Federal Reserve banks on paycards
By Rob Smith, Ceridian manager of Government Relations
In the 10 years that paycards have been in existence, they have become an increasingly popular option for businesses to pay their employees. Paycards work much like a common debit or credit card -- an employee is given a plastic card with a magnetic strip which accesses an account the employer assigns to the employee. The employer uses this account to credit wages and other recurring compensation, and the employee is free to withdraw the money as he or she chooses. The paycard model was originally implemented to pay "unbanked" employees who did not have traditional bank accounts and might have difficulty cashing a paper check. The cards are also a convenient way to pay seasonal workers and other employees who may only be at a job for a short time. As this option has become more widely available, even some employees who hold bank accounts have started to enroll in paycard programs. Cardholders can divert all or a portion of their salaries into their paycard accounts, which they can use to save money for future purchases they plan to make, or they can give the card to another family member who may need a regular influx of cash. As the paycard system has evolved, major brand credit card companies and other financial services are starting to get in on the game and have greatly improved the card technology and ease of use. In recent years, the industry has developed paycard products that function much like debit cards participants can use at retailers and other points of sale. In fact, a study by Boston-based financial research firm Aite Group, LLC estimates that these new options will lead to an industry growth of nearly 60 percent by 2009. The cards provide significant savings for businesses that do not have to issue as many paper checks, and employees have easy, immediate access to their funds. The growth in this market has not come without challenges, though. Up until now, the government has provided little guidance on how the cards should be administered, and paycard participants have been in the dark on their responsibilities, liabilities and rights. Undoubtedly, this uncertainty has limited the cards' appeal both for employers and employees. In response to these concerns, in August the Federal Reserve Board finalized a rule to regulate the cards and establish a framework for what's expected of card holders and the businesses who issue the cards. New Reg E requirementsEffective July 1, 2007, the new rule will place paycards under Regulation E (Reg E) of the Electronic Fund Transfer Act, the law that governs electronic fund transfers at ATMs, points of sale, banks and any other financial service that electronically debits or credits a consumer's account. In general, Reg E requires financial institutions to disclose the terms and conditions of an electronic fund transfer (EFT), provide receipts and periodic account statements, and limit consumer liabilities for unauthorized transfers. The rule will cover all paycards issued or administered by an employer, a depository institution or a payroll processor. While paycard providers had been concerned that the new requirements would make the cards prohibitively expensive to offer, there is a growing consensus that the industry will benefit from the clarity and uniformity in service that the rule will bring. "It's certainly going to be more costly for all these measures to be in place, but from a consumer point of view, these cards will be more attractive," says Eva Weber, an analyst with Aite Group. It's clear that the Federal Reserve took many of the paycard providers' concerns into account as it developed the rule. For example, it will not require providers to send traditional paper statements to card holders. This exemption was particularly important as a paper statement requirement would have erased a big chunk of the savings employers can achieve by using the card technology. In the initial disclosure to participants, card providers will be required to furnish a description of participants' rights to this information and detailed instructions regarding how they can obtain it. Instead of paper statements, providers will be allowed to make account balance information, fee disclosures and a 60-day transaction history available over a telephone line or on the Internet. They will also be required to provide promptly upon request a written history of the cardholders' account activity. These account activity services, regardless of what method the participant chooses, must provide the same information users could receive in a traditional paper statement. The rule also makes it clear what types of cards do not fall under the Reg E requirements. Gift cards, cards used to disperse travel expenses, and cards that are linked to health savings accounts, health reimbursement accounts or flexible spending accounts will not be covered by the rule as long as these payments are not transferred to or from the employee's payroll card account. According to the American Payroll Association, the most significant news for employers is that the new rule will not classify them as "financial institutions," which would have made employers responsible for providing the disclosure and account information listed above. Specifically, the new rule only requires one party in a paycard arrangement to be classified as a "financial institution." For example, if a business runs its paycards through a bank, the bank would bear sole responsibility for meeting the Reg E requirements. Since banks and the financial institutions that usually administer the cards already have systems in place to provide consumers with this information, the new rule will pose little additional expense. Full speed ahead
While few industries, if any, welcome new regulation, the Federal Reserve's paycard rule appears to be a positive development. Now that traditional banking protections and account information services have been brought to paycards, many of the doubts and skepticism the cards faced have been erased. With an estimated 80 million "unbanked" consumers in the United States and the new products credit card companies and other providers are offering, this market is sure to grow. And, the Reg E rule may very well provide paycards the boost they need to realize their potential. The Federal Reserve allowed companies to begin complying with the rule in September. Check back with Ceridian for compliance and industry updates.
