An administrative snafu at my university led to me receiving my latest payroll on a debit card. Those accustomed to large universities will see nothing unusual in that. Universities exist mainly to propagate bureaucracy, often making research and teaching seem like an afterthought. I have experienced–and I am not making this up–a Committee on Committees and a Committee to Decide Which Time Classes Should Meet. This payroll debit card seemed like another good story about university bureaucracy to tell around the campfire at the next academic conference I attended.

The only novelty about the payroll debit card was my idea it was a novelty. Payroll debit cards already are a big thing. They can be great for employers because they reduce the expense and hassle of processing paper checks. They can be great for companies selling payroll debit card services because they mean more business and more funds on which they do not have to pay interest. It is just  not always clear that payroll debit cards are great for employees, and it is not always clear that every employee has a choice. I can have my next paycheck sent to my bank account via direct deposit. For part-time or low-wage workers, they may have no choice but to accept a debit card for their pay.

Payroll debit cards are being pushed big-time by the consumer financial services industry. Do a Google search for "payroll debit cards", and you will find plenty of industry web sites extolling their virtues. (Add the word "consumer" to the search if you want to find web sites discussing some of the pitfalls.) Payroll debit cards are advertised as being cheaper than a bank account, but it is not clear that is always the case. Payroll debit cards are like any other debit card, and fees are charged at ATMs for using them (although the first withdrawal from a payroll debit card is sometimes free). Any other fee that one might get for a debit card also can apply to a payroll debit card.

There are potential issues with payroll debit cards. First, not all payroll debit card companies are banks, and if the payroll debit card company goes bust, employees could get caught in a legal fight between their employer and the company. There also are questions about what happens if the debit card is lost, although a recent rulemaking from the Federal Reserve subjecting payroll debit cards to the same regulation as ordinary debit cards probably answers the questions and limits the consumer’s losses.

The consumer financial services industry markets payroll debit cards as especially useful for the "unbanked," persons who do not maintain a regular bank account. Payroll debit cards certainly seem a better solution than check cashing operations with high fees, but payroll debit cards raise policy issues for those interested in consumer finance. I have an open mind whether, on balance, payroll debit cards are a positive development. Read the advertising literature for payroll debit cards, and you will
see convenience, convenience, convenience. In other words, payroll debit cards make it
easier for consumers to spend, spend, spend and for a particularly unsophisticated segment of the consumer market. Do payroll debit cards discourage saving? If so, do we really need another fee-based payment system that discourages consumer savings? What are the true out-of-pocket costs of payroll debit cards? Is existing regulation adequate to meet the challenge of payroll debit cards?