Watch Out, Wal-Mart: Schneiderman Is on the Prowl

Source: http://www.flickr.com/photos/ameriswede/

Tastier than cash.

New York Attorney General Eric Schneiderman is on the prowl again. Schneiderman is responsible for a number of lawsuits against the likes of JPMorgan Chase (NYSE:JPM), Wells Fargo (NYSE:WFC), Bank of America (NYSE:BAC), and HSBC (NYSE:HBC). Overall, he’s pretty much been the go-to guy in the fight against corporate abuse of the little guy in the wake of the financial crisis.

Now, he’s turning his attention to a tangent of the financial industry he loves to hound: payroll. Or, more specifically, the use of payroll cards issued by major financial institutions and used by large employers like Wal-Mart Stores (NYSE:WMT), Home Depot (NYSE:HD), and McDonald’s (NYSE:MCD). Schneiderman has reportedly sent letters to 20 employers seeking additional information regarding practices relating to the issue and use of payroll cards.

Payroll cards are not a new phenomenon by any means. Research firm Aite Group says that $34 billion was loaded onto 4.6 million active payroll cards in 2012. The group forecasts that the amount loaded onto payroll cards will climb to $68.9 billion by 2017, and the number of active cards is expected to grow to 10.8 million.

At a glance, a payroll card functions like a debit card. Instead of being attached to a bank account, a person’s paycheck is credited to the card. Users can then withdraw cash at an ATM, spend directly from the card, or transfer the money to a bank account

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At issue is whether or not employees are being issued the cards on equitable terms. Reports from some employees suggest that the cards come packed with a plethora of transaction fees for everything from checking a balance to withdrawing cash. In some cases, the existence of these fees was not clearly communicated to employees. There are also reports that some employees were not given any choice but to receive payment on a payroll card, which is against the law in many states. The New York Times covered the issue earlier this week and reported the stories of several people who feel mistreated by employers.

There are some clearly opposing incentives at work here. Any given employer could have a desire to switch to cards to handle payrolls because it solves at least one tedious problem: the cost of cutting a check. As many as 10 million households do not use a bank at all, making direct deposit impossible. The financial institutions issuing the cards also have an incentive to encourage employers to use the cards because they earn money through fees.

To an employee without a bank account, the card could feasibly be useful. Cashing a check is sometimes costly and difficult, although ostensibly there is a legal framework in place to ensure free check cashing at the bank the company uses. A payroll card can also provide instant access to funds, and can be more convenient to carry around than cash.

“We are concerned about excessive or insufficiently disclosed fees which may unduly reduce employees’ take home pay,” Schneiderman’s office told employers, according to letters seen by The Times.

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