Why You Need to Offer a Pay Card Deposit Option

American African Holding Paycheck Or Payroll Check

Offering a pay card deposit option allows your employees more flexibility in how they receive their pay, and you can significantly benefit current or potential employees who do not have a bank account. With just over 6% of US households being unbanked, there is a chance many employers will want to hire an unbanked employee at some point in their business operation. If that is the case, they have a few options for paying this employee each pay period. They could either pay them in cash, with a paper check or use a pay card system. There are various pros and cons to each option, but we’ve compiled them all in one place to help you make the best decision for managing your payroll.

Who Is Unbanked?

According to the Federal Reserve data, the population of unbanked U.S. citizens is primarily households making under $40,000 a year, but there are unbanked individuals in every income level. In the 2017 FDIC National Survey of Unbanked and Underbanked, 53% of the unbanked population cited not having enough money to put in an account as the number one reason they did not have a bank account. The second-largest reason, at 30%, was a distrust of banks.

Most bank accounts require minimum deposits to avoid fees, which is likely where the most significant percentage of the population comes from. Regardless of the reason, being unbanked can leave many people vulnerable, especially during a pandemic. We’ve seen many businesses stop accepting cash altogether, which has placed additional constraints on the unbanked population.

There are also a lot of costs associated with being unbanked that make it much more challenging to save the money needed to open a bank account. Despite the fees for opening a bank account being the most prominent reason for being unbanked, the fees for not having a bank account are much higher when you take a closer look.

Bank fees are always clearly stated, whereas many alternative financial services that allow the unbanked to make payments have hidden fees that make it seem like their services are cheaper than opening a bank account. Unfortunately, what looks like an easy way to save on costs can often lead you into a much more difficult financial situation down the road.

As an employer, you are not necessarily concerned about how your employees spend their money. Still, if you have the foresight needed to save your employees some cash in their paycheck every pay period, you would benefit them quite a lot, especially over the long run. In addition, having positive intentions for the financial well-being of your employees will often mean a higher workplace satisfaction rate and positive performance of your employees.

Cash or Check?

The first two payment options for the unbanked, cash or check, have benefits and drawbacks. In many ways, a check is the easier way to pay your employee, but they then have to go to a check-cashing center, where they will have to pay additional fees to receive their money. Not only does this take extra time to go to the check-cashing center, but your employee will be subject to steep fees throughout their time working for you. Over time, those fees add up and amount to a large sum of money that is not going to your employee every year.

On the other hand, cash can easily be stolen, and you have to verify you are paying the employee exactly what they are owed. In addition, reporting cash payments to the IRS requires you to record every penny for tax deductions, and your records need to be exact in the case of an audit. This is simply an added layer of complexity that businesses are not already accounting for in most cases. Many employers are uncomfortable paying cash for these reasons since a lot of effort and time goes into it.

If both of these methods have serious drawbacks, can a pay card remedy these difficulties and serve as a competitive option for unbanked employees?

What is a Pay Card?

Pay cards are an employee payment method that work similarly to a prepaid gift card. On payday, your employees who receive their paychecks via pay cards will automatically receive their pay for that pay period as if they were receiving it into their bank account.

As a result, you do not have the risks or headaches associated with paying cash, and your employees can avoid trips to the check-cashing center. They will also save on the steep fees that add up over time. Employers can choose from two types of pay cards when deciding if they’re suitable for their employees.

Two Types of Pay Cards

There are both branded and unbranded pay cards. Branded pay cards include name brands such as Visa, MasterCard, or American Express. Nonbranded pay cards connect to a specific ATM or POS network.

Today, almost all pay card options are going to be branded. That’s because they are more widely accepted, can be used to pay bills, and include various security features. When looking at pay card options, you should prioritize the cards that provide free or low-cost ATM access to a network that is available in your area. The bigger the ATM network, the more useful the card is since users will have better access to their cash. 

Free-to-use pay cards are the most desirable since you can avoid fees altogether. If you can find a branded pay card supported by an extensive ATM network with no fees, that will provide your employees with the best pay card option.

Download: Why You Need to Offer a Pay Card Deposit Option

What Are the Benefits?

When you offer a pay card option, you have a more competitive offer for the unbanked. You do not want to move through the entire hiring process with an employee and not have an alternative option ready when you discover they do not have a banking account. Instead of getting to this point and figuring it out as you go, it can be a good idea to develop a pay card option before you hire an unbanked employee. This plan will give you a wider pool of candidates to choose from and allow you to lead your employee through a smoother hiring process without unnecessary delays.

The most notable benefit of offering a pay card is it allows you to assist your employees in their financial future. As mentioned previously, the unbanked face many financial constraints and fees that are often hidden and difficult to plan for. That leads to economic dependence on alternative payment methods, debts, and a mountain of fees that grows over time.

Instead of cutting a check or adding cash payments to your payroll, offering a pay card not only simplifies the process altogether, but your employees will be able to keep more of the after-tax money you are paying them. Then, they can have an easier time saving the deposit needed to open a bank account or have a healthier financial situation for those who do not trust the banking system. Either way, a pay card will save your employees money and allow them to manage their finances better.

An additional benefit to offering a pay card option is that employers can cut down on the physical statements they need to provide for their employees. You likely do not have to give your employees physical pay statements or checks, which will also save on paper waste. With a pay card, employee wages are loaded electronically. Especially if you have remote employees, this can be desirable for those who like the simplified system. Since much of our economy has moved online over the last few years, this will keep things simple and allow for a more organized financial history.

Pay Card Providers

You can find pay card providers in many places. Still, it is generally going to be a better idea to go with a branded pay card, which will allow your employees the greatest flexibility, security, and ease of use instead of unbranded pay cards.

One of the most efficient ways to offer a pay card is to outsource your payroll processing altogether. With an experienced payroll preparation company, you can have professionals manage your payroll without hiring additional employees or even an entire department in many cases. There are many additional benefits to outsourcing your payroll preparation, such as staying up to date on employment laws, delivering employee checks, or receiving comprehensive payroll reports.

However your employees desire to get paid, a payroll preparation company will ensure you can offer the best option suited for the employee’s needs while staying compliant with federal and state regulations.

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