For the millions of Americans without bank accounts, a prepaid debit card can provide some conveniences usually associated with a bank account or credit card, like direct deposit and online payments.
But the Consumer Financial Protection Bureau issued a bulletin to employers Sept. 10 reminding them they cannot require employees to receive wages through a particular financial institution. The consumer’s right to a variety of compensation options means the exclusive use of prepaid cards as paychecks breaches consumer protections outlined by the Electronic Fund Transfer Act.
The warning said violators would be identified and stopped, but there were no specifics on enforcement.
“The CFPB has heard reports of employers, particularly in the retail and food service industries, distributing wages solely through payroll cards,” the bureau said in a news release. “Federal law, however, prohibits employers from mandating that employees receive wages exclusively on a payroll card.”
The Pros and Cons of Prepaid Cards
Earlier this year, employees of some McDonald’s franchises sued their employers for allegedly requiring them to receive direct deposit to prepaid debit cards. The New York Times reported that many workers at various companies feel they don’t have a choice other than prepaid cards, which often come with fees.
Though prepaid cards are often marketed as an alternative to banking — which has its own collection of fees — they can be expensive to open and maintain. And when it comes to building credit, prepaid cards aren’t reported to the credit bureaus, so they won’t help.
But prepaid cards have advantages, too. There’s no approval process for a prepaid card, so consumers with no or bad credit can take advantage of their flexibility. Prepaid cardholders can engage in online shopping and bill paying, withdraw money from ATMs and set up direct deposit, as opposed to using pricey cash-checking services.
These cards have fewer fraud and billing protections than most credit cards, but they exist. For instance, payroll card holders are entitled to fee disclosures, though the CFPB said many employees with such cards complain of unexpected fees.
Card issuers are also required to provide statements and access to account history, including fees incurred. Cardholders must report unauthorized use of the card within a certain period of time so they are not held liable for the purchases, and financial institutions must respond to reports of account errors if the report is received within a certain time frame.