The Attack On Payroll Cards: Letting The Perfect Be The Enemy Of The Good

Welcome to PYMNTS.com’s VC Voices: a weekly column where we bring you commentary from the best of the best around the world of payments investment. Want to know what the biggest backers of our industry’s innovators and disrupters think? We give our VCs 500 words of unedited space to do with as they please, so you’ve come to the right place.

This week, we’re joined by Matt Harris, managing director at Bain Capital Ventures, who gives his take on the recent payroll card debate.

By Matt Harris, Managing Director, Bain Capital Ventures

Many of us in the payments community read the recent New York Times article on the perils of payroll cards with a combination of chagrin and disdain.  I’m not an investor in any companies in the space, but was the first institutional investor in TxVia, as well as a board member and investor in Simple, so I know the prepaid space relatively well. Through my investment in iSend, a directed remittance company, I also have some perspective on the un- and underbanked.  As anyone with even a cursory knowledge of the space will tell you, the key takeaway is that it is expensive to be poor as it relates to financial services … this population gets taken advantage of right, left and center. That said, this article, by focusing on the moderate fees associated with payroll cards, entirely misses the point that the traditional alternative (paper checks) leads to far worse economics for the paycheck recipient.

The Times article uses 2-3 dozen paragraphs and a bunch of inflammatory anecdotes to make two key points: payroll cards have fees, and employees aren’t given any other option than to use payroll cards. The second point describes a practice that is illegal in most states, and vanishingly rare in those states where it is legal. Nearly all employers offer (and indeed, prefer) direct deposit, and most continue to offer paper checks as well. The criticism regarding fees is only slightly more valid. The payroll card fees are largely out-of-network ATM usage fees, and can be easily minimized and managed. They tend to be $2.00-$3.00 per transaction, and even if you withdraw your full check in cash twice per month, that should average $5.00 total (the $40.00-50.00/month cited is crazy and I’m not sure how it survived basic fact checking). Let’s not forget:  banks have fees, too, many of which are less transparent and can be far worse. The highest fees of all are from check cashers, which average 2-4 percent of the face value of the check.  Check cashing fees in aggregate cost the underbanked roughly $2B per year, many times the aggregate fee revenue of the entire payroll card industry.

As PYMNTS.com pointed out earlier this week, the largest single issuer of payroll cards (as well as benefits cards) is the Federal Government itself. The U.S. government disbursed $136B on prepaid cards in 2012 through hundreds of agencies and programs, which is more than four times the size of the total payroll card market.  Their aggregate data confirms the points made above: 60 percent of the fee revenue came from ATM usage, and the total fees as a percent of the amount disbursed is only 0.26 percent (trending down over time). Notwithstanding the fact that New York’s Attorney General is now digging into the payroll card “scandal” based on the Times article, the U.S. Government is voting with its feet and continuing to expand its use of this disbursement method.

I’m left scratching my head about why the journalist at the New York Times took the angle that she did.  Perhaps the practice of demonizing financial institutions has become so ingrained at that institution that it dampened her natural intellectual curiosity and bias towards fairness. I regret that the article had any influence on the debate; the underbanked need more digital and electronic payments options, not fewer.