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Do Payroll Card Incentive Programs Harm Consumers?

Adam Rust's picture

Posted July 3, 2013

Here is the question: do incentives offered to employers in payroll card programs put the interests of consumers in conflict with those of the company that pays them?

Some payroll card programs pay employers when they sign up to offer their cards to their

employees.

One executive of a large processor insisted that this is the free market - that no employee has to put their direct deposit on to the card provided by their employer. This is undoubtedly true.

Nevertheless, behavioral economics says that people do the easiest thing. This is why some policy makers want to make it a default for employees to sign up for a 401 (c), even though they are turning away a match.

Moreover, recent history says that kickbacks often mean that consumers end up with second-best products. Back in the fast and easy sub-prime mortgage days, mortgage brokers often received incentives for getting a "yield-spread premium." The broker told the borrower that this was the best deal. More than a few of them signed on, perhaps because they trusted their broker. I imagine that many people have even more trust for their employer.

The same thing happens with prepaid card programs at some schools. I spoke with a team leader for prepaid products at a large Southeastern bank. For some time, the company had the contract to take disbursements from federal loans at a state university. Things were good, until one day when the executive got a call from the school:

"Another company is going to give us incentives to work with them," they said. "What can you do for us?"

"Nothing," the banker replied, "except continue to save you money on the costs you would be absorbing if you had to deal with paper checks."

"Well," the administrator said, "we will take our business where we can do better."

He did, and in doing so, they passed along a fair share of those incentive costs to students, who paid for them in the form of monthly maintenance fees, frequent ATM surcharges on the much smaller network of campus ATMs, and fees for PIN transactions.

In the end, the executive rationalized the choice. "If we had done that and those students subsequently told their parents about all of those high fees, we would have lost plenty of better business," he said. "But those other guys don't have branches."

Nevertheless, the schools continue to take these deals. In fact, it is not unusual for administrators to pitch the cards during new student orientations. Their advice was to get the card - never mind that most of those students could probably get a checking account at a normal branch.

Then again, program managers pay incentives elsewhere. This is an excerpt from NetSpend's final 10-K:

A significant portion of our operating revenues are derived from our products and services sold at the stores of our distributors. Because we often compete with many other providers of consumer and financial products for placement and promotion of products in these stores, our success depends on the willingness of our distributors to promote our products and services successfully. In general, these third parties are able to exercise significant discretion over the placement and promotion of our products in their locations and they can chose to give greater prominence to the products and services of other prepaid debit card providers. In many instances, our distributors have greater incentives to promote other products or services to consumers. If our distributors do not actively and effectively promote the sale of our cards, our growth will be limited and our operating results will suffer.

To that point, NetSpend's recent renewal of their contract with ACE Cash Express included a clause for maintaining an incentive paid by NetSpend based upon the number of new accounts opened in the store.

Still, this point only underscores the larger point, which is that consumers ultimately pay for incentives. Retail cards often cost more than cards sold over the internet, even though the costs related to fraud are generally lower.