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Debit Card Pay: Extra Fees or Money-Saving Opportunity?

This article was written by in Career and Work. 7 comments.


Last month, a McDonald’s employee in Pennsylvania sued her employer to receive all of her rightful wages. This was a class-action lawsuit for the benefit of all employees now faced with an annoying trend. Employers are forgoing paychecks and direct deposit in favor of distributing wages on prepaid debit cards.

Here’s how it works.

When an employee is initially enrolled or hired, the employer provides a prepaid debit card. At the end of each pay period, the employer transfers net pay into each employee’s account. It’s simple for the employer, and there’s a great chance the debit card process saves the company money. Savings could, in theory, be transferred to employees as higher wages, all though that’s highly unlikely, or to customers as lower prices, also unlikely in the short term.

The employee then must go to an ATM to access the wages as cash, for a fee, or use the debit card to make purchases.

Most low-wage employees already use all of their paycheck for purchases. In one sense, this is more convenient. For low-wage employees who have not put a savings strategy into action or who are earning just enough to meet their basic food and shelter needs, prepaid debit cards could actually be a better choice.

Not all expenses can be paid with a debit card. If you pay rent with cash, you’re going to need to withdraw cash from the account, and withdrawals come with a fee for using the ATM. Some stores will offer cash back when you may a purchase with the debit card, but there could be a fee associated with that transaction, too.

The reality is that the employees now forced into receiving pay via debit card by and large don’t have bank accounts. Participating in the financial industry may not be part of their social existence, and banks do a poor job of catering to the needs of low-wage, minimum-wage, or poverty households. So for many, the choice isn’t between receiving pay via debit cards and receiving pay via direct deposit, it’s between paying debit card fees or check-cashing fees. Check-cashing fees can be just as harmful to a tight budget as debit card fees.

Pay on debit cards makes savings more difficult. It’s unlikely that low-wage employees are putting money away each pay period. It would be great to break that cycle, to start putting just a small percentage of each paycheck in a savings account. It’s hardly noticeable in the budget over time and could go a long way towards making a huge difference in the life of a family. But any progress one could hope to make in savings could easily be stymied by this debit card system.

Pay on debit cards reduces the need to interact with the deposit end banking system, checking and savings accounts, almost a necessity for building meaningful savings.

Employees should have a choice. In Pennsylvania, where the employee mentioned above lives and works, has a law that says employers must have a choice to be paid by check or cash. In this particular instance, the McDonald’s franchise’s requirement that its employees be paid only by debit card seems to run afoul of this statute, but the final determination will be up to the legal system. Regardless, employers should offer a choice.

The government wants to know more

In response to the rise in debit cards used to distribute pay, sixteen senators petitioned Richard Cordray, director of the Consumer Financial Protection Bureau (CFPB), for the organization to investigate whether employers are coercing employees into enrolling in the debit card programs. In many cases, the debit card pay system is the default option for employees, and in some, it may be the only option.

These senators want the CFPB to regulate the use of payroll debit cards to protect the concerns of the consumer.

When I get paid, I know I want every cent to go to me, without losing any money just for the privilege of accessing my money. I can imagine this desire would be even greater for someone whose budget is tight, a family that needs to watch every cent to pay for just the household necessities. Every cent I earn should be my own, not lost to unnecessary fees. Debit card fees and check-cashing fees both make this a difficulty for households that are not taking advantage of at least a free checking account at their local credit union or bank.

I have no special love for the financial industry, especially with regards to its inability to address the needs of its poorest customers in a way that doesn’t take advantage of their situations. It’s no surprise that the most vulnerable households avoid the financial industry, but the alternative banking products available to these communities, payday loans, check-cashing storefronts, and now pay via debit card, are not much better.

Would you accept your pay on a prepaid debit card? Do you find this method more convenient or are you troubled by the fees that must be paid to access your own money?

Philly.com, New York Times

Published or updated July 12, 2013. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 7 comments… read them below or add one }

avatar Mark

I would not take pay on a debit card if I had a choice, I want the money going straight to my bank account.

However if the choice was between

1. Get a job and paid with debit

2. No job

I would choose option 1.

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avatar Michael

I don’t really have a problem with this as long as the employee is given a choice. If the employer is unwilling to cut paper checks (mine won’t), then direct deposit should at least be an option.

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avatar Ceecee ♦796 (Dime)

I wouldn’t want to be paid on a debit card. I don’t have one now. I don’t feel as if they are as protected as a credit card. I can’t imagine not having a choice—-that seems crazy! If a company wants to do this then they should make arrangements with a bank to have free ATM withdrawals for their employees, or free transfer to a no-fee checking account.

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avatar Amydala

My former employer was considering this option. It was not implemented while I was there, but they had a solid proposal on the table.

I can’t speak to all situations, but their proposal wasn’t as limiting and unfair to the employee as this article suggests all such programs might be. A few points:

1) The debit card was in lieu of cutting and sending paper checks. Automatic deposit to a checking account was still available. The debit card option was being provided to employees who did not have a bank account. These employees are probably already incurring check cashing fees.

2) Employees were to be given an option of 2-4 (I can’t remember exactly how many) free cash withdrawals per month against the card. The employee could easily use one of these free withdrawals to cash out the entire paycheck balance just as if he or she was cashing a paper check.

3) Just because the money is transferred to a debit card, it’s not like it cannot be redeemed for cash the same way a paper check is. This does not lock the employee into using the debit card for all financial transactions and incurring fees each time. You can still get cash like you would for a check and conduct your life that way.

4) The company is a large employer in the area. As such, they were experiencing a significant incidences of check fraud. People were forging the checks under the company name and trying to cash them. The company frequently had to send representatives to court to testify about fraudulent checks. The debit cards were one of their approaches to combating this fraud.

I agree that a program where a debit card is the only option (no direct deposit alternative) and where fees are charged for even the first transaction to receive pay are burdensome and unfair to the employee. On the other hand, there were probably objections when companies stopped paying cash at a window on payday and insisted on only providing paper checks.

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avatar John S @ Frugal Rules

I actually just wrote a post on this issue that’ll be going up next week. :) If it was between this and no job then I would, of course, choose to keep the job. That said, I think it’s a joke that this is happening, largely because it’s passing more fees on to the consumer – in this case those that are largely lower paid. It is a big business though, and it’s only going to grow in the near future.

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avatar Viola

I’d throw a giant tantrum if I was unable to have direct deposit. And if they want to issue a prepaid card, then there should be one for employers to use that has no fees. Period. What an unfair system.

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avatar Laura

What upsets me the most is that this sends the wrong message to young people. Instead of encouraging them to get an interest generating bank account and saving their money for something important (or having it in an emergency) – a debit card only encourages them to spend it. Impulse buys become that much harder to resist if it is as easy and swiping and signing. Just look at how many adults are in debt! Teenagers have a hard enough time focusing on long term goals, giving them access to all their earnings can only promote bad spending habits.

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