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CU Urges Fed To Protect Payroll Card Users

Wednesday, June 23, 2004
Gail Hillebrand – 415-431-6747 (office) or
415-572-0040 (cell)

Stored Value Cards Lack Important Safeguards If Money Is Withdrawn Fraudulently

The Federal Reserve Board should protect workers who are paid with electronic payroll cards by providing needed safeguards in the event such cards are stolen or money is withdrawn fraudulently, a group of consumer, community reinvestment, and labor organizations said today.
In a letter sent to the Federal Reserve Board, the groups highlighted how current regulations are unclear whether payroll card recipients and users of other stored value cards are entitled to the same kinds of protections consumers are afforded with a bank debit card. The groups urged the Federal Reserve Board to make clear that all payroll cards and similar stored value card programs are entitled to the protections of the federal Electronic Funds Transfer Act, including liability limits and error resolution rights, such as a ten business day “recredit” of funds removed in a disputed transaction. For a copy of the letter click here.
“Lower wage workers who are paid with payroll cards are the very households who can least afford to be deprived of funds or face delays in accessing their money, due to a theft or an unauthorized transaction,” said Gail Hillebrand, a Senior Attorney with Consumers Union’s West Coast Office. “To protect consumers and make payroll cards and other stored value cards a valuable stepping stone into the banking system, the Federal Reserve Board must ensure that these cards have at least the same protections that apply to ordinary debit cards.”
Payroll cards, one form of stored value cards, are increasingly offered to low and moderate wage workers and are being marketed as serving the same functions as a bank account. Payroll cards can be more convenient than using a check casher because the recipient can make ATM withdrawals and use the card at stores to buy things. Some payroll cards are cheaper than a check casher, but others are not. Payroll card recipients usually have to pay a fee if they use their card at an ATM more than once per pay period. Other stored value cards include prepaid cards sold to individuals for internet and in-person card use, cards used to deliver income tax monies or tax refund loan proceeds, child support cards, and cards used to draw unemployment payments.
Federal law protects consumers with banks accounts by setting limits on how much money individuals can lose if a card linked to a bank account is stolen and used by a thief. Federal law also requires that banks must “recredit” or return funds removed from a bank account by theft or mistake within 10 business days, unless the bank can show that there was no theft or mistake. But federal law is unclear whether these protections are afforded to payroll card users.
Companies marketing payroll cards, prepaid debit cards, and other stored value cards sometimes cite the VISA or Mastercard “zero liability” policies as evidence of the safety of these cards for consumers. However, these policies do not provide consumers with the same protections as the federal Electronic Funds Transfer Act. For example, Mastercard’s policy does not apply if there are two or more instances of theft or unauthorized use of a card in one year. VISA’s “zero liability” policy does not apply when the card is used at an ATM. And VISA’s policy does not protect the consumer if the card is used for a PIN-based transaction processed on another network. Of course, a consumer cannot control whether a thief who gets their card and guesses the PIN chooses to use this information at an ATM or a non-VISA network.
“Lower income families who are the primary recipients of payroll cards simply do not have the assets to cushion even a temporary interruption of funds,” said Hillebrand. “The Federal Reserve Board must act now because these cards are a growing business and current law leaves consumers vulnerable to losing funds that are needed to cover rent or a mortgage, buy food, and pay other bills.”
Payroll cards are being actively marketed to employers as a way to reduce the costs of handling paper checks and as a way to serve the needs of the millions of U.S. households who do not currently have bank accounts. A study issued by the Office of the Comptroller of the Currency reported that 10 percent of unbanked households, representing 1 million families, were using payroll cards at the end of 2002. Usage has grown dramatically since then. In May 2004, the Associated Press reported that 1,000 companies were using payroll cards in the U.S. According to a report by the Mercator Advisory Group, U.S. companies are distributing $11 billion annually in payroll and $4 billion annually in employee incentive or commission payments, and the potential U.S. market for payroll cards for unbanked, temporary, and remote location workers is $109.8 billion.
Consumers Union has published a tip sheet with advice for employers and employees about payroll cards. For the tip sheet, click here.