Analysts Pinpoint Payroll Cards’ Weaknesses (And Surprising Strengths)

The payroll card industry is far from immune to controversy. Especially in recent years, regulators have eyed the space amid waves of criticism over high fees associated with the cards or a lack of education given to employees about the payroll tool.

With an estimated 8.7 million employees receiving wages on payroll cards as of 2016 (compared with just 5.5 million employees that receive a paper check on payday), payroll cards are no longer used only as a last-resort for underbanked employees.

The Center for Financial Services Information (CFSI) has just released its first report on payroll cards. Its 2017 Payroll Industry Scorecard found a few areas the payroll card industry needs to improve.

But first, the good news.

According to the CFSI, core features of payroll cards typically tend to be very strong. These core features, deigned as “standards for a high-quality payroll account,” include security, access and personalization. Overall, the payroll card industry scored an A- in this area, with analysts giving high marks because employee funds held on payroll cards are quite secure.

Surprisingly, the CFSI also concluded that cardholders can usually access their full wages held on payroll cards without costs, although they did deliver a B grade for affordability and the ability for employees to perform basic functions with their cards without incurring unreasonable fees.

A B grade was also delivered in the area of transparency, with analysts finding that “few program managers offer additional tools, such as online videos and tutorials, that can help cardholders derive the most value from their cards.”

The area CFSI dubbed as “stretch features,” scored a bit lower than the core features category.

Stretch features, analysts explained, are “best practices for providers to stretch beyond the basics” and include convenience, mobile compatibility, education and portability. In what may come as another surprise, the payroll card industry received an A grade for its ability to link products to a mobile device or platform. Portability — the ability for an employee to receive funds from multiple sources — also scored an A.

But CFSI gave out a C grade to the industry in the area of enabling employees to send money to other payroll cardholders from their card, as well as for education and the practice of providing information to employees about how to best use their cards. This lack of education has been a key topic in the debate over payroll cards, with some regulators now requiring employees to provide a certain level of educational resources to employees that receive their wages on payroll cards.

A C grade also landed on the area of budgeting, with CFSI signaling the industry has some progress to make in the area of offering employees personal finance management tools — considered a “Next gen feature.”

But the worst grade of all was a D, which was stamped on the area of savings — providing employees with access to a savings account linked to the card. Considering that payroll cards are often used to facilitate payments to employees that are underbanked, a lack of a savings account linked to the payroll card may signal ongoing difficulties in efforts of financial inclusion for the U.S. workforce.

With so much debate around payroll cards today, some negative analysis of the industry was to be expected. But according to CFSI, the outlook is pretty bright.

“What we found was encouraging: payroll cards offer many of the basic features and functionality to be considered high-quality products,” the company stated in its executive summary of the report. “But, there remain opportunities for program managers to stretch beyond the basics by offering additional features that can help cardholders build long-term and lasting financial health.”