This week, my younger brother, a college freshman, will start a new job at one of the largest retailers in the United States. Recently trained, he’s now ready to start. And he just found out how he’d be paid…
A Prepaid Debit Card?
Gone are the days of the paper check and the direct deposit. My brother will be paid promptly each week with an instantaneous transfer to a prepaid debit card. Not unlike any other prepaid debit card on the planet, it’s loaded with fees:
- $3 per month for inactivity (he’ll need to make at least one purchase every three months to avoid this on-going charge)
- $1.50 for ATM withdrawals (on top of any other charge from the ATM)
- $.50 for any non-credit point-of-sale purchase (credit card processing fees are higher than debit card fees – the bank needs the money!)
Employers have good reason to use these cards. First, financial literacy is a crisis. Seeing as more and more Americans are unbanked, and unwilling to open a bank account, employers who hire part-time nearly-minimum wage laborers have to provide some kind of way for employees to collect their bi-weekly wages.
Secondly, prepaid debit cards are a fee mill. No one makes any money on paper checks or debit cards from traditional banking institutions. These quasi-banking arrangements generate new revenue sources that never existed in the retail banking business.
Employers to Workers: Don’t Save
It’s pretty obvious what the net effect of putting a plastic card in the hands of an hourly-wage worker will be: convenience spending. Even if you are a well-organized person who maintains an accurate and hard-lined budget, you’re still going to be tempted by the ease at which this debit card allows you to spend. Undoubtedly, my brother’s employer is banking on him spending his biweekly wages in the store, hopefully returning much of the money they’ll pay him over the holiday season.
The card comes with only two checks written out in his name, at least giving him the option to write himself a check equal to his pay for two periods so that he doesn’t have to use this financial landmine waiting to happen. But what is he to do when those checks are gone? Who knows. After reading through four pages of fine print, I’ve yet to find any information about how to request new checks or if it is even possible.
This is the kind of stuff that even a free-market-loving person like myself cannot defend. Sure, these cards make payroll much less expensive for employers, as the costs are shuffled to the employee. Sure, the employee can jump through hoops to get their cash in the least expensive way possible. Sure, the employer should have the right to pay his or her employees however they wish.
But at some point, companies can go too far. This is too far.
Business owners should have a vested interest in their human capital. They should have an interest in their employees being productive members of a community. They should encourage their workers to go to a bank, open an account, and start taking a close look at how the financial system works.
A Growing Social Problem
My brother and I are lucky to have parents who exposed us to finance starting at a young age. I’m thankful to have a father who would let me play with his HP12C financial calculator and explain how the stock market worked when Bloomberg TV played quietly in the background. We’re lucky to have parents who took us to the bank to conduct our own transactions and engage ourselves in an adult environment as youngsters.
Many people go without that kind of influence, as evidenced by this study on the horrific state of Financial Literacy in America. Many people spend their first 18 or even 22 years of life without a bank account. Many more live their whole lives without a bank account at all.
It’s a shame. Financial dependency isn’t just a numbers game or an electorate problem; it’s a social issue. How can we expect to solve financial dependency when we cannot even get people to engage in step one of financial independence by opening a simple checking and savings account? What are the chances that someone will make a budget or save for retirement if they never even know the meaning to “deposit” or “withdrawal?”