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Protect Wages on Payroll Cards

June 23, 2004
Chairman Alan Greenspan
Federal Reserve Board
20th & C Streets, NW
Washington, DC 20551-0001
202-452-3819 (by fax)
Re: Request for interpretation that Regulation E applies to stored value cards such as payroll cards, child support cards, unemployment payments cards, loan proceeds cards, and prepaid debit cards
Dear Chairman Greenspan,
Request for Action
Consumer, labor, community reinvestment and community development organizations ask the Federal Reserve Board to issue an interpretation of federal Regulation E to apply its consumer protections to stored value cards, particularly for payroll cards and other cards holding funds such as unemployment payments or child support payments which are critical to a household’s financial stability.
The groups making this request are: Consumers Union, Arizona Consumers Council, California Reinvestment Committee, Capital Area Asset Building Corp., Center for Economic Progress, Coalition of Religious Communities, Community Legal Services, Inc. of Philadelphia, Community Reinvestment Association of North Carolina, Consumer Action, Consumer Federation of America, Democratic Processes Center, Just Harvest, Legal Aid Society of Milwaukee, Massachusetts Consumers’ Coalition, Michigan Consumer Federation, National Association of Consumer Advocates, National Community Reinvestment Coalition, National Consumer Law Center, National Consumers League, Neighborhood Economic Development Advocacy Project, San Diego Housing Federation, Sargent Shriver National Center on Poverty Law, Texas Legal Services Center, UAW, U.S. PIRG, and Virginia Citizens Consumer Council.
Reasons for Request
Individuals are increasingly being asked to accept stored value cards to receive payments of funds which are essential for day to day family expenses. Consumer groups and organizations who work with employees, child support recipients, and others who are being offered these cards are deeply interested in ensuring that these cards offer the same level of consumer protections as those bank debit cards which are linked to individual consumer checking accounts. These cards, sometimes called stored value cards, are increasingly targeted to those not using traditional deposit accounts. These cards include payroll cards, prepaid cards sold to individuals for Internet and in-person card use, cards used to deliver income tax refund monies or income tax refund loan proceeds, child-support cards, and cards used to draw unemployment payments.
Payroll cards, one form of stored value cards, are increasingly offered to low- and moderate-wage workers. These products are being marketed to workers as serving the same functions as a bank account even though present law is at best unclear about whether these cards carry the same federal consumer protections which apply to bank debit cards linked to an individual deposit account.(1)
To make payroll cards and similar stored value cards a valuable stepping stone into the banking system, rather than an inferior product, the Federal Reserve Board must ensure that these cards have at least the same protections that apply to ordinary debit cards. As consumer, labor, and community organizations, we call upon the Federal Reserve Board to clarify the full application of federal Regulation E to stored value cards, including payroll cards, regardless of whether the funds are held in an individual or a pooled account, and regardless of how the accounting is performed for these cards.
A payroll card looks like a bank debit card, but it can be linked to an account held in the name of the employer, with or without individual subaccounting by the issuer. The employer’s bank may transfer the payroll funds for all employees using the cards into a single account, and all the payroll cards for that employer may pull funds from that one account. It is also possible to set up the cards with individual accounts for each employee. When an individual account structure is not used, there are questions about the application of federal Regulation E. The OCC has identified Regulation E coverage as a key unsettled issue, stating in a May 2004 advisory letter to national banks: “There are a number of unsettled regulatory issues involving payroll cards including … whether Regulation E applies to payroll card systems….” OCC Advisory Letter AL 2004-06, May 6, 2004.
We ask the Federal Reserve Board to issue an interpretation determining that all payroll card programs and similar stored value card programs – including card programs using a pooled account in which funds paid by, on behalf of, or for payment to, a number of individuals – qualify as a “consumer asset account” under Regulation E and therefore that cardholders are entitled to the protections of the federal Electronic Fund Transfer Act, including liability limits and error resolution rights, such as the right to a ten business day recredit of funds removed in a disputed transaction.
Lower wage workers who are paid by payroll card, single-parent households receiving child support payments distributed by stored value card, and persons receiving unemployment payments through a state benefits card are the very households who can least afford to be deprived of funds, or delayed access to funds, due to a theft or an unauthorized transaction using the consumer’s card. These funds are needed to pay rent or a mortgage, buy food, and pay bills. As the OCC told national banks earlier this year about payroll cards: “The systems hold what are, for the individual consumers, important amounts of money – their payroll.” OCC Advisory Letter AL 2004-06.
A delay in access to funds or a loss of funds due to non-application of the protections of the Electronic Fund Transfer Act could trigger eviction, a black mark on a credit record, and hungry children. Lower income families simply do not have the assets to cushion against even a temporary interruption of funds. In the year 2000, significant numbers of U.S. households had negative or zero net worth, including 27.6% of Hispanic households, 29.1% of Black households, and 11.3% of White Non-Hispanic households. An additional 6.7%; 7.3%; and 4.7% of these households respectively had net worth ranging from $1 to $4,999, even when including equity in the family car. B. Robles, Economic Opportunity: Family Assets, June 2003, a report prepared for the Annie E. Casey Foundation, www.utexas.edu/lbj/faculty/robles/research. These families simply can’t afford to be without access to their funds because of a problem with a payroll card, child support card, or unemployment benefits card.
The Federal Reserve Board must act now, because these cards are a growing business. Payroll cards are being actively marketed to employers as a way to reduce the costs of handling paper checks for employers 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 Comptroller of the Currency reported that 10% of unbanked households, representing 1 million families, were using payroll cards at the end of 2002. Payroll Cards: An Innovative Product for Reaching the Unbanked and Underbanked, OCC Community Development, October 2003. 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., distributing $11 billion annually in payroll and $4 billion annually in employee incentive or commission payments. New Payroll Cards Sub for Paychecks, Associated Press Online, May 31, 2004. In that same story, a VISA spokesperson claimed “triple digit growth rates for this category.” AP cites the Mercator Advisory Group for an estimate that the potential U.S. market for payroll cards for unbanked, temporary, and remote location workers is $109.8 billion.
Now is the time for the Federal Reserve Board to act to prevent the payroll card and other stored value cards delivering funds to families from becoming another inferior, “second-tier” product for persons lacking a bank account. The Federal Reserve Board has the power to interpret the requirement in Regulation E of a “consumer asset account” as satisfied by a pooled account holding funds upon which cardholding consumers are entitled to draw. Such an account holds assets owed to consumers even if it is not held in the name of the individual consumer. Without such an interpretation, unbanked consumers are offered a significantly inferior product and face significantly higher risks when they accept a payroll card, child support card, or similar stored value card—an electronic payment mechanism that lacks the baseline consumer protections available to other debit-based electronic payment mechanisms, that is, the protections of the Electronic Fund Transfer Act (EFTA).
If the Regulation E requirement of a periodic statement is the reason that the Federal Reserve Board is reluctant to act, it could issue an interpretation applying the loss and error resolution aspects of the EFTA to these cards, while postponing the periodic statement issue for further study by providing for a temporary, time-limited waiver (perhaps for one year) of the obligation to provide a statement other than on request of the cardholder. This approach would allow consumer cardholders to get the essential loss and error resolution protections now, while allowing more time to study the periodic statements issue.
Marketplace facts
Stored value cards, including payroll cards and prepaid debit cards, are being marketed to consumers as account substitutes
Stored value card marketing emphasizes account-style features. At an October 2003 presentation on non-EBT government benefits payment cards such as cards to distribution state-collected private child support, one provider told the NACHA Electronic Benefits Services Council that custodial parents often use these cards as savings devices, carrying portions of their child support payments over from month to month, perhaps in anticipation of larger than usual periodic expenses such as holidays or back-to-school spending. Payroll cards also are touted as a way not to spend the whole paycheck at once, an account-substitute feature. Indeed, web descriptions by payroll card issuers frequently use terms such as “your account” and “your money” in addressing the cardholders. Here are a few examples: (emphasis added).

“The AccessCard only lets you get money you already earned and is in your account.”
“The money is already in their account!” referring to the individual employees.
www.paychex.com/products/accesscard.html (as of September 26, 2003, still posted May 26, 2004).


“Direct to cash features include…” “Account cannot be overdrawn.”
Subsubpages =2058 subpage=1508 master = 1 (as posted January 6, 2004, still posted May 26, 2004).

Money Network:

“You can initiate your own money transfer; use free TransChecks, which work like a traditional cashier’s check or request information about your balance and deposits via ATM or telephone.”
“Access your Moneynetwork payroll card account by phone.”
www.moneynetwork.com (as posted January 6, 2004, still posted May 26, 2004).

Advantage Financial Systems:

“Paychecks and/or Federal Benefits are electronically deposited into your account.”
“Your account is FDIC insured up to $100,000 for your piece [sic] of mind.”
www.advantagefinancialsystems.com/electronicpayrollcard.html (as posted May 26, 2004).

The voluntary, so-called “zero liability” policies of VISA and MasterCard do not eliminate the need for EFTA protections for stored value cards
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 give the same protections as the federal Electronic Fund Transfer Act. First, the VISA and MasterCard policies have significant exceptions, so that they do not give cardholders zero liability in all cases. 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. MasterCard’s policy also requires that the consumer have taken reasonable care to safeguard the card, and that the card account be in good standing. VISA’s “zero liability” policy does not apply when the card is used at an ATM. VISA’s policy also does not protect the consumer if the card is used for a PIN-based transaction processed on another network. Of course, the consumer can’t control whether a thief who gets the card and steals or guesses the PIN chooses to use this information at an ATM or a non-VISA network.
Second, application of a “voluntary” policy is never as good for consumers as a statutory protection because voluntary policies generally lack an effective means of enforcement. Statutes provide an enforcement mechanism, which can be an incentive to more complete compliance and a safety valve for the consumer in the event of non-compliance. Finally, a voluntary policy is subject to the risk of uneven application, and discretion of employees about how and when to apply the policy, which may disadvantage consumers whose primary language is not English, who are less able to spend time on the phone with customer service due to the nature of their jobs, or who are less able to write a persuasive letter describing the problem – in many cases, the very consumers to whom stored value cards are being marketed.
Recent statements in the Federal Reserve Bulletin emphasize the risk for consumers
A recent publication of the Federal Reserve Board’s highlights the risk for consumers of stored value cards in the absence of EFTA consumer protections. In the Winter 2004 Bulletin, an article by Federal Reserve staffers states:

Products Not Related to Bank Accounts
Electronic products that are not tied to a consumer bank account but instead store monetary value in a related database or on a card include prepaid cards (such as phone and gift cards), payroll cards, college and military cards, cards used to deliver insurance benefits to disaster victims, and cards used by states to deliver child support payments. These cards can look much like traditional debit cards (for example, they may carry a MasterCard or Visa logo) and may even be called debit cards by merchants and vendors.

The article continues, in a box titled: “E-Banking and Consumer Protection”:

…Generally, electronic fund transfer products not associated with a consumer bank account, such as stored-value cards, are not covered by the EFTA.

U.S. Consumers and Electronic Banking, 1995-2003, Federal Reserve Bulletin, Winter 2004, pp. 3-4.
The explosion in the uses and the dollar volume of stored value cards increases the risk for consumers of loss or interruption of essential household funds accessed through these cards. The FDIC has taken an initial step in response to this significantly expanding market by addressing an issue within its jurisdiction – deposit insurance for stored value cards. The OCC has warned national banks that there are significant unsettled issues, including the application of the EFTA. The next step is up to the Federal Reserve Board. The Federal Reserve Board should interpret Regulation E so that the consumer protections of the Electronic Fund Transfer Act apply to the expanding market of stored value cards, particularly payroll cards, prepaid debit cards, child support cards, unemployment cards, and cards used to distribute employee benefits.
Payroll cards and other forms of stored value cards offer the promise of bringing persons not using traditional banking products into the electronic payments mainstream, but that promise cannot be fulfilled if these cards have absent, ambiguous or inferior consumer rights and protections.
Very truly yours,
Gail Hillebrand
Consumers Union
San Francisco, California
Richard M. Hall
Capital Area Asset Building Corp.
District of Columbia
Mary Ruth Herbers
Center for Economic Progress
Chicago, Illinois
Linda Hilton
Coalition of Religious Communities
Salt Lake City, Utah
Irv Ackelsberg
Community Legal Services, Inc. of Philadelphia
Philadelphia, Pennsylvania
Peter Skillern
Community Reinvestment Association of North Carolina
Durham, North Carolina
Ken McEldowney
Consumer Action
San Francisco, California
Jean Ann Fox
Consumer Federation of America
District of Columbia
Al Sterman
Democratic Processes Center
Tucson, Arizona
Kristie Weiland
Just Harvest
Pittsburgh, Pennsylvania
Jim Walrath
Legal Aid Society of Milwaukee
Milwaukee, Wisconsin
Paul J. Schlaver
Massachusetts Consumers’ Coalition
Cambridge, Massachusetts
Rick Gamber
Michigan Consumer Federation
East Lansing, Michigan
Ira Rheingold
National Association of Consumer Advocates
District of Columbia
David Berenbaum
National Community Reinvestment Coalition
District of Columbia
Margot Saunders
National Consumer Law Center
District of Columbia
Susan Grant
National Consumers League
District of Columbia
Deyanira Del Rio
Neighborhood Economic Development Advocacy Project
New York City, New York
Dory Rand
Sargent Shriver National Center on Poverty Law
Chicago, Illinois
Randy Chapman
Texas Legal Services Center
Austin, Texas
Alan Reuther
District of Columbia
Ed Mierzwinski
District of Columbia
Irene E. Leech
Virginia Citizens Consumer Council
Richmond, Virginia
Diane Bacon
Arizona Consumers Council
Phoenix, Arizona
Alan Fisher
California Reinvestment Committee
San Francisco, California
Tom Scott
San Diego Housing Federation
San Diego, California
Cc: Ms. Braunstein
(1) For information discussing the issues and risks of payroll cards for employees and employers, as well as the ways in which these products could be enhanced to build a stronger bridge to financial security and fuller access to the banking system for unbanked workers, See: http://www.consumersunion.org/pub/core_financial_services/000920.html, March 16, 2004 and http://www.consumersunion.org/pub/core_financial_services/000922.html, March 16, 2004. A key issue highlighted in that material is the potential for a higher level of risk of loss or theft of funds accessible through the card than is present for consumers who hold a debit card linked to a traditional, individual bank account.