Pushback for Paychecks via Prepaid Debit Cards

Photograph by Pat Greenhouse/The Boston Globe via Getty Images

Update, 1:50 p.m.: Updated to include comments by Wal-Mart.

Wal-Mart Stores, Time Warner Cable, and more than a dozen other huge companies are being investigated for paying employees with prepaid cards that nickel-and-dime already-low wages with fees.

New York Attorney General Eric Schneiderman launched an inquiry yesterday into 20 companies where the practice may be common—mostly retail and restaurant enterprises. His investigation follows a lengthy article on the practice in the New York Times on Monday. “We are concerned about excessive or insufficiently disclosed fees which may unduly reduce employees’ take-home pay,” Schneiderman’s office said in letters to the companies.

Employees, it turns out, have to consent in writing to being paid in plastic. If the cards were a condition of employment, the companies offering them could be in for some trouble. The Times talked to many employees who said they had no choice in the matter.

Wal-Mart spokesman Randy Hargrove said all of the retailer’s employees can opt for direct deposit or paper checks, though it considers its payroll cards extremely “employee-friendly.” Hargrove, who declined to say what share of Wal-Mart workers are paid on plastic, said the company detailed the program to the New York Department of Labor shortly after it began in 2009.

Time Warner Cable could not immediately be reached for comment this morning.

New York’s legal inquiry, meanwhile, threatens to crimp a ripening revenue stream for Bank of America, JPMorgan Chase, and other big banks that offer payroll card programs. Schneiderman is specifically asking to see all correspondence and contracts between employers and payroll card providers.

Last year $34 billion was loaded onto 4.6 million payroll cards, according to Aite Group, from institutions who pitched the programs as cheaper for employers than paychecks and traditional payroll systems. It’s hard to divine how much of that $34 billion balance cycles back to banks in fee revenue, but it’s safe to say that Wall Street is making tens of millions of dollars on the cards (and indirectly from folks earning minimum wage at fast-food joints).

As with debit cards, there can be a rash of fees for payroll cards, including charges for balance inquiries, card replacement, ATM withdrawals, or simple inactivity. Here’s a look at the fees (PDF) in Home Depot’s Citibank Payroll Program.

Fees aren’t the only place where the cards may pinch users. Many studies have shown that people spend more when they use cards rather than cash. Behavioral economists refer to the phenomena as “decoupling”—when a consumer is literally separated from cash and psychologically insulated from the “pain” of a purchase.

Casinos are familiar with the dynamic: It’s the main reason they use chips. It isn’t novel to banks, either. Behavioral economist Richard Thaler called credit cards (PDF) “the best decoupling device.” In a 2009 trail in India, Citibank found that consumers who opted to “tap and pay” via cell phone spent significantly more than they otherwise would have.