What is a payroll card and how does it work?

Payroll cards are gaining in popularity as employers are diversifying their salary payment methods. They offer several advantages for both employees and employers, but also have their drawbacks.

Businesses need to carefully weigh the pros and cons before deciding whether or not to introduce payroll cards as an additional payment option for their employees. To do this, they first need to understand what a payroll card is and how it works. Let’s dive right in.

Payroll cards are prepaid debit cards to which employers transfer employee wages and salaries. The payment process is similar to direct deposit, but the employee doesn’t need a bank account to receive the money.

Just as a normal debit card, a payroll card can be used for different payment processes, including making in-store and online purchases, withdrawing cash from an ATM, and paying bills.

There are different payroll card providers on the market that offer their own payroll card systems with varying fees and services. The payment systems themselves are supported by  payment processing networks like Visa or Mastercard.

A payroll card is a prepaid card that gets topped up by the employer each payday. Once the employer has loaded money onto the card, the amount is available to the employee to make payments or purchases.

When it comes to buying power, payroll cards work similarly to normal debit cards. They can be used for paying at the local shop, withdrawing money from ATMs, making online payments, or getting cash back at the grocery store.

Payroll cards are accepted in any place that accepts a debit card offered by the same financial institution. Usually, it’s a major credit card issuer that stands behind a payroll card, even if the service provider is a different one.

The only difference between a payroll card and a debit card is that the latter needs to be linked to a bank account. A payroll card, on the other hand, does not require a separate bank account. The money is still deposited with the financial institution that offers the payroll card service, but the transfer processing does not require a separate account.

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One question that is frequently raised by both employees and employers is why they should use payroll cards. Payroll cards offer several benefits compared to traditional payment methods. Here is an overview of the advantages linked to pay cards:

• Employees can access their pay without having to open a bank account, which makes a payroll card a valuable financial instrument for unbanked or underbanked employees.

• Payroll card payments are secure.

• Compared to other payment methods, payroll cards come with lower administrative costs for processing payroll.

• Money transferred to the payroll card is accessible almost instantly.

• Payroll cards can also be used as a payment method for remote teams as well as for temporary or seasonal employees.

• Payroll card fees are a lot lower than the cost incurred by businesses when using paper checks.

• If set up correctly, payroll card systems can be combined with Earned Wage Access which increases flexibility in the payment process and enhances employee financial wellbeing.

• Depending on the payroll card provider, it may be possible to connect the payroll card to mobile payment systems like Apple Pay or Google Pay.

However, there are also some disadvantages to using payroll cards, including:

• In contrast to bank accounts, employees receive no interest with a payroll card.

• Payroll cards might get stolen, which leads to employees not being able to access their wages until they can get a replacement card.

• There usually are additional payroll card fees that are charged for certain services.

• Payroll cards cannot be offered as the business’s only payment method but only as an alternative to another payment option.

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Before adding a payroll card to their payroll system, businesses first need to fully understand how this payment method works. Here are the answers to the most frequently asked questions surrounding the use of payroll cards.

Do you need a bank account for a payroll card?

The major advantage of a payroll card is that it can be used without opening a bank account. This makes them a real game changer for employees who are either unbanked or underbanked, meaning that they either have no bank account whatsoever or that their access to basic financial services is limited. According to data provided by the United States Federal Reserve, 6% of Americans are unbanked, while another 16% are underbanked.

What is the difference between a payroll card and a debit card?

Payroll cards and debit cards function in the same manner. They both provide access to money that is deposited with a financial institution. The only difference is that the use of a debit card requires opening an account with the respective bank that issues the card. A payroll card, on the other hand, functions without a separate account.

Can you deposit money on a payroll card?

Whether employees are able to deposit additional money on their payroll card depends on the respective payroll card provider. Some providers allow for additional funds to be deposited on the card, others don't.

Why should I use a payroll card?

A payroll card offers many benefits. It’s a secure and fast payment method for receiving salaries and wages without opening a bank account. This makes them an important financial instrument for unbanked or underbanked employees, especially since they are very versatile in use. Once topped up, payroll cards can be used for different payment processes, including making in-store and online purchases and withdrawing cash from an ATM.

Can you overdraft a payroll card?

A payroll card does not allow for overdrafting nor for acquiring debt like a credit card. Since it’s a type of debit card that is based on a prepaid system, employees can only spend the amount that has been loaded onto the card by the employer with the last payroll run—plus any existing balance that is still left from the last pay period.

What's the difference between direct deposit and payroll card?

Payroll cards and direct deposit are two different ways of paying employees. Paying wages and salaries via direct deposit is the payment method of choice in many businesses. However, payroll cards offer a big advantage for employees, which is that they don’t require a bank account.

What are payroll card alternatives?

Despite the many benefits they provide, payroll cards aren’t suited to every business. For instance, when it comes to paying international employees, businesses might have to opt for different payment methods. Suitable alternatives for globally distributed teams are digital  multi-currency wallets like the Lano Wallet.

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Payroll cards are the ideal payment option for employees who don’t have bank accounts. They are a fast, convenient, and secure payment option. However, businesses should make sure they fully understand the fees and conditions that apply before introducing a payroll card.

Also, employers shouldn’t forget that payroll cards cannot be used as the only salary payment method offered by the business. It is necessary to offer at least one alternative payment option—at least, this is the case in the United States.

Whether using a payroll card for paying employees is a good choice for a business depends on several factors. Before deciding for or against payroll cards for employees, businesses should carefully weigh the different pros and cons and compare the total cost they would incur with alternative payment methods and different payroll card providers.