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Everything You Need to Know About Paycard

Updated on April 21, 2022 12:53 pm
hands holding up payday sign

How do you pay your employees? As an employer, paying your employees is an important part of your business. Direct deposit to your employee's bank account or issuing paper checks are two of the most common ways of compensating them. Gone are the days when employees used to get paid in cash.

But what happens when some employees have no bank accounts? This is where paycards come in. Paycards for employees are an alternative option when the employees do not own a bank account, and the employers do not want to pay in hard cash.

It is estimated that about 5.4% of U.S. households (approximately 7.1 million) were "unbanked" in 2019, according to the U.S. Federal Deposit Insurance Corporation (FDCI). An unbanked household means no one in the household had a checking or savings account at a bank or a credit union.

For small businesses with employees with no bank accounts, paycards can be a convenient option as a payment option.

Direct deposit and paycards both offer the benefit of a paperless payroll distribution process and allow the employer to electronically transfer funds conveniently. While direct deposit is the norm for many businesses, paycards are gaining popularity each year.

There are pros and cons of using paycards, and in this blog, we will discuss if paycards are right for your business and employees.

What is a Paycard?

Paycard is a lot like a prepaid debit card as it is made of plastic and can be pre-loaded. In the case of a paycard, the money loaded comes from the employer in the form of an employee's pay. The card carries the issuer name such as MasterCard, Visa, or Discover.

Are Paycards Good, and Who is it For?

A pay card can be used to pay an employee who does not have a bank account. Paycard holders or employees can cash out from paycards at a bank, ATM, or other point-of-service locations.

Employees can also pay bills over the phone using their paycard number or authorize electronic bill payments to specified companies.

Employees can use paycards at any merchant, grocery store, retail shop, or gas station that accepts debit cards.

Do Paycards Have Fees?

By law, employees must be able to access their wages in full without any fees. They can obtain the cash at a bank teller, ATMs associated with the card issuer, pay bills by telephone, or use the card for point-of-sale purchases.

However, there may be fees for electronic fund transfers or for cash withdrawals at ATMs that are not in the issuer's network. There may be fees for card replacements, balance inquiries, inactivity fees, or other reasons. 

The Consumer Financial Protection Bureau issued a rule in April 2019 that paycard issuers must disclose all the fees to cardholders.

Employees must be informed of the potential fees. The paycard issuer is required to give you disclosures on such fees before you sign up for a paycard or a payroll card.

Also, paycards are regulated by state laws, so you might have to check for additional details depending on your state. Some states are making efforts to reduce fees that affect employees.

As you can see, paycards fees mostly affect employees. In the case of direct deposits, employers are the ones who have to pay fees for setting up the payroll distribution system and a transaction fee for each time they transfer wages into an employee's account. The payroll software may also charge a fee for their service.

Can Employers Save Money When Using Paycards?

Since paycards are reloadable cards, employers can have the banks reload the paycards with their employees' wages for the pay period, avoiding the costs and hassle of issuing paper checks, mailing them, or re-issuing lost checks. The savings may not be a substantial amount but they can add up gradually.

Can Employers Choose between Direct Deposit and Paycards?

While there is no mandate that employers can only offer either direct deposit or paycards to their employees for their wages, it is safe to check with your state's law on payroll distribution.

One-third of states allow employers to require employees to have bank accounts for direct deposit. In such a case, paycards may not be needed. Also, there is no law preventing employees with bank accounts to opt for paycards as their payment option.

Though generally, employees tend to prefer direct deposit because of its efficiency and the least costly method of payment, as a business owner or an employer, it is better to give options instead of imposing only one method.

Ask your employees about their preferred method of payment and what benefits (convenience, low fees, etc.) serve them the best.

In fact, Federal law requires employers to offer alternative payment methods like paper checks or direct deposits.

Should Employer Provide Pay Stub?

Pay stub provides details of the employees' pay for each pay period. Employers are not required by federal law to give employees their pay stubs. However, many states have laws that require some form of written pay statement.

Even if your state doesn't need you to provide pay stubs, you are still required by the Fair Labour Standards Act to keep track of your employees' working hours.

For employees, a pay stub gives a record of their wages, deductions, contributions, and other information. It is also proof of income or employment, which is often needed when applying for a loan, credit card, or housing.

For employers, a pay stub is useful for tax purposes, and it can be used to resolve any discrepancies with employee pay.

Is it Possible for Paycards to be Overdrafted?

Usually, paycards works like debit card, allowing cardholders to withdraw up to the limit of the loaded amount. However, there are paycard that allows overdraft for employees. But it can come with hefty overdraft fees if employees use funds over the limit in their account. Usually, you should be able to prevent misuse by subscribing to an overdraft protection service.

Will Paycard Affect Credit Score?

Paycards, like all prepaid cards, do not affect an employee's credit score.

What is a Paycard Gets Lost or Stolen?

A replacement card can be issued in such cases. The employee needs to notify the employer, and then the employer should immediately notify the card issuer. The employee is not liable for the incident as long as the issue is timely reported. Paycards come with similar protection as that of a prepaid card.

The reporting time is determined by the card issuer. If you wait longer to report after learning of the loss and theft, the fraudulent charges may increase. You may have to pay a fee for the replacement card.

Pros and Cons of Paycards

Pros

  • A win-win situation for unbanked employees and their employers.
  • Green alternative to paper checks.
  • Immediate payment to employees.
  • No hassle of cashing a paycheck.
  • No monthly or maintenance fees.
  • Added security when assessing their funds (paycards require a PIN).
  • Employees can report to the issuer if funds are used unauthorized.
  • Paycards can be reloaded during each payday, saving money on issuing paper checks.
  • Added efficiency for the employer as the employer would not have to physically present or mail paychecks to unbanked employees.

Cons

  • Employees may incur fees for several reasons. Be aware of such potential fees.
  • Employers have certain responsibilities to educate employees about the usage of paycards.
  • Limited range of services and flexibility in managing your funds compared to bank accounts and other prepaid cards.

The best paycards programs are easy to set up, have lower fees, quick access to funds, and provide a range of benefits such as cashback and discounts. We have made a list of popular paycards providers for businesses:

Wisely Paycard by ADP

  • Online portal and mobile app
  • Compatible with Apple Pay, Samsung Pay, and Google Pay
  • Zero cost sign up
  • No hidden fees
  • No credit check
  • No overdraft fee
  • Zero cost direct deposit of pay and other sources of income (including government benefits)
  • Accepted wherever Visa is accepted
  • Keep track of spending and account balances 24/7 on the app
  • Get cash back at major retailers
  • Surcharge-free ATM withdrawals
  • FDIC insured
  • Security features include instant card lock, purchase protection, and travel alert notifications

Rapid Paycard

  • Direct Deposit onto rapid paycard
  • Load funds from approved checks with Ingo Money mobile apps
  • No fee for cashing paycheck
  • 24/7 account access with rapid! Access mobile app
  • No credit check
  • Can be used at ATMs, merchants worldwide, wherever Debit Mastercard or Visa debit cards are accepted
  • Pay bills and make purchases
  • Book airline and hotel reservations online
  • Earn interest on savings account
  • Get cash back rewards
  • FDIC insured
  • Money protected with Zero Fraud Liability

Kittrell Paycard

  • No fees to use (there are fees for certain situations)
  • Fee-free ATM network with MoneyPass
  • Website and Kittreall App
  • Get real-time alerts and push notifications
  • Cash back at point-of-sale terminals
  • 2-way texting to manage your card and account
  • Compatible with Apple Wallet, Google Pay, Samsung Pay
  • Easy portability (Get direct deposit of stimulus checks, tax refund, benefits)
  • Freeze or unfreeze card on-demand

Skylight Paycard

  • Zero sign up fee
  • No credit check
  • No minimum balance 
  • Personalized your card with a family photo or unique image
  • Manage money anywhere on Mobile App
  • Direct deposit your government benefits, tax refunds
  • Use anywhere where Visa Debit & Debit Mastercard are accepted
  • FDIC insured
  • Zero liability protection
  • Pay bills online
  • Earn interest on savings account
  • Earn cash back with Payback Rewards
  • Send money to or receive money from friends and family with Netspend cards
  • Set text alerts about transactions
  • Refer a friend and boost your card balance
  • Skylight overdraft limit is $100 & 3 times/ month

Conclusion

Overall, paycards can be convenient and cost-effective for employees and employees when compared to paychecks or for those employees with no bank account. And the paycard fees are becoming more transparent and competitive.

While paycards can be challenging at times, especially when you are employed in multiple jobs and have a separate paycard with each employer, your funds are scattered in multiple cards so it becomes difficult to manage your finances. Some may prefer to put all their money in one place, like a checking account.

However, if you can't open a bank account, a paycard is a great option to get paid. Read the fine prints before signing up for a paycard and know the potential fees that come with it.

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