Things I Would Never Do: Pay An Employee With a Prepaid Debit Card

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wallet full of cards

Welcome back to another entry in my series of things I would never do. It’s mainly meant as a way to spur discussion over something that is arguably either humorous or somewhat ridiculous in nature. The topic we’ll be discussing this month comes from an article I read several weeks ago in the New York Times that discussed the growth of employers, mainly fast-food or retail in nature, that are paying their employees via prepaid debit cards.

While it may seem harmless, or at least convenient, when you search below the surface, you see that it is not what it’s cracked up to be. I had never really heard of this practice before reading the article but have since learned that it is actually a fairly big business. As the article states, $34 billion was put onto 4.6 million payroll cards as of 2012 and that figure is expected to more than double over the next five years. As with other posts in this series, there is more than one side to the story, so let’s take a look at it. If you’re interested in reading the other posts in this series, here are a few entries for you:

Many People are Unbanked for a Reason

You might be asking yourself why is it a big deal that people are paid via prepaid debit card? Not everyone uses a bank so this seems like a viable option for them. One of my early jobs right out of college was working at a bank. I was able to see people from all walks of life handle (or not handle) their money on a daily basis. I learned very quickly that not everyone uses a bank, and for a variety of reasons. They can range from individuals that have problems bouncing checks or check kiting, to those who don’t trust banks to those who’re unable to have a bank account due to legal issues.

Regardless of the reason, it’s difficult to force someone to use a bank and, at the end of the day, you’ll always have those who choose not to use a bank. We see this area being serviced from the growth of check cashing institutions to stores like Wal-Mart cashing payroll checks for a fee of $3-$6. As companies face the issue of needing to have some way to pay their employees I can understand, on one level, why they’d go the route of prepaid debit cards as it can make it easier for all involved.

What is an Employer’s Responsibility?

It is easy to look at this issue, see that employers are paying their employees and think that is all that matters. Ultimately, other than paying the wages they owe, and following the legal standards of employment law that is all the employer really has to do. I cede that point, however, I believe employers are called to do more. I’ve discussed before how many companies today are putting the bottom line ahead of the needs of their staff and this issue is more of the same.

Prepaid debit cards save money for employers by shifting payroll costs to employees. I can understand giving employees the option of choosing to receive pay via prepaid debit card, but sadly, many of the companies involved are either not making it optional or are making it incredibly difficult for employees to opt out of it. Beyond that, the article shared numerous stories of people who are having to pay $40-$50 per month in fees just to get access to their cash. As someone who runs a small business I ask myself why I would want to put such a burden on someone that works for me, with the risk of them bringing that into the office, just so I could save a buck or two of my money. Just as a horrible 401k plan is a disservice to employees so too are prepaid debit cards when they’re forced upon employees as their only payroll option.

A Prepaid Debit Card Encourages Spending Mentality

There are two major issues in paying employees with prepaid debit cards. First, it can encourage undisciplined spending. Second, many of these debit cards are loaded with fees that eat into take home pay. Most of the banks issuing these prepaid debit cards charge fees from accessing the cash from an ATM, to statement fees, to fees to replace a card. As an aside, it’s interesting to see that many of the employees impacted are hourly/lower wage individuals from some very large companies – including Wal-Mart, Walgreens, Taco Bell, McDonald’s and more. Not that financial illiteracy is contained to certain classes, as it does spread amongst many classes, but why wouldn’t we want to encourage those making the least among us to manage their money wisely so they can improve themselves?

It is difficult enough as it is to establish a budget or have a spending plan, but putting money on a debit card that is not linked to a bank account makes it even worse. If the individual in question does not have a bank account then it forces them to handle everything in cash which they get dinged for every time they withdraw cash from an ATM. Thus, causing a possible cycle of continuing to live paycheck to paycheck while dealing with the headache of fees on top of that. What makes matters worse is if they’re playing with credit cards and paying interest and fees on them then they’re getting it on both sides of the equation.

Pass the Buck

I remember when I was paid by paper check…yes I am THAT old, and remember the unease of moving to having paychecks deposited directly into my bank account. I would not go back to the good ol’ days, because I much prefer the direct deposit method. But, paying employees via prepaid debit card is taking it a step too far in my humble opinion. What is coming to light in relation to this trend is that some banks are now offering kickbacks to larger employers to sign up their employees for these prepaid debit cards.

Reportedly, Citibank offers $1 per head to some firms to sign up their employees for the cards and it’s going on with other banks as well. Some firms are saving money by shifting the burden to their employees and getting paid to do it. On top of that, the major banks who’re offering these prepaid cards are able to recoup fees that they’re losing out on thanks to new limits on credit/debit card fees which ultimately puts the consumer, or in this case the employee, in the middle dealing with it on their own. It is not just the banks who’re offering these cards; one of the major players in this prepaid debit card game is a company known as NetSpend. Take a look at their fee structure and you’ll cringe. It definitely is a big business and much of it is on the back of lower income Americans who’re given little choice in the matter. One can only hope that the recent lawsuits that have sprung up will bring more light to the matter.


What are your thoughts? Would you ever pay an employee with a prepaid debit card? Are there any other issues you can think of that I might’ve missed?


Photo courtesy of: 401(k) 2013

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John is the founder of Frugal Rules, a dad, husband and veteran of the financial services industry whose writing has been featured in Forbes, CNBC, Yahoo Finance and more.

Passionate about helping people learn from his mistakes, John shares financial tools and tips to help you enjoy the freedom that comes from living frugally. One of his favorite tools is Personal Capital , which he used to plan for retirement and keep track of his finances in less than 15 minutes each month.

Another one of John's passions is helping people save $80 per month by axing their expensive cable subscriptions and replacing them with more affordable ones, like Hulu with Live TV.


  • Glen @ Monster Piggy Bank says:

    I don’t think I would, in this day and age most people expect to be paid via direct deposit straight into their bank account. I know that if someone wasn’t going to pay me in that way then I probably wouldn’t want to work for them as I would think something shady was going on.

    • John says:

      I agree Glen, I wouldn’t either for a variety of reasons. I am much happier just having it deposited directly into my bank account.

  • Jon @ MoneySmartGuides says:

    I agree with Glen. If the business can’t pay me via direct deposit, I would have to think twice about working for them. I personally don’t know anyone that gets paid via debit card, but it just encourages spending. Well, I have $200 on this thing, might as well spend it.

    • John says:

      As do I Jon. I agree that it does encourage spending, which is concerning since it’s hitting those who generally make much less.

  • DC @ Young Adult Money says:

    Well, now that you mention the negatives I would never pay an employee with a prepaid debit card! I guess I had never even thought of that option. Interesting how some of the bigger companies are doing this, though it’s not surprising. You also aren’t THAT old – I got paid by paper check at my first two jobs 😉

  • Holly@ClubThrifty says:

    I think that’s awful. How are they supposed to start a savings account with a prepaid bank card? The employer is basically saying that they don’t expect them to save anything….ever.

  • Snarkfinance says:

    The habits of the predatory portion of the financial industry (well, maybe I should be more specific) is incredible and incredulous. Their audacity is amazing, and paying employees via a card is right up there with charging people for access to their cash. While there are many reasons why someone may not have a bank account, there are even more as to why they should have one.

    • John says:

      I could not agree more. While many bank practices disgust me, having a bank account (generally speaking) is much better than many, if not all, of the alternatives.

  • pauline says:

    It sounds weird but if you don’t have a bank, safer and easier than going home with a stack of cash. With a bank account is seems pretty childish however if there will be fees to cash your check and that is free, why not. I got most of my pays by direct deposit into my account which was fast, reliable and always on the same date so you can arrange your bills around it.

    • John says:

      You do have a point Pauline, though if the debit card is unsecured, then there is still a considerable risk If you lose the card. Not to mention the $10-15 fee to replace the card.

  • Rita P @ Digital Spikes says:

    I haven’t heard anyone getting paid by prepaid debit card. It is strange to me. Best way is to get direct deposit your bank account as it is best and safe method. Getting paid via prepaid card would definitely increasing the spending mindset. I would rather refrain to work instead of accepting payments via card

    • John says:

      I agree, it is strange Rita and just a bit ridiculous. I think it does encourage a spending mindset, which we already deal with in our society as it is.

  • Thomas | Your Daily Finance says:

    I know alot of people who think this is the best thing since sliced bread. They hate banks or don’t know how to budget. Want access to there cash immediately so I guess it really boils down to what the person wants. Me personally just put it in my account. I don’t want something on a card that already says go buy something. I have heard of a few companies paying this way. I personally think you should have an option to choose. Seems to be the best way to go.

    • John says:

      I think it does boil down to what the person wants. If it works for you as an individual then that’s great. The problem is that in many cases where it is an option, you have to jump through all sorts of hoops to opt out of it. They make it more difficult to get out of it, which when you see the kickbacks given, makes sense.

  • monica @monicaonmoney says:

    Great article. I think using a prepaid debut card feels like spending free money.

  • Laurie @thefrugalfarmer says:

    Pauline’s got a great point, but by and large I agree with you, John. However, until this article, I had no idea people were paid using the pre-paid credit cards! Yep, I’m in the dino ages right along with you and your paper checks, John. 🙂

    • John says:

      She did, though if the card is unsecured then there is still quite a bit of risk involved. I had no idea this was happening either, and then I did some research on it and it is becoming much more widespread.

  • Matt Becker says:

    I could see offering it as an option for employees who otherwise would be using a check-cashing service, but I’m with you that I don’t like it as the default method of payment. I’m not even sure how you might decide to save money on a pre-paid card. I would much rather see employers offer to help their employees sign up for free checking accounts with local credit unions.

    • John says:

      I agree Matt, if it was a true option and not one where employees had to jump through all sorts of hoops to opt out of being paid via card. I think it would be incredibly difficult to save if paid via this method, especially if you’re unbanked.

  • Brian @ Luke1428 says:

    I don’t know of anyone that receives their pay in this way. But it sounds like a practice that does not help employees develop sound personal finance practices in their life. What happens if you lose the card?

    • John says:

      I completely agree Brian, it does nothing to really help people establish good financial habits. If you lose your card, then many charge a $10-15 fee to replace it, on top of all the other fees associated with using it.

  • Kim@Eyesonthedollar says:

    I haven’t seen this with employers, but I have seen some of the tax firms offer the debit card as an early way to get your return minus the fee. Didn’t you do a post about that? What it boils down to is that people who receive money this way are expected to spend it right away. It would actually be much harder to save, even if they wanted to, with the fees for taking cash and extra steps. I also wonder if they don’t push the employee into accepting payment this way if there is even a choice. Maybe offering a small bonus or better shift or even just favor with the boss? I think the whole practice is just wrong, and while I don’t especially like more government regulations, I think this might be something that needs oversight.

    • John says:

      There are more and more tax firms doing this, which is just as sad. I didn’t do a post directly on that, but on RAL’s which thankfully are dying.

      I agree that this practice is wrong, on a number of levels- especially considering that many are pushed into it with no true choice.

    • MomofTwoPreciousGirls says:

      Sadly, it’s partly the result of regulation! The government thought cutting back fees banks could charge would help the consumer. They actually convinced people that retailers would be able to lower prices if they capped the fees on debit/credit cards. I have not noticed anything I buy going down in price!!

      THESE are the areas where the government should stop this practice….BUT lo and behold, the US Treasury ALSO issues these debit cards. People collecting SS or disability are forced to either have direct deposit or these debit cards. They no longer issue paper checks. No doubt they are also getting a kickback for forcing this practice!

      My sister worked for Tommy Hilfiger and was forced to get her paycheck this way for the first six months and she had a bank account (has since she was 16) and wanted direct deposit. They refused. The worst part was they still sent her a paper paystub with the voided check at the bottom! That was after their claim that it was for the environment! She was charged to take money out, check her balance AND she was charged TWENTY FIVE CENTS for every single purchase she made!!! She made $7/hr and worked 20 hours a week (she was a full time college student). It’s ridiculous that this is legal.

  • Budget and the Beach says:

    When I worked at the container store briefly, my last payment was made with a pre-paid debit card. I had no idea but I wasn’t happy about it, but it was for a pretty small amount so I guess no big deal. It just takes some of the decision making power away from the employee of what to do with their money. I would never work for anyone that did this regularly.

    • John says:

      I could see how it would not be an issue if it were for a small amount and in a one-off situation. I would not work for someone who did it either.

      • MomofTwoPreciousGirls says:

        The only problem these low wage workers are usually taking those jobs for a reason, whether its no other jobs available, they need to work odd schedules, or need extra income..they probably DON’T have many options on where to work…which the employers know. They are pretty much hostages to the employer.

  • Michelle says:

    I don’t like prepaid debit cards at all. Chevrolet pays their employees with this (I know this because W works for a Chevy dealership), and it is just a horrible system. I HATE it. It costs $15 to withdraw from the card, and it takes 3 months for them to upload their pay to it.

    • Michelle says:

      I forgot to add that if it was just a small amount, I wouldn’t be as bothered, but most of the salesmen make $100K and up per year, so it all being put on a debit card is very weird and frustrating.

      • John says:

        Ouch! $15 to take money out? That’s just nuts! I agree that if it were a small amount, and in a one-off situation, that’s one thing but to be paid regularly like this would suck. The fees alone make it not worth it.

  • Jake @ Common Cents Wealth says:

    If an employee prefers to be paid with a prepaid debit card I may consider it, but I wouldn’t make it be their only option. It doesn’t seem like a good idea if there are a lot of fees associated with them like you mentioned above.

    • John says:

      If it were a true option, then ok, though I would not encourage it at all. Not only does it encourage spending, but it’s rife with fees.

  • My Money Design says:

    I have never heard of this before. It kind of sound likes paying someone in cash that is digital; a little weird. Maybe I’m too old school, but why can’t people just have a bank account where they can deposit their paychecks?

    • John says:

      That’s a great way of putting it MMD. I agree, having a bank account would be much simpler, though many do not have bank accounts. Very sad indeed.

  • Chris @ Stumble Forward says:

    I think one of the other hopes by employers that give out debit cards rather than a paycheck is the hopes that they won’t spend all of the money. I’ve heard of this tactic being used by retailers when people would go to claim a rebate and get a prepaid card instead of check. I think their hope is that they will get down to having a small amount left on the card and never use it in turn saving the company money. It’s a crappy tactic if you ask me.

    • John says:

      I agree, it is a crappy tactic. From my reading, it actually saves the company money because there is less cost involved for them in regards to payroll processing. Add that to potential kickbacks from a bank to offer it and you have plain ol’ moral hazard basically.

  • jefferson @SeeDebtRun says:

    It seems a bit shady to pay with a prepaid card.. Like you are almost eliminating the paper-trail, which could come back and haunt you.

  • Shannon@TheHeavyPurse says:

    Wow! I agree, it’s definitely something I would never do, and not just because I’m a financial advisor. I can’t imagine paying my employees via prepaid credit card. While I certainly recognize there are people who don’t have a bank account and thus do pay a fee to have their checks cashed, I still suspect the majority of people being paid this way – do have a bank account, and are losing a significant portion of their pay to fees they didn’t choose to incur. It doesn’t seem right, especially knowing that companies are being in-cented to pay their employees this way.

    • John says:

      Nor could I Shannon. From my research it did seem that a majority of the individuals interviewed did have a bank account, which meant they had more hoops to jump through to get their pay, not to mention the fees involved in moving it. It just made me mad to read that some banks are offering incentives to firms to push this option. So…the firm gets to cut costs, get a kickback and the burden is shifted to the employee. It’s a bad recipe if you ask me.

  • Andrew@LivingRichCheaply says:

    I kinda agree that paying with a prepaid card is not ideal. It does seem to encourage the employee to spend it. I’m not surprised banks are pushing it as they are reaping the benefits in the fees. As for people who are unbanked…can they still go to the bank where the check was issued from without paying a fee or going to a check cashing site.

    • John says:

      I agree Andrew, I think it’s a good thing for the banks involved and bad for the employees. In regards to your question, I think it varies from bank to bank. I’ve seen some charge to cash their own checks, so there is no real uniformity in it.

  • Broke Millennial says:

    I’m 24 and my first job paid with a paper check, so don’t worry it doesn’t date you too much!

    This was a really interesting read, John. I had never heard of paying employees with prepaid debit cards, except maybe for a holiday bonus. I agree it seems to encourage impulse buying and would make it harder to budget and manage expenses. Frankly, it doesn’t seem practical other than for a company’s bottom line. Thanks for sharing this, it will be a great thing to discuss with people looking for their first jobs/ use in a financial literacy awareness talk.

    • John says:

      Your right Erin – the only thing it really benefits is the bottom line of the given firm. They get to cut costs at the very least and if they get a kickback then it’s a double win for them while the employee is left shouldering the extra burden.

  • John@MoneyPrinciple says:

    I can’t understand this approach – as others have said it leads to a practice of living on a card. But there is something even worse around in the UK which is zero-hour contracts where workers are just employed for exactly the number of hours on demand. Does this happen elsewher?

    We are going rapidly backwards while the owners of the busineses vote themselves massive pay rises.

    Something is very wrong.

    • John says:

      Interesting, I’ve not heard of this zero-hour contract. That does not sound like a very good thing at all. I agree, we are going backwards…more burden is being shifted to the individual employee while those in power make more. It’s very sad indeed.

  • Tara @ says:

    When I worked for NYC’s 311, they did offer being paid via prepaid debit cards but they didn’t force it. I do know there are some people that can’t/don’t want to have checking accounts due to not-so-pleasant reasons– ie- there’s a collector out to garnish money due to them, they’ve been arrested to writing bad checks, etc. I know a guy who legally can’t pay his rent via checks because he wrote so many bad checks.

    But this practice of FORCING folks to get a prepaid debit card is terrible and local governments should step in and regulate that. I understand offering it, but make it a) optional and b) not default. Cut the check for your employee. If your job can’t do that, find work elsewhere. There are plenty of places out there that aren’t trying to screw over employees like that.

    • John says:

      Thanks for your input Tara. I agree that there are many out there who are unbanked and there will always be a some that will remain that way. I think giving the option, as long as it’s a true option then that’s one thing.

      I agree that forcing it on people, or giving them all sorts of hoops to jump through is ridiculous. It lowers costs for a firm, but it shifts the burden to employees when they already (in general) have enough to deal with.

  • anna says:

    I’ve never heard of this, but how shady especially if the coworker has to pay fees to access their hard-earned money! I agree it sets people up to just spend and not save, what a horrible system!

    • John says:

      I agree Anna, it is a horrible system. It sets up the employee to have fees to pay as well as not being incented to save.

  • The First Million is the Hardest says:

    A restaurant I used to work in started to do this. I guess it’s ok for the people without bank accounts, but for everyone else it was a major hassle compared to getting a normal paycheck.

    • John says:

      I agree that it would be a hassle to have to deal with compared to a “normal” paycheck. That said, if looking plainly at costs, it would generally be much cheaper to give a paper check so they could go to somewhere like Wal-Mart to cash the checks as opposed to the fees associated with the cards.

  • KK @ Student Debt Survivor says:

    How terrible is that? I actually am working with a client right now who works for a security guard company. They’ve been paying her with prepaid cards. Once the cards get low it’s really hard to get the remaining balance off them (according to her). Additionally there are a bunch of misc fees. It’s really a lose-lose in my opinion. She has no agency to change the way they pay her and they know it. Sad!

    • John says:

      That would suck and can understand why that might be the case with lower balances. If the only way to really access the cash is through ATM (if you don’t have a bank account) then it would be difficult to get the cash.

  • Dividend investing Martin says:

    I have never heard of this option or that employers would ever do it. As far as the fees go, do you really pass the payroll cost to an employee by issuing a prepaid debit card? If a person doesn’t have a checking account, then if you issue her a check, she will end up paying a fee cashing it in a bank with which she doesn’t have an account anyway. There is no other way for that person anyway, or is there?
    I would totally agree with you if a person have a checking account and is forced receiving a debit card loaded with fees. then it is a bummer.

    • John says:

      It actually passes the cost on because it is significantly cheaper for the firm to process payroll to a debit card vs. electronic deposit/paper check. So, they get to cut costs and the employee gets costs shifted to them because these cards are rife with fees. Many who are paid in this way pay $40-50/month in order to access their money. In regards to check cashing, they could go to Wal-Mart, which charges $3-6 to cash the check and likely cut their costs in half, depending on how often they’re paid.

  • Untemplater says:

    I haven’t heard of such a thing before. It seems so weird to think about being paid that way. I remember getting paper checks myself. Direct deposit is so much easier!

  • E says:

    I just started a new job. I am 17 and do not have a bank account. This is my first job and when we were completing my paperwork, my manager told me the prepaid debit cards were really great and easy to use and encouraged me to do it. Since I never heard of prepaid cards or anything, I said okay. My mother was telling me last night that they are going to eat all of my money, so now I started researching how much of my paycheck is going to into this and honestly I do not feel so good about it. I don’t think I can change it now, and I am afraid to ask because I just started working and do not want to lose my first job so quickly.

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