper checks to payroll cards. While that may be the most compelling reason to use payroll cards, there are several other advantages:

  • Low initial start up expense
  • Available to businesses of any size
  • Eliminate the liability associated with paper checks
  • Reduces the exposure of check fraud
  • Environmentally friendly
  • Improves employee morale

Payroll Card Advantages for Employees

Employees whose best option is a payroll card will benefit in a number of ways:

  • Instant access to their pay
  • Eliminates the wait and cost to cash their paychecks
  • Easy access to their wages at any time
  • No more having to carry around a paper check that can get lost or destroyed
  • Can make direct purchases that draw on an account, rather than having to carry cash
  • More effective way to manage their money

Is There a Downside?

There really can’t be a downside when both parties can save time and money in carrying out a critical function such as payroll processing. However, the payroll card industry has gone through some shaky periods in which there have been accusations of “fee gouging.” In the early days (payroll cards were first issued in the 1990’s), there were complaints about the high fees for various types of transactions. As consumer agencies have increased their scrutiny of payroll card providers, fees have come down or have been eliminated altogether.

Employers have a fiduciary duty to ensure the payroll card provider they select charges only reasonable fees and that there is complete transparency in how employees are charged. It makes no sense, and can only increase an employer’s liability, if the only party that benefits from the payroll card option is the employer. There’s a growing marketplace of payroll card providers, including your local banks, so employers have the opportunity to shop and compare costs and services.