Bye-Bye, Paycheck

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Mounting banking fees became such an annoyance to Andral Parrish that when her company, U-Haul International, offered a paperless alternative to direct deposit she signed up to receive a payroll card. Now the debit-style card with the Visa logo and a Bank of America imprint gets loaded with her salary twice a month. No bank account required.

Payday is moving from paper to plastic. Payroll cards, the latest iteration of stored-value cards — like the gift cards you can buy from retailers and give at Christmas — are sweeping into payroll departments at some of the nation's largest companies. McDonald's, Lowe's, Blockbuster, FedEx and Sears, Roebuck are among those writing fewer paper checks and loading value onto cards, which are held by over 1 million workers.

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For companies, the advantage is clear. Electronically transferring funds to employees is up to 75% cheaper than issuing checks. U-Haul saves $1.10 for each paper check not cut, about half a million dollars in savings a year. For the nearly 14 million U.S. households that are "unbanked," payroll cards, usually issued by banks with the MasterCard or Visa logo, bypass the need to establish the personal accounts used for direct deposit.

"We're using them in our overall initiative to pay folks electronically," says Tonia Horton, director of payroll and financial services at Sears, which is rolling out payroll cards to its 4,300 domestic locations, including department stores, automotive centers and corporate offices. The cards are a great match for Sears' large part-time force, says Horton, as well as the company's young workers, who receive more than 70% of the paper checks that Sears still cuts. In the 11 states where law allows, Sears is giving employees two choices: direct deposit or payroll card. In other states, where paper checks must be available, the cards are being hyped in an effort to get employees to join voluntarily.

It's another step toward a cashless society, but there's a debate about who ultimately benefits — employer or employee. Unbanked employees stand to gain by avoiding hefty check-cashing fees, says Ariana-Michele Moore, an analyst at Celent Communications, a Boston-based consulting firm. Such fees are typically 2% to 3% of a check's value but can go as high as 10%. Generally, employees can use the cards at ATMs to withdraw cash or make purchases at stores. Celent estimates that by 2006, payroll cards will reach 3.8 million workers, mostly low-wage or temporary employees in industries like retail, food service, hospitality, construction and farming.

Some consumer advocates say the cards simply transfer costs from company to worker. Payroll cards can come loaded with fees for any number of transactions — opening or maintaining an account, or withdrawing money from an ATM — although typically the first withdrawal of each pay period is free. Fees for balance inquiries, adding money or making a purchase have also cropped up. Says Tracy Shelton, consumer attorney for the New York Public Interest Research Group (NYPIRG): "Because it's $1 here, $1.50 there, a lot of people may be shocked to see what they spend. They don't think it's going to cost that much." Consumer Reports estimates a payroll-card holder may fork over $164 a year in fees, but that is still less than the $324 the NYPIRG calculates for check cashing.

Blockbuster introduced payroll cards to its corporate employees last December and is seeking to expand the program to its 60,000 store employees. Employees get one free Bank of America ATM withdrawal per week. There is a $1.50 monthly maintenance fee, but workers also receive monthly statements on paper, Web access to card activity and an automated telephone system for tracking transactions and balances.

Proponents say features like these can be a big step for people who wouldn't otherwise have such money-management tools. "It introduces a lot of people to banking who haven't been introduced to banking before," says Sam Austin, UHaul's payroll manager. Some advocates are worried that there aren't consumer-protection laws for payroll-card holders similar to those for people with debit or credit cards. But given the compelling efficiency of the technology, it is a relationship employees will have to get used to, if they want to get paid.