(MoneyWatch) Consumers once had to beware their bank. Today they may need to be equally cautious when dealing with their payroll department now that paying workers with plastic rather than checks has become a burgeoning business.
An increasing number of employers, schools and government agencies are loading pay and benefits onto prepaid debit cards, which payroll departments laud as an attractive alternative to paper checks. Payroll professionals have reason to be enthusiastic. Replacing paper checks with reloadable plastic cards can save check issuers millions each year.
That financial incentive is helping to fuel explosive growth in the industry, which has tripled in size over the past five years and is likely to double again by 2015. Mercator Advisory Group estimates that some $76.7 billion was loaded onto prepaid cards in 2012 and that total will rise to $168 billion by 2015. Aite Group estimates that 4.6 million payroll cards were active last year.
By contrast, payroll cards' impact on employees and other consumers is drawing concern from consumer advocates. These cards are largely unregulated and come with a bevy of service fees, they say. Where regulators have barred a range of fees on ordinary debit and credit cards, prepaid debit cards -- which work much the same way -- are mostly exempt.
As a result, payroll card users may incur fees for "inactivity" -- in other words, you didn't spend down your balance fast enough.
The largest issuer of payroll cards, NetSpend of Austin, Texas, levies as many as 18 different fees on its cardholders, according to CardHub.com, a credit and debit card comparison site. By comparison, the average prepaid card charges as many as 10 different fees, although the best issuers limit the charges to a relative few, according to Odysseas Papadimitriou, chief executive of CardHub and the author of a just released study of on the best and worst prepaid cards.
Among the most egregious fees on payroll cards are those that charge consumers to simply see their remaining balance, says Joseph Ridout, consumer services manager with Consumer Action, a San Francisco advocacy group.
"Balance inquiry fees punish people for being financially responsible -- for checking the balance in their account before they spend," he says. And because these cards are used to pay public benefits to some of the poorest Americans, Ridout adds that the nagging fees are being borne by the segment of society that can least afford to pay.
In some cases, meanwhile, employers and government agencies even get kickbacks from the banks that issue the prepaid cards, according to a recent New York Times report. McDonald's (MCD), Taco Bell, Walgreen (WAG), Wal-Mart (WMT) and other major employers were loading hourly workers' pay onto these cards, creating a financial burden on employees, the paper found. One worker quoted in the story, who earns $7.25 an hour, said he spends an average of $40 to $50 per month on fees associated with the prepaid debit card he receives in lieu of a check.
Such controversy recently led one McDonald's franchisee to announced that it would stop making payroll cards mandatory after getting sued and becoming a target of a New York state investigation.
Although companies and the issuing banks maintain that prepaid cards are a benefit to the roughly 10 million Americans who don't have bank accounts, critics say many workers have no option of getting their pay in any other way, even when they do have a bank account.
CardHub's survey found that while the fees on these cards have come down as the industry has become more competitive, consumers could end up spending as much as $360 annually -- $30 a month -- with normal use of these cards. However, every card has a slightly different fee structure, and most allow a certain number of free transactions, so it's difficult to generalize about how much any given card will cost. It depends in part on how the consumer uses it.
Compounding the problem is that fee disclosures are often lacking, or so confusing that consumers accidentally trigger fees in ordinary use. Worse, debit cards were initially sold as budget tools that guaranteed you couldn't overspend your wealth. The notion was that once you'd spent the amount you had in your account, any further purchases would be denied. Parents were even encouraged to use prepaid cards to manage their kids' allowance for this reason -- the thinking went that prepaid card would stop teens from overspending and teach worthwhile lessons about handling their finances.
However, while recent federal law stopped banks from allowing overdrafts on ordinary debit cards without the consumer's express approval, prepaid cards are increasingly providing automatic "overdraft protection" -- at a steep cost of roughly $25 per overdraft.
New York lawmakers are now considering whether to regulate payroll cards, while the federal Consumer Financial Protection Bureau has promised to weigh in soon on the products. In the meantime, employees and other consumers who are issued the cards in lieu of a check must protect themselves.