The Debate About Payroll Cards
In the most recent Consumer Advisory Council meeting at the Federal Reserve, one of the topics of discussion was consumer protections for payroll cards.
Payroll cards are a checkless method of providing salary payments to employees. The card functions as a smart card. The employer, through the financial institution, credits an amount to the payroll card that is the amount of the user's salary. With each payday, the card receives this balance that can then be used just as a debit card or credit card would be used.
Financial institutions are encouraged to participate in payroll card programs for a variety of reasons, but there is a price tag. Consumer advocates want protections for payroll card users that parallel the protections provided for credit and debit cards.
The front-burner protection item is to provide monthly statements to the payroll card users so that they have some information about and verification of the ways in which they have used their cards. At present, the only transaction records a payroll card user receives are records, such as receipts, provided at the time and place of the transaction. For example, if the user presents the payroll card at the grocery store's check-out, the customer would receive a receipt from the grocery store. However, this would not indicate the balance remaining on the card.
Consumer advocates asked the Federal Reserve Board to require financial institutions offering payroll card services to provide regular statements to the payroll card users. The statements envisioned would look much like a checking account statement or a credit card statement. It would show the date, amount, and location of transactions and provide the consumer with balance information.
Sound simple? Before jumping to a conclusion, this idea should bear some analysis.
The theory behind requiring financial institutions to provide statements is that they have all the information. There are two problems with this assumption.
First, the financial institution does not have all the information needed to provide statements. It has information related to the card, but not information related to the card user. That information belongs to the employer. What financial institutions typically have is enough information to identify the payee account and the transaction information on that account. All other information, such as address and identifying information, is compiled by the employer.
Second, financial institutions are not necessarily in direct contact with payroll card users. Their contact is the employer and the information, including payment amounts, that is provided by the employer. Employers are in a position to distribute statements to their employees. They are presumably in regular contact with their employees and presumably have information about the employees such as where they live.
The idea of providing periodic statements has strong merit. It could be the only tool with which users of payroll cards could track their uses of the card. It could also be the only tool with which users would become aware of errors.
The financial institutions which handle the payroll card electronic transactions, both crediting salary and posting debits, is in a position to generate a monthly statement. However, the step of providing that statement directly to the payroll card user would necessitate taking a role that is not presently part of the system. It would require the financial institution to establish a direct relationship with the payroll card user.
Concerns expressed by bankers at the CAC meeting dealt directly with this issue. The bankers questioned whether the additional work was necessary and justified simply to provide statements to payroll card uses when those statements could be provided by other means.
But second, and more significant, the additional relationship with the payroll card user raises questions about whether there is a customer relationship between the payroll card user and the financial institution.
The existence of a customer relationship raises concerns under other regulations, such as BSA and FCRA. For example, should the financial institution determine and verify the identity of the payroll card user when heretofore the only relationship has been to cash or clear that person's payroll check? Will the financial institution have the obligation to report the behavior of the payroll card user? Or, will the financial institution have any legal basis for obtaining a credit report on the payroll account user as it would for a depositor? And what if the payroll card user files an identity theft alert?
These questions need answers. To get the answers, the industry needs to provide information on the costs, feasibility and consequences of creating a payroll card user relationship. So start thinking.
ACTION STEPS
Review your payroll accounts to establish a measure for the extent of possible responsibilities.
Look for any relationships with payroll account payees beyond that of processing the payroll.
Estimate the cost of compiling information that would be required for sending statements to payroll card users.
Identify any benefits from having a more direct relationship with payroll account payees.
Be prepared to comment and share this information.
Copyright © 2005 Compliance Action. Originally appeared in Compliance Action, Vol. 10, No. 6, 5/05
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