82 posts categorized "Debit Cards" Feed

Survey: FDIC Releases Results From Latest Survey Of UnBanked And UnderBanked Consumers

Yesterday, the Federal Deposit Insurance Corporation (FDIC) released the results of its "2011 National Survey of Unbanked and Underbanked Households." The FDIC conducts this survey every two years, in a partnership with the U.S. Bureau of the Census. Key findings from the survey:

  • "8.2 percent of U.S. households are unbanked. This represents one in 12 households in the nation, or nearly 10 million in total. The proportion of unbanked households increased slightly since the 2009 survey. The estimated 0.6 percentage point increase represents an additional 821,000 unbanked households."
  • "20.1 percent of U.S. households are underbanked. This represents one in five households, or 24 million households with 51 million adults. The 2011 underbanked rate in 2011 is higher than the 2009 rate of 18.2 percent..."
  • "29.3 percent of households do not have a savings account, while about 10 percent do not have a checking account. About two-thirds of households have both checking and savings accounts."
  • "One-quarter of households have used at least one AFS product in the last year, and almost one in ten households have used two or more AFS. In all, 12 percent of households used an AFS product in the last 30 days, including four in ten unbanked and underbanked households."

The survey included responses from about 45,000 households. The term "unbanked" refers to consumers who do not have a checking account nor a savings account. the term "underbanked" refers to consumers who have either a checking account or savings account, but not both. This is important because banks have targeted both unbanked and underbanked consumers with financial products and services-- typically prepaid cards and variations such as flexible spending health-care cards and payroll cards.

These prepaid cards, which often have numerous fees, and offer fewer rights for consumers than both credit cards and debit cards. Industry research has documented the perception by consumers, many of whom have bank accounts, that prepaid cards are a desirable method to avoid the expensive overdraft fees with debit cards. Some additional findings from the survey:

"The highest unbanked and underbanked rates are found among non-Asian minorities, lower-income households, younger households, and unemployed households. Close to half of all households in these groups are unbanked or underbanked compared to slightly more than one-quarter of all households... Among unbanked households, slightly more than half have never had a bank account. Relatively high proportions of Hispanic (14.7 percent) and foreign-born noncitizen households (18.9 percent) have never had an account. The most common reasons why households report they do not have bank accounts are that they feel they do not have enough money for an account, or they do not need or want one."

The specific banking rates by demographic groups:

Demographic GroupUnBanked %
Underbanked %
Fully Banked %
All Households 8.1
Black households 21.4
Foreign-born, non-citizens 22.2
Households experiencing unemployment
Lower income households (less than $15,000)
Unmarried female head of households 19.1
Hispanic households 20.1
Households with people under age 24

By targeting unbanked and underbanked households, banks are trying to replace pay-day lenders and check cashing services, often referred to as "Alternative Financial Services" (AFS). The survey reported:

"AFS transaction products (i.e., non-bank money orders, non-bank check cashing, and non-bank remittances) are considerably more widely used than AFS credit products (i.e., payday loans, pawn shops, rent-to-own stores, and refund anticipation loans). In the last year, 23.3 percent of households used transaction AFS and 6.0 percent used AFS credit products. The relationship between household banking status and AFS use is complex. A non-trivial share of unbanked households (29.5 percent) do not use any of the AFS providers asked about in the survey, suggesting they rely primarily on cash. However, overall, unbanked households are more active AFS users than underbanked households."

Also, I found these survey results interesting:

"Having a bank account does not guarantee long-term participation in the banking system. Households can and do cycle in and out the banking system over time. For example, nearly half of unbanked households had an account in the past, and nearly half (48.2 percent) of these report that they are likely to join the banking system again in the future... Households with banking experience appear to have more positive perceptions of having an account and rely less on AFS. Unbanked households that previously had a relationship with a financial institution are more likely to see value in having a bank account than unbanked households without this relationship. Previously banked households are more likely to want to open an account in the future..."

Download the FDIC survey (Adobe PDF, 7.9 MBytes).

Will A Credit Card Or a Debit Card Protect You From Fraud Better?

[Editor's note: today's guest post is by Odysseas Papadimitriou, a personal finance industry expert and CEO of the credit card comparison website Card Hub as well as the new personal finance social network Wallet Hub. I have written previously about CardHub.com, and hope to see the site develop more tools and information to help consumers make informed decisions about financial products. Consumers often ask whether debit cards or credit cards are better. Today, Mr. Papadimitriou answers that question regarding fraud prevention.]

By Odysseas Papadimitriou

We all work hard, pay obscene amounts in taxes, have seemingly endless bills to pay, and certainly don’t want to be handing out money to strangers or serving as the financial backing for common criminals. That’s why I regularly hear from consumers who are terrified of falling victim to fraud and are wondering about the best ways to safeguard their finances, especially whether a credit card or debit card will better protect them.

Spoiler Alert: The combination of federal laws and policies instituted by the major networks limit liability for unauthorized purchases made with either a credit card or a debit card, often to $0.

In other words, even if someone does get ahold of your card or account information, you probably won’t ultimately be out any money. That, combined with the fact that fraud only affects about 0.005% of all credit and debit card transactions, means it isn’t as big of a concern as many people think.

Credit vs. Debit

With the above being said, there are differences between credit cards and debit cards when it comes to fraud. First of all, you won’t be liable for any fraudulent credit card transactions, whereas you may or may not be liable for debit card transactions, depending on how quickly you report the fraud and whether or not the transactions in question were completed with a signature or your account’s PIN.

In addition, the decision between a credit card and a debit card will affect how difficult fraud is to deal with from a logistical standpoint. The reason has to do with the fundamental differences between these products.

When you make a purchase with a debit card, funds are automatically removed from your account. On the other hand, the bank initially foots the bill when you pay with credit, and you aren’t required to spend any of your own money for days.

Therefore, you can usually sort out credit card fraud before it affects the rest of your life or requires you to retrieve any money. The same cannot be said for debit card fraud, as you might not notice the fraudulent activity before you are required to cut checks for other monthly obligations; if they bounce, you’ll have even more to sort out.

Other Anti-Fraud Tips

While using a credit card can help simplify fraud fallout, there are a number free and easy ways that you can proactively safeguard your finances.

  • Check your credit reports: Everyone is entitled to a copy of each of their three major credit reports (i.e. Experian, Equifax, and TransUnion) once every 12 months, and reviewing them is a good way to ensure that no one has opened any financial accounts under your name.
  • Lock your mailbox & shred documents: Thieves have been known to raid people’s mailboxes (especially when they’re out of town) and trash in search of direct mail credit card offers, replacement cards, and financial information they can use to open accounts in other people’s names.
  • Choose secure passwords: You don’t want someone to be able to hack into your e-mail or online banking account just because they know your child or pet’s name. You should ideally use a combination of letters, numbers, and selective capitalization and update your passwords every couple of months.
  • Be wary of giving out financial information: The best policy is to only give sensitive financial information to people you contact, rather than the other way around. This allows you to ensure you know who you’re dealing with and drastically reduces your chances of falling for a scam.

Final Thoughts

You should ultimately take three things from this article: 1) Fraud isn’t as problematic as the local news makes it out to be; 2) Credit cards protect you from fraud better than debit cards; and 3) There are a number of easy ways that you can protect yourself on a daily basis. In other words, you should be vigilant in protecting your money but not let the fear of fraud consume you.

What should be of greater concern is choosing the right financial products and managing them responsibly. Consumers are on pace to incur $50 billion in credit card debt for the second straight year, and not only is budgeting therefore in order, but there are also a number of excellent credit card offers out there that can help lower the financial burden.

How To Evaluate Prepaid Card Options

Perhaps, you have already noticed. Banks now offer a variety of prepaid cards. They are popular to. According to a 2012 report by CardHub.com:

"Consumers loaded $57 billion onto prepaid cards in 2011, a nearly 33% increase from 2010, and that number is expected to rise by 44% to $82 billion in 2012, according to the Mercator Advisory Group. By 2013, the group predicts consumers will load $117 billion onto prepaid cards, which would mark a 200% usage increase in just three years."

With so many prepaid card options, how can a consumer pick the best card? It all depends upon your financial situation. Of course, if you have the money, opening traditional checking and savings accounts at a bank or credit union is probably the best route. There are several articles in this blog to help you decide if moving your money to a prepaid card is a wise choice.

If you are determined to use a prepaid card instead, the best card for you probably depends upon your specific financial situation: how often you are paid, how much you are paid, the format of your pay, your spending and shopping patterns, and if you perform online banking.

In its 2012 report about prepaid cards, CardHub.com presented three scenarios to help consumers evaluate and find the best prepaid card. The three scenarios:

  • Scenario 1:a person paid $2,000.00 monthly, whose employer offers direct deposit, visits an ATM once per week, expects to makes five purchases per week with their prepaid card, and pays two bills per month by check.
  • Scenario 2: a person gives their teenager a $100.00 monthly allowance. The teenager visits an ATM twice per month and expects to makes two purchases per week with the prepaid card each week. In this scenario, money is loaded onto the prepaid card from the parent's bank or PayPal account.
  • Scenario 3: a person paid weekly and earns $1,600.00 monthly, does not have the direct deposit option, and expects to make three purchases per week with the prepaid card. In this scenario, the person must load money to their prepaid card and make ATM withdrawals each week.

Of course, you can pick the scenario that matches or is closest to your financial situation. It might be that none of these scenarios adequately describe your financial situation. Maybe you have more children, earn a vastly different amount, or shop more often (e.g., groceries, lunches while at work).

Of course, you have the option to give your teenage child an allowance in cash and let him or her learn by deciding whether or not to transfer their cash to a prepaid card. Regardless, if is important for both parents and youth to learn the differences between credit cards, debit cards, and prepaid cards. Banks can charge a variety of fees on prepaid cards. Some employers offer banking services, pay their employees via prepaid cards, and administer health care spending accounts via prepaid cards.

In its 2012 report about prepaid card, CardHub.com listed the monthly costs for various banks' prepaid cards for the above three scenarios, and which prepaid cards are not suitable. Some of the monthly costs exceed $26.00, which is a lot ot pay for any banking option. So, it is wise to shop around and do your homework first. Know your pay and spending patters, then compare prepaid cards based on your banking habits.

Whatever you decide, it is wise to revisit your decision after a few months to see if your banking habits changed. A change in pay, ATM withdrawals, out-of-network ATM withdrawlas, and/or spending may make a prior decision no longer best for you:

"... every card has different fees based on the specific usage of each card. How often a person uses an ATM and how much money they load onto the card each month are the most important drivers in the cost of each card..."

If you use a prepaid card, what do you use it for. And what factors influenced your prepaid card choice?

Global Payments Takes $84 Million Charge For Its Data Breach

The Wall Street Journal reported that the Global Payments will cost it $84.4 million. Earlier this year, the Atlanta-based company experienced a data breach where payment information for about 1.5 million credit- and debit-cards was stolen. The breach could cost the company an additional $25 to $30 million in 2013.

There definitely are consequences when companies fail to protect sensitive consumer information.

Consumers Pay With Methods Other Than Cash

Some statistics about consumers use of cash versus other payment methods:

"Last year 27 percent of all point-of-sale purchases were made with cash and that number is expected to drop to 23 percent by 2017... plastic cards purchases comprised 66 percent of all in-person sales, with nearly half of them, or 31 percent, made with debit cards, according to Javelin. Last year shoppers used credit cards for 29 percent of point-of-sale purchases; Javelin expects that number to rise to 33 percent by 2017. Shoppers deployed gift cards and prepaid cards for 6 percent of purchases made with plastic last year. A mere 7 percent of transactions involved use of a paper check..."

The Huffington Post article also mentioned a few retail stores than no longer accept cash.

Is It Wise To Move Your Money To A Prepaid Card?

Earlier this year, Pew Health Group released the results of focus group research about how consumers view and use prepaid cards. Key findings:

  1. Consumers view prepaid cards as a way to avoid hidden bank fees
  2. Consumers use prepaid cards to budget and control spending
  3. Some prepaid card users like the privacy of prepaid cards, since they don't have to register with their personal information
  4. Consumers dislike fees on prepaid cards
  5. Prepaid card users don't want either overdraft protection, nor credit lines on prepaid cards
  6. Prepaid card users want direct deposit, a savings option, and credit building tools
  7. Consumers incorrectly assume federal government oversight of prepaid cards

Finding #1 and #2 together suggest that some consumers view prepaid cards as an easy way to avoid spending money you don't have and avoid the overdraft fees banks charge. For these consumers, moving their money from a checking account to prepaid cards seems attractive. But what are the "costs" or consequences of using prepaid cards instead?

Life has taught me that there are always consequences; some unintentional. Read on.

The overdraft fees banks charge have been so large and frequent, that some consumers seem conditioned to view prepaid cards as a cheaper alternative. We've all heard stories about the $35.00 cup of coffee. Nobody wants to pay that.

CNN Money reported that the average prepaid card charges $300 a year in fees. That $300 in annual prepaid fees may seem cheap if you incur overdraft fees (at $35 each) more than 9 or 10 times a year. This seems to be the case with some of the Pew focus group participants. Pew shared one participant's comments:

"I don’t like the fees on prepaid debit cards... It costs to load (them). It costs $3.95. I don’t like that I pay the $3.95... I’m good with my checking account. Nobody wants to pay extra fees. If we had to, I’d take the $3.95 any day over the $35 overdrafting or for some other fees."

If only the load fee was the only fee on prepaid cards. Both CNN Money and Consumer Reports found a wide variety of fees when it investigated prepaid cards: activation fees, monthly fees, reload fees, cash withdrawal fees, inactivity fees, online payment fees, paper statement fees, customer service phone call fees, and more.

That same $300 in annual prepaid fees seems expensive when compared to a $5 - $10 monthly checking fee many banks charge (assuming good budgeting with no overdraft fees inc urred). That $300 seems ridiculous and avoidable when compared to far lower fees or free checking available at some banks and credit unions.

Are consumers confused? Probably. Banks charge both overdraft fees and fees for overdraft protection. Wise consumers know the difference. And, to avoid overdraft fees It may be better or simpler for you to decline auto-enrollment of overdraft protection.

I found it disheartening that the focus group participants didn't seem to understand the banking practice to reorder debit purchases to maximize overdraft fees. In early 2009, this blog reported about this  banking practice, which increases the frequency of overdraft fees. The CFPB is tackling the overdraft fees issue, and seeks comments from consumers by June 29.

I find particularly troublesome finding #7 above. When deciding to use a checking account or a prepaid card, consumers need to consider:

  • The fees on prepaid cards (see the above list and related articles), and which will apply given your usage
  • The limits, if any, on fees and interest rates
  • Prepaid cards don't build your credit history
  • Your rights to receive periodic statements, disclosures of fees, error resolution process, and changes in terms
  • Your liabilities when your card is lost, stolen, cloned, includes unauthorized transactions, or includes transactions in error

There are huge differences between credit cards, debit cards, and prepaid cards. There are different types of prepaid cards: gift cards, general purpose, health care spending, and payroll. This blog discussed payroll cards from Bank of America and the Walmart MoneyCard.

Wise consumers know that not all prepaid cards are the same:

  • Consumer's liability (e.g., loss, theft, unauthorized transactions) is different for payroll prepaid cards versus gift/general purpose prepaid cards
  • Statements and disclosure requirements are different for payroll prepaid cards versus gift/general purpose prepaid cards
  • Employer-provided health care flexible spending prepaid cards often have an entirely different set of rules

To learn more and be a smart shopper:

  1. Ask the retailer/bank/employer for a copy of their terms and conditions policy for the prepaid card you are considering,
  2. Read that policy,
  3. Read this FDIC comparison of debit cards, credit cards, and prepaid cards, and
  4. Browse related articles in the "Prepaid Cards" section of this blog.

What's your opinion? Do you think it is wise to move your money from a checking account to a prepaid card?

5 Things You Should Know About Prepaid Cards

Right now, there probably are three different types of plastic in your wallet or purse. Each type has different rules, disclosures, government regulations, and fees. So, wise consumers use the best type of plastic instead of cash.

Most consumers are familiar with credit cards and debit cards -- the first two types of plastic. Credit cards include an interest rate applied to all purchases, plus a variety of fees (e.g., overdraft, annual usage). Debit cards are offered by banks to their account-holders to access money in their checking and savings accounts.

Prepaid cards often look like debit cards but have several important differences. Prepaid cards must have value stored or "loaded" onto them before they can be used. Usually, consumers use cash to add value to a prepaid card. Then, the consumer uses the prepaid card for purchases, which are deducted from the balance on the card until there is no value left on the prepaid card. Then, more value must be added to the card before it can be used again.

Retail stores, restaurants and malls offer prepaid cards, usually called gift cards. Chances are you may have already received a prepaid card as a gift. I've received and given several prepaid cards as gifts. Customers use the Dunkin' Donuts prepaid card are the chain's retail stores. Prepaid cards from The Old Spaghetti Factory, Starbucks, and Target all operate similarly. Some retailers use their prepaid cards to track customers' purchases for rewards for loyalty programs.

Besides retail stores, many other companies and entities offer prepaid cards. Some employers pay their employees via prepaid cards, often called payroll cards. These payroll cards are designed for employees who don't have checking and savings accounts. Behind every payroll card is a bank that handles the transactions.

Some employers offer their employees prepaid cards only for qualified healthcare spending purchases. Some golf clubs offer prepaid cards for their members to use at the club's golf store and restaurant.

Some banks offer prepaid cards, too, for consumers who lack checking and savings accounts. With all of these prepaid cards in use, it is important for consumers to to know the advantages and disadvantages. There is a pretty good CNN Money article that discusses what consumers should know about prepaid cards:

"Watch out for the fees: The average prepaid card charges nearly $300 in basic fees a year, such as monthly charges, ATM fees and reloading fees, a recent NerdWallet study found... many prepaid cards also charge activation fees, transaction fees, bill payment fees, declined transaction fees, inactivity fees, customer service fees and paper statement fees."

"They don't build credit: Using a prepaid card doesn't help you build credit with the three major credit bureaus... don't be fooled into thinking they are doing anything to boost your credit score."

To browse the entire list of five tips, read the CNN Money article. To learn more about the differences between the three types of plastic in your wallet/purse, read the FDIC alert about consumers' rights. You can also select Prepaid Cards in the tag cloud in the near right column.

What has been your experience? What prepaid cards have you used?

Report Analyzes Breach Notifications Affecting Massachusetts Residents

Last week, the Massachusetts Office of Consumer Affairs and Business Regulation (OCABR) released its findings from an analysis of four years of data breach notifications reported to the state. A chief finding was that sensitive data often was not encrypted.

Any businesses or entities storing consumers' personal information has been required since Oct. 31, 2007 to report data breaches to the OCABR. Through September 30, 2011, the OCABR received 1,833 breach notices affecting about 3.2 mikllion people, or an average breach size of 1,727 stolen or lost records. 73% (1,336) of the breaches involved electronic files and affected 97% of breach victims.

The financial services industry reported the most breaches (955) during the last four years, affecting 901,156 people. Most of these breaches were the credit- and debit-card transactions at processing centers and retail stores. The health care industry has had fewer breaches (214), but affected far more people ( 983,746), including the South Shore Hospital breach in 2010.

In March 2010, new laws went into effect requiring entities that store, own, or license personal information about Massachusetts residents to develop, implement, and maintain a comprehensive written information security program (WISP) describing how it will protect sensitive information. the new law required entities to encrypt sensitive information if it is transmitted over public networks, the Internet, or carried on portable devices.

The of breaches each year have remained pretty steady, ranging from a low of about 415 to a high of about 470. Other findings:

"... stolen or lost portable electronic devices are most often not secure. Of the 365 devices reported lost or stolen, only 13 were encrypted. The lost devices led to exposure for 409,572 people. By contrast, the 27 encrypted machines kept information secure for 24,269 people... of the 75 lost or misplaced portable devices reported; only one was encrypted, compromising 1.2 million pieces of information. Of the 290 stolen portable devices stolen, 12 were encrypted, protecting 4,110 pieces of information. The 277 unencrypted devices exposed 220,000 pieces of information."

The types of devices lost/stolen included desktop computers and computer tapes. The types of portable devices lost or stolen included laptop computers, thumb drives, and storage discs (CDs). The report concluded:

"If all portable devices were encrypted from 2007 to 2011, the number of residents whose personal information was compromised would be remarkably lower by 47 % or 1,490,308 people. If all portable devices were encrypted from march 1, 2010 the number of compromised residents would have decreased by 29 percent or 909,992 people... compliance with the encryption requirement is a powerful to to safeguard the personal information of millions of residents"

Download the OCABR data breach report (Adobe PDF, 948K bytes).

Global Payments Breach Affects 1.5 Million Consumers

Last week, debit and credit card payments processor Global Payments Inc. announced that its systems had been breached by hackers and perhaps as many as 3 million credit and debit card numbers had been stolen. Global Payments processes transactions for Visa and MasterCard for retailers and card issuers.

In a statement released Sunday, Global Payments revised downard the number of stolen cards:

"... it identified and self-reported unauthorized access into its processing system. The company believes that the affected portion of its processing system is confined to North America and less than 1,500,000 card numbers may have been exported. The investigation to date has revealed that Track 2 card data may have been stolen, but that cardholder names, addresses and social security numbers were not obtained..."

The company has not disclosed how hackers breached its systems, nor the duration of the breach. The company's Monday-morning conference call focused on earnings and left little time for questions about the breach details.

The term "Track 2" refers to certain data elements stored in the magnetic strip on the back of debit and credit cards. Also on Sunday, Visa removed Global Payments from its list of "compliant service providers." Forbes magazine reported that the company expects to quickly correct the Visa compliance issue:

"Global Payments chief executive Paul Garcia is quoted in the company’s statement as saying that “We are making rapid progress toward bringing this issue to a close,” and emphasized that all major brands of cards still allow Global Payments to act as a payment processor."

After a breach like this, card issuers (e.g., banks, credit unions, retailers) will usually notify directly those cardholders with stolen account information, and whether replacement cards and accounts will be issued. And the card issuers usually seek reimbursement from the payments processor to cover the costs of issuing replacement cards to consumers.

Another payments processor, Heartland Payment Systems, experienced a much larger breach in 2008, after which multiple lawsuits resulted as card issuers provided replacement cards and accounts. With a reported 800,000 merchants and 3.5% market share, Global Payments is a smaller payments processor, when compared to First Data Corporation's 22.6% market share.

The largest banks, like Bank of America, have subsidiaries with joint venture arrangement with processor First Data to process card transactions. It seems to me that hackers have smartly figured out a way to steal valid credit/debit card information is to attack the transaction processors instead of retailers, like T.J.Maxx, or banks directly.

I called Global Payments to see how many retailers they may have lost already due to the breach and their inability to process Visa transactions. The public relations rep referred inquiries to the company's data breach site: www.2012securityupdate.com, which includes this statement to its merchants/retail clients:

"We are still processing all of your transactions, including Visa transactions, and will continue to work with the card associations in response to this incident."

Time will tell if and how long that continues. The company's breach web site also advises affected cardholders who suspect fraud to monitor their accounts, contact their card issuer, and place a Fraud Alert on their credit reports.

The Global Payments breach highlights the fact that several companies are involved in debit/credit card transaction flow, from the time yo swipe your card until when payment is completed. And, the security of that transaction flow is only as strong as the weakest link, or company, in the flow.

Your Rights And The Differences Between The Three Types Of Plastic In Your Wallet Or Purse

While this blog has covered a variety of banking issues, one of the more important issues is that consumers need to know about the three types of "plastic" in your wallet or purse. Otherwise, you are likely to be "mugged" by your bank or card issuer.

As part of National Consumer Protection Week, the U.S. Federal Deposit Insurance Corporation (FDIC) listed the differences between credit, debit and prepaid cards. There are important differences about how interest rates, fees, and your liability apply. Your rights vary greatly with the type of "plastic" you choose to use.

What protections do consumers have with prepaid cards? How are prepaid cards different? The first thing you need to know is that there are several types of prepaid cards:

  • "General purpose reloadable" (GPR) cards: these carry a brand of a card network (e.g., Visa, MasterCard) and can be used wherever that brand is accepted
  • Payroll cards
  • Gift cards

Prior blog posts have discussed payroll cards from Bank of America and the Walmart MoneyCard. How prepaid cards work:

"... allow consumers to spend only the money deposited onto them, can have a number of different features. For instance, some gift cards may be used only at a single merchant; most GPR cards may be used to pay for purchases and access cash at ATMs."

When using a prepaid card, your liability is different from a credit or debit card:

"Liability depends on the type of funds on the card. If the card is a payroll card, then the liability rules are the same as for debit cards. But if the card is a general purpose reloadable card or a gift card, then there are no protections to limit your liability under federal law."

What prepaid card issuers (e.g., retail store, employer, bank) must tell you in the prepaid card agreement varies:

"Disclosures depend on the type of card. For example, payroll cards must disclose any fees and the error resolution process, but a GPR card does not have any disclosure requirements. In addition, gift cards must disclose the terms of dormancy fees, whether there is an expiration date, and any other associated fees."

Similarly, your rights and access to statements are different with prepaid cards:

"Payroll cards must provide either a periodic statement or account balance by telephone as well as electronic transaction history. GPR cards and gift cards do not have periodic statement requirements under federal law."

When terms change for a prepaid card, your rights about advance notice of changes are different, too. With prepaid cards, you generally don't get as much advance notice as with credit cards (45 days):

"Payroll cards must provide 21 days notice before making changes to fees charged or the liability limits for unauthorized transactions. GPR cards and gift cards are not required to do so under federal law."

Some people like prepaid cards because they can avoid interest rates. It is wise for consumers to fully understand the types of fees that apply to prepaid cards:

"GPR cards and gift cards have certain restrictions on dormancy fees charged. There are no specific requirements related to payroll cards under federal law."

So, you are probably wondering if prepaid cards are a good deal, or not. That answer depends upon your financial situation and the type of prepaid card you expect to use.

Since I already have checking and savings accounts at a bank, prepaid payroll cards are of no value to me. I find extremely troublesome the lack of restrictions on payroll cards, which means the banks can change terms, fees, and interest rates whenever they want; and as high as they want.

If you don't have a checking account, then a payroll card may benefit you. (Given the fee schedules and lack of restrictions, payroll cards will definitely benefit the banks but not necessarily consumers.) However, closely read the card agreement and fee schedule first. You may be better off (e.g., fewer fees, lower rates) opening a checking account instead at a community bank or credit union.

I still find retailers' prepaid gift cards (e.g., Dunkin' Donuts, Stop 'n Shop, Cheesecake Factory) useful for some holiday or birthday gifts, but the lack of agreements with many prepaid gift cards is troublesome. The lack of an agreement means the card issuer can change things whenever they want and not notify you. I will likely reduce my use of prepaid gift cards to only those that have card agreements.

What's your opinion? Do you use prepaid cards? If so, which types? If not, why not?

CFPB Accepts Complaints From Consumers About Checking And Savings Accounts

By now, you have probably heard about the new Consumer Financial Protection Bureau (CFPB), a federal agency designed to ensure that financial products and services for consumers are beneficial for consumers. Previously, the CFPB accepted complaints about credit cards and mortgages. Consumers can now submit complaints about checking and savings accounts to the CFPB. The website has a different form for consumers to share their stories about experiences with financial products.

Also, the CFPB is investigating how checking account overdraft programs affect consumers. Part of this investigation the CFPB seeks feedback from the public about a proposed “penalty fee box” disclosure on a consumers’ checking account statements to clarify the amount overdrawn and total overdraft fees charged.

Reportedly, the average overdraft fee ranged from $30 to $35 in 2011. A 2008 study (Adobe PDF) by the Federal Deposit Insurance Corporation (FDIC) found several alarming trends and statistics about overdraft programs.The CFPB has four concerns about overdraft fees:

  1. Transaction Re-ordering that Increases Consumer Costs: the way that overdraft fees are applied by some banks increase costs to consumers. One practice is the co-mingling of all checks, bill payments, debit card transactions, and ATM withdrawals each day and processing the largest transactions first -- rather than in the order received. This maximizes the number of transactions that will trigger overdraft fees.
  2. Missing or Confusing Information: the CFPB is analyzing how consumers anticipate and avoid overdraft fees given current banking disclosures -- and if there is a better way.
  3. Misleading Marketing Materials: the CFPB is investigating reports that consumers have received misleading marketing materials about overdraft fees, since opt-in rates to overdraft programs vary widely by bank.
  4. Disproportionate Impact on Low-Income and Young Consumers: The CFPB is concerned that overdraft programs disproportionately affect certain groups. The same 2008 FDIC study found several alarming statistics, including that 9 percent of checking account customers pay about 84 percent of overdraft fees.

You can view a prototype of this "penalty fee box" at the CFPB website (Adobe PDF). To submit feedback about overdraft fees, include the Docket No. CFPB-2012-0007 with your submission by:

  • Online instructions: www.regulations.gov,
  • Email: cfpb_overdraft_comments@cfpb.gov
  • Postal Mail: send letters to Monica Jackson, Office of the Executive Secretary, Bureau of Consumer Financial Protection Bureau, 1500 Pennsylvania Ave, NW, (Attn: 1801 L Street, NW), Washington, DC 20220.

The CFPB began operation on July 21, 2011. In its annual report (Adobe PDF) to the U.S. Congress, the CFPB reported that by December 31, 2011, it had received 13,210 complaints from consumers, including 9,307 credit card complaints and 2,326 mortgage complaints. 44% of all complaints were submitted through the CFPB website, and about 15% via telephone calls.

The FTC advises consumers who experience identity theft or fraud with financial products to both submit a complaint to the CFPB and submit a complaint to the FTC.

CFPB Reports List Of Consumer Complaints About Financial Products

Logo for Consumer Financial Protection Bureau In its annual report, the new Consumer Financial Protection Bureau (CFPB), a federal agency designed to ensure that financial products and services for consumers are beneficial for consumers, listed the leading complaints submitted by consumers. The CFPB accepts complaints about credit cards and mortgages.

The CFPB began operation on July 21, 2011. In its annual report (Adobe PDF) to the U.S. Congress, the CFPB reported that by December 31, 2011, it had received 13,210 complaints from consumers, including 9,307 credit card complaints and 2,326 mortgage complaints. 44% of all complaints were submitted through the CFPB website, and about 15% via telephone calls. The leading types of credit-card complaints received:

Leading Credit Card Complaints Reported By
Consumers to CFPB. July 21 - Dec. 31, 2011
1. Billing Disputes 1,278 13.7%
2. Identity Theft / Fraud / Embezzlement 1,014 10.9%
3. APR or Interest rate
950 10.2%
4. Other
5. Closing / Cancelling Account 478 5.1%
6. Credit reporting 437 4.7%
7. Credit Card Payment / Debt Protection 383 4.1%
8. Collection Practices 378 4.1%
9. Late Fee 364 3.9%
10. Other Fee 334 3.6%
Total for Top 10 complaint types 6,470 65.9%

The types of mortgage complaints received:

Mortgage Complaints Reported By
Consumers to CFPB. July 21 - Dec. 31, 2011
1. Problems when you are unable to pay (Loan modification, collection, foreclosure)
2. Other 540
3. Making payments (Loan servicing, payments, escrow accounts) 501 21.5%
4. Applying for the loan (Application, originator, mortgage broker) 235 10.1%
5. Signing the agreement (Settlement process and costs) 96 4.1%
6. Receiving a credit offer (Credit decision/Underwriting) 65 2.8%
Total Mortgage Complaints 2,326

The FTC advises consumers who experience identity theft or fraud with financial products to both submit a complaint to the CFPB and submit a complaint to the FTC.

I like the CFPB's mission and its website. The agency's consumer response mechanisms are still new and in their infancy. They will become more beneficial as the agency identifies and resolves problems. What is your opinion of the CFPB?

Bank Of America To Test New Fees

After consumer backlash last fall forced it to abandon plans to add fees for consumer debit card accouns, the Bank of America is now testing new fees for checking accounts in three states: Arizona, Georgia, and Massachusetts. Reportedly, the new monthly fees apply only to new accounts and range from $9 to $25 depending upon the consumer's account balance.

Meanwhile, the Massachusetts Secretary of State Galvin seeks legislation for national banks operating within the state to offer free checking accounts for young adults under 19 years of age and elders ages 65 and older. Galvin wants to prohibit these banks from holding state and local government deposits unless they offer free checking for these two groups. State-chartered banks in Massachusetts are already required by law to offer free checking to these two groups.

To learn more, visit the banking authority for your state.

How To Evaluate A Health Care Debit Card Plan From Your Employer

A blog post on Tuesday described Caren's experience with her United Healthcare Consumer Accounts Card, a specialized debit card her employer provided for Flexible Spending Account (FSA) expenses. That blog post highlighted what can go wrong with a health care debit card.

I wanted to take a closer look at the card agreement, and see what broader issues might apply in general. Today's blog post includes my findings about several items employees should be aware of when considering a health care debit card plan. I am not an attorney, so this is not legal advice -- just my observations and opinions as a consumer -- like you tyring to navigate a complex world. If you need legal advice, hire an attorney.

First, healthcare debit cards are similar to traditional debit cards, but with several important differences. Employees must understand how they work and when fees apply, just as you would with a traditional debit card with your bank checking account. So, it is important to closely read all appliable agreements, terms, or policies y to know your rights and responsibilities -- especially when bad things happen.

The introduction to the United Healthcare Consumer Accounts Card agreement (Adobe PDF; which is also available here) lists some important warnings:

"At the register or cashier: This is not a credit card, but you will need to choose “credit” when making purchases... At the pharmacy, supermarket or other retail store: Pay for eligible over-the-counter (OTC) supplies and materials. Please note: The card will be rejected if purchasing OTC medicines, even when prescribed..."

Select "credit" at the point-of-sale even though the card says "Debit" on its face? Prescribed OTC medicine will still be rejected? These exceptions sound like a recipe for employee confusion and rejected purchases. While the agreement states that it is a MasterCard Debit, I wonder if the bank tweaked a traditional credit-card payment solution for health care purchases and rushed it to market without removing all the bugs first.

What comes to mind is that old saying: never buy the first year of a new car production (and wait until the manufacturer gets all of the bugs out). Seems to apply to payment solutions, too.

Section #2 of the same agreement states:

"When you use the Card, you represent and warrant that you will not submit, and have not previously submitted, a claim for reimbursement for the same expenses under any other plan or program. You agree to save all invoices or receipts that are provided to you by merchants and service providers when you use the Card. You agree to provide a copy of any such receipt to us or United Healthcare, promptly on request. If you fail to submit a receipt when it is requested, under IRS rules, the amount in question may not be excluded from your gross income for federal tax purposes or may otherwise result in financial penalties to you. Your use of the Card is subject to the terms and conditions of the Plan, as well as the terms and conditions of this Agreement..."

So, employees must still save all purchase receipts. The health care debit card doesn't eliminate all paperwork. The last sentence in the above clause is important because it highlights the fact that several policies apply. It would be helpful if this agreement listed all applicable policies. My estimate is that at least five different policies apply:

  1. Consumer Accounts Card Agreement,
  2. United Healthcare HIPAA Privacy Policy,
  3. Any additional policies at myUHC.com,
  4. Employee handbook or manual,
  5. Optum Bank policy

Employees should not have to guess which policies apply. It would be best for employees if a single, consolidated policy applied, but unfortunately American business does not operate that way today.

Let's return to the Consumer Accounts Card agreement, which also states:

"You agree that you will only use the Card to pay for eligible expenses under the Plan... if you use the Card for anything other than an eligible expense, you will be liable for any taxes, penalties and other expenses payable under applicable law and any expenses we, United Healthcare or your employer may incur as a result of such impermissible use. Upon demand, you agree to reimburse us, United Healthcare or your employer, as the case may be, for any such use for non-eligible expenses..."

While employees may think that ineligible FSA expenses are automatically blocked at the point-of-sale, the agreement governs what really happens. The Consumer Accounts Card payment process may indeed block some ineligible purchases, but United Healthcare and the bank seem to have left themselves a convenient loophole where employees are still liable. It would be helpful if the agreement stated what those amounts of taxes, penalties, and other expenses could be. It seems risky to use a debit card when you don't know the exact amount of fees that might apply.

Second, employees should be aware of their responsibilities to avoid liability. The "Consumer Liability" portion of the agreement states:

"Tell us AT ONCE if you believe your Card has been lost or stolen. Telephoning is the best way of keeping your possible losses down. If you tell us within 4 business days, you can lose no more than $0 if someone used your Card without your permission. (If you believe your Card has been lost or stolen, and you tell us within 4 business days after you learn of the loss or theft, you can lose no more than $0 if someone used your Card without your permission.)"

This four-day time period seems unreasonably short. My bank allows 60 days from my statement to dispute a charge on that statement. Does United Healthcare expect employees to check their online FSA account every four days? The next portion of the agreement states what happens when employees provide notice after the four-day window:

"If you do NOT tell us within 4 business days after you learn of the loss or theft of your Card, and we can prove we could have stopped someone from using your Card without your permission if you had told us, you could lose as much as $50."

OptumHealth Financial Services logo Now, the liability sounds more like the liability with a traditional credit card: $50. What I find troubling about this clause is that it assumes traditional theft or loss. This blog has documented numerous examples of identity thieves plant skimming devices inside point-of-sale terminals at gas stations, supermarkets, and other retail stores to steal consumers' data to clone debit cards. Since employees are forced to use health care debit cards at retail stores, a more relevant agreement would provide tips about what to do if they believe their card has been cloned. Perhaps the myUHC.com site explains this, but I don't have a myUHC.com account.

The agreement also states (emphasis added by me):

"... if the statement you receive from the Plan administrator shows transfers that you did not make, tell us at once. If you do not tell us within 90 days after the statement was mailed to you, you could lose as much as $50 if we can prove that we could have stopped someone from taking the money if you had told us in time."

Again, that sounds like traditional credit card liability (e.g., $50), but at least the window for notice is longer at 90 days. Why lead with the four day clause? It seems unnecessary. In Caren's case, it seems that United Healthcare is enforcing the 90-day clause. What I find troublesome about the above clause is that it assumes paper statements sent via postal mail. In reality, employees' statements are available online. Nothing is sent via postal mail. So, why write the agreement assuming this? It sounds like the card agreement was rushed to market without all the bugs removed.

Another portion of the agreement states:

"ALL QUESTIONS ABOUT TRANSACTIONS MADE WITH YOUR CARD MUST BE DIRECTED TO THE BANK, AND NOT TO YOUR EMPLOYER OR PLAN ADMINISTRATOR. The Bank is responsible for issuing the Card and for resolving any errors in transactions made with your Card. The transactions will appear only on the statements provided to you by the Plan administrator."

It would be helpful if the agreement listed the bank's phone and postal address information. I couldn't find it in the agreement. The agreement lists United Healthcare's phone and postal address information. In my experience, well-written agreements provide both phone and postal address information with any instructions where consumers should give notice. Perhaps, the other policies provide this information, but I don't have a myUHC.com account.

SO, let's see if I got this correct. The agreement directs employees to contact United Healthcare for transfers the employee didn't make, but contact the bank about statement "errors."What's the difference? How are employees to tell? This sounds confusing.

It troubles me that the above clause mentions "errors" and doesn't mention "fraud." I would expect any bank to aggressively investigate suspected fraud. The fact that Optum Bank's flow of funds page still presents a 2008 copyright does not give me much confidence in the bank:

Optum Financial flow of funds image from website

If something this simple still says 2008, what else has this bank missed? Or, should consumers conclude that the Optum web site hasn't been updated in four years? Or is this flow-of-funds information that is four-years old and/or obsolete? I would expect more timely and current information from any bank -- especially one processing my extremely sensitive health care information.

The "Fees" section of the agreement states:

"OptumHealth Bank does not charge usage fees for this card."

No fees are good, because banks can apply a wide variety of fees to debit-card accounts.However, it means that employees should monitor any changes in the card agreement. Things might change with new fees introduced. So, employees should read any updates to the card agreements or policies with their health care debit cards.

Now, let's return to Caren's story. The fact that Caren never used the Medco online pharmacy should be a huge "red flag" to Optum Bank, Large HR Firm, and United Healthcare. It suggests that Caren's payment information was stolen. The payment data on Caren's Consumer Accounts Card could have been stolen via a skimming device, which identity thieves plant inside point-of-sale terminals at retail stores and gas stations -- not just at bank ATM machines.

If Caren's Consumer Accounts Card was not cloned via skimming device theft, then a couple other options are possible. The pharmacy may have re-submitted the purchases it originally rejected -- and if so, it should have notified Caren, and reimbursed her for the purchases she paid out-of-pocket. Caren could test this by using a different pharmacy. If the duplicate charges don't happen at the second pharmacy, then it is reasonable to assume a problem at the first pharmacy. If the duplicate charges continue, then it seems safe to assume that her debit payment data was stolen.

Insider identity theft is always a possibility. It's harder for employees to spot, but it does happen.

What should employees do if your employer offers a specialized debit card for healthcare expenses? I suggest the following steps:

  • Read all applicable policies to know your rights and responsibilities -- especially before registering for a FSA with your employer. Your employer may have negotiated a really good deal for its employees, or not. Don't blindly assume so; read the fine print in the agreement first. Part of evaluating if it's a good deal is looking for certain clauses in the agreement -- like the ones listed above. If you have difficulty reading contracts, get help from a trusted friend, family member, or attorney if you can afford one.
  • Use the Internet to find reviews written by employees about their health care debit card plan. Places I like to look include Consumer Reports, The Consumerist, and Epinions.
  • File a police report with local law enforcement. (In Caren's case, somebody spent money from her FSA account without her authorization. That is theft.) Insist on law enforcement accepting the report. Make several copies. Attached the police report to any complaints filed with your employer, the FSA healthcare administrator, and the bank,
  • Use a different pharmacy. If the duplicate charge problem stops, it is reasonable to assume a problem at the first pharmacy, and file a police report accordingly,
  • If you feel that you aren't getting the services promised by the bank which processes your health care debit card transactions, learn about how to file a complaint against your bank.
  • File a fraud complaint with the U.S. Federal Trade Commission (FTC) including any relevant documents (and non-action by employer, HR Firm, health care firm, and bank). This will help the FTC track any emerging theft trends with health care debit cards.
  • If there is no action by the employer, HR Firm, healthcare firm, and/or bank), write a letter to your federal or state elected officials asking for help. It's part of their jobs -- to help their constituents.

Is the United Healthcare Consumer Accounts Card a good deal? Only you can decide for yourself, as everyone's needs are different. Hopefully, I have highlighted the things consumers should look for in any health care card agreement, so you can make an informed decision.

If you use a specialized debit card for health care expenses, what has been your experience?

A Debit Card Cautionary Tale

[Editor's Note: today's post is by guest author R. Michelle Green, the Principal for her company, Client Solutions. She is a combination geek girl, personal organizer, and career coach. Michelle helps others improve their use of technology in their personal or professional life. Today, she tackles what I believe will become a huge identity-theft problem. As employers lower their administrative costs by outsourcing payment systems that include debit-card transactions, the result is a more complicated, patchwork mix of companies where it is not easily clear who is responsible when bad things happen.]

By R. Michelle Green

At a business conference I attended, the topic turned to health care insurance administration. Some of the attendees now have new debit cards they didn’t ask for. Their employers gave them debit cards for their health care expenses (to access their Flexible Spending Accounts). Instead of having to submit receipts, employees offer the card at the point of sale. If s/he tries to charge more than allowed, or tries to charge things that are not acceptable, the card is rejected. Easily fits into the distributor’s payment systems (cash credit debit), no paperwork for the employee, less evaluative work for the FSA provider. Everyone wins, right?

Not everyone.

Meet Caren (not her real name, of course). She offered her new debit card -- her's is called a United Healthcare Consumer Accounts Card -- for prescription meds in January last year. However, the purchase was rejected by the pharmacy. She assumed it was a glitch, and paid for it herself. While this eventually happened every time, she doesn’t have medical charges every day, so it took a while to recognize that the card never worked. For reasons not relevant here, she did not pursue this with the provider until the fall, only to discover that all her money had been used up on health care charges she didn’t make.

She spoke with United Healthcare using the phone number on her Consumer Accounts Card. She submitted all her information in writing as they requested. They produced a sheet showing that her charges mostly matched (about 70%) identical charges paid 1-2 business days after hers. Though they did not accuse her of fraud, they did say the case was closed and did not merit an appeal. When she approached her human resources provider, he said, well at least she got the tax break. (!) She didn’t get a tax break, she got a salary reduction! She was deprived of access to her own money, set aside from her salary. The debit card agreement online says that she should call the bank operating the card, but that hasn’t proven productive either.

Had a second card been issued to someone else, we wondered? Not to her (or to the bank’s) knowledge. Did the drugstore have signatures on the other charges ostensibly hers? The other charges were mail order charges through Medco, so no receipts or signatures. She has no account with Medco. The pharmacy is not interested in pursuing this, they’ve been paid (perhaps twice!). Medco won’t address it, as she is not a client. The debit card provider only knows the money is spent. The FSA account holder is satisfied that it was spent for the right things. Only Caren is out of pocket and disadvantaged. Doubly so – this was so traumatic that she did not enroll in FSA this year. That makes her ineligible for the associated tax benefit in 2012.

Turns out our blog host is interested in the way financial systems are evolving, and found this issue particularly interesting. There are a lot more parties in the mix than you might at first think. Caren has an employer small enough that it purchases human resources expertise from a national firm. So there’s Caren, Small Firm, and Big HR Firm. Big HR Firm takes the money from her account and sends it somewhere based on their agreement with United Healthcare. Her debit card is managed by United Healthcare, and Optum Health Bank administers that card for them. Optum Health Bank has a subsidiary, Optum Financial, that handles the flow of money from the holding account to the point of sale. And what about the pharmacy: could their processes have been compromised as well?

I read a lot about fraud and scams, and wondered if this could be the tip of a software theft operation, selecting certain customers, and duplicating certain customers’ receipts, at just low enough rates that they are not perceived. (Good movie, eh? But Occam’s Razor says: not likely.) But who is the person with enough clout to investigate this, particularly if no one person or entity loses big bucks?

Today she tweeted that she had heard from Big HR Firm – there’s nothing they can do. So who’s responsible? Several corporations are in play; doesn’t each have a responsibility to Caren? Who can help her?

Big Banks vs. Credit Unions

If you are unsure about whether or not to move your money from a big banks to a small, community bank and credit union, consider the statistics below from Consumer Reports:

Item / FeeBig BanksCredit Unions
Non-interest Checking (per month) $10.27 $6.00
Minimum Balance to Waive Fees $1,115.97 $500.00
Online Bill Payment (per month) $6.95 $0.00
Use Another Bank's ATM (per transaction)
$2.21 $1.07
ATM Surcharge (per transaction)
$2.96 $2.79
Overdraft (per transaction)
$34.48 $27.82
Insufficient Funds (per transaction)
$34.48 $27.82
Stop Payment (per transaction)
$31.09 $19.43

To learn more:

Debit Cards: A New I've Been Mugged Topic

Since many consumers have shifted their purchases from cash and credit cards to debit cards, I have added a new topic in the tag cloud in the near right column. With recent events in the banking industry, new offerings allows employers to perform direct deposits to employees payroll cards, a customized version of debit cards. The "Debit Cards" topic includes this content of interest to consumers and residential banking customers. I hope that you like the new category.

Bank of America Merchant Services And Money Network Announce New Payroll Solution

Earlier this month, Bank of America Merchant Services (BAMS) and the Money Network(R) announced the launch of the Money Network(R) Payroll Distribution Service sponsored by Bank of America. According to the press release on MarketWatch:

"The program enables employers to comply with complex payroll distribution laws, such as the need to offer a paper paycheck and free check cashing locations, while providing a safe and convenient pay alternative for employees who do not have access to a deposit or checking account. With the Bank of America-issued Money Network(R) Service, the payroll process is efficiently streamlined through more than 17,750 Bank of America ATMs and 43,000 Allpoint(R) Network surcharge-free ATMs..."

This is huge news. The benefits for employers are numerous. I'd written previously about a version of this payroll solution at Walmart. Most employers would stop printing paper checks as paycards allow them to avoid check printing expenses. The benefits for consumers seem questionable.

This payroll solution enables companies to essentially provide selected banking services to their employees. Where is the line between a company and a bank? It seems blurred with payroll services like these. Have you asked your employer for check-cashing services? I doubt it. Something else is going on here.

Notice that the press release includes this statement: "for employees who do not have access to a deposit or checking account." The banking industry uses the term "underbanked" to identify consumers that have a checking account or a savings account, but not both. The industry uses the term "unbanked" to identify consumers who don't have both types of accounts.

According to a 2009 FDIC study (Adobe PDF document), only 7.7% of U.S. households are unbanked. Those unbanked households typically make less than $30,000 per year, and 66 percent of them use services with high fees: non-bank money orders, non-bank check cashing, pawn shops, payday loans, and rent-to-own services. The same study also found:

"Minorities more likely to be unbanked include blacks (an estimated 21.7 percent of black households are unbanked), Hispanics (19.3 percent), and American Indian/Alaskans (15.6 percent). Racial groups less likely to be unbanked are Asians (3.5 percent) and whites (3.3 percent)."

Those percentages are probably higher given the prolonged economic downturn of the last couple years. I doubt that BAMS and Money Network targeted this new payroll service at only the 7% unbanked slice of the market. The same study found that about 18% of U.S. households are underbanked. The market for this new payroll service seems to be both unbanked and underbanked consumers who currently use high-fee banking services, plus the upside potential:

  1. More consumers might become underbanked or unbanked during economic downturns,
  2. Employers with operations in developing countries have a larger percentage of unbanked employees,
  3. Employers with a large percentage of seasonal or contract workers, and
  4. If positioned a certain way, the new payroll service could capture more market share from employees that already have both checking and savings accounts

Upsides #3 and #4 worry me. This new payroll service seems to me to be a slick method to force consumers to use certain banks -- to restrict freedom of banking choice. Think of it this way: employees that are paid by their employer via a Bank of America-branded Money Network(R) PayCard, are being paid with a customized debit card. Use that PayCard within Bank of America and Allpoint networks and there are few or no surcharges. Use that PayCard outside of its network, and more fees and charges apply. Where do you think employees will shift their banking to?

If a company uses the Money Network Payroll Distribution Service for all its employees, then those employees who already have checking accounts (at the banks of their choice) either lose their freedom to bank where they choose, or pay more in fees to bank where they choose.

This reminds me of the old "company store" practice from the 1800's where companies forced their employees to shop only at the company store which effectively kept them in debt bondage. Haven't we learned from this history?

Perhaps, we are now seeing the future of banking and the big banks' response to customer fury about checking account fees. The big banks could co-mingle employer payroll solutions with limited consumer banking services -- all without having to highlight the embedded debit/checking fees to consumers and let the employers take the heat. Afterall, employees may not complain if they are afraid for their jobs.

This 2005 State of California study (Adobe PDF) researched the advantages and disadvantages of payroll paycards:

"... Pay Cards give an employee who does have a bank account an alternative to carrying cash or cashing a check, which may require a fee. Employees who do not have bank accounts gain the convenience of using a debit card. However, depending on the program chosen by an employer, Pay Cards may or may not reduce payroll costs for the business and/or for the employees."

This study documented a variety of fees charged to employees' pay cards:

  • Monthly maintenance fee
  • ATM balance inquiry fee (per transaction)
  • ATM in-network domestic withdrawal fee (waived or a limited number of withdrawals per month)
  • ATM outside-network domestic withdrawal fee (per transaction)
  • ATM in-network foreign withdrawal fee (per transaction)
  • ATM outside-network foreign withdrawal fee (per transaction)
  • ATM transaction decline fee (per transaction)
  • Domestic customer service automated inquiry via phone fee (per call)
  • Domestic customer service live-person inquiry via phone fee (per call)
  • Point-of-sale pinless signature purchase fee (per transaction)
  • Point-of-sale cashback fee
  • Emergency cash transfer fee (annual)
  • Emergency cash transfer fee (per transaction)
  • Bill payment fee (per transaction)
  • Funds transfer fee
  • PIN change fee
  • Paycard replacement fee
  • Paycard replacement fee (express delivery)
  • Negative balance fee
  • Account closure fee
  • Duplicate statement fee
  • Research fee (per hour)
  • Tax levy or garnishments fee (per occurrence)

And, all of these fees for employees are in addition to fees the bank charges the employer directly for the payroll service. So, costs for employees go up when multiple fees apply, or to use a payroll paycard outside of the network at the bank of their choice. More fees apply if the employer negotiated a poor deal for its employees. These fees are effectively an economic incentive to force employees to do business at certain banks.

It is easy to find paycard solutions. This guide for employers' human resources department professionals lists ten branded payroll paycard services.

If you think that this is enough, there's more.

Similar to the Walmart Money Centers, the Money Network PayCards are insured by the FDIC (via MetaBank). So, as more employers provide limited banking services, the federal government (via taxpayers) is responsible for insuring more accounts. It would be preferrable for more public discussion about whether we want to insure more non-banks doing banking during a time of limited government budgets. 

My first impression of this payroll solution was that it may be a security issue, since it allows consumers to easily move money around the globe, with Allpoint ATM locations in the USA, Mexico, Australia, and the United Kingdom -- today. In the future, Allpoint may serve more countries. In a world where governments are concerned about terrorism, this payroll solution struck me as a potential security risk.

Then again, this payroll solution could make it easier for employees to send money to relatives in their home country -- assuming the relatives have paycards, too.

After researching this investigative article, I have learned to keep an eye on both Bank of America Merchant Services, and Banc of America Merchant Services LLC. With this latest announcement, I have learned to also keep an eye on Money Network(R), a First Data Company.

What's your opinion? If your employer pays you with a payroll debit card or paycard, please share your experiences below. I've Been Mugged readers are interested.