Thursday, May 23, 2024

September 2006 Legal Briefs

Payroll Card Accounts & Regulation E Changes

  1. “Payroll Card Account”
  2. DHS Cards vs. Payroll Cards
  3. Is a Payroll Card Useful?
  4. Advantages to Consumers
  5. Employer Considerations
  6. Advantages for Banks
  7. Payroll Cards Not Mandatory?
  8. No Periodic Statements
  9. Consumers Who Don’t Want Statements
  10. Error Resolution
  11. Limits on Liability
  12. Modified Disclosures

Payroll Card Accounts & Regulation E Changes

The Federal Reserve has amended Regulation E, effective July 1, 2007, to bring payroll card accounts under Regulation E’s protections for the first time.  Payroll cards provide considerable convenience for individuals who need only a very simple range of electronic transactions.  The Fed wants to be sure that payroll card holders receive adequate disclosures and protections.

Based on the revisions, payroll cards will become subject to the same error-resolution procedures, the same limitation on liability for unauthorized transactions, and almost the same disclosure provisions, that already apply to other accounts with electronic transactions.   

Banks will not have to send monthly statements of EFT activity on payroll card accounts if current balance information is made available by telephone and a rolling history of at least the previous 60-days’ transactions is accessible by Internet at any time.  An accountholder will be allowed at any time to ask for a mailed transaction history on the account, covering the last 60 days’ transactions.

Payroll cards are a fairly new product for banks, but will become more important over time.  At some point most banks will need to consider whether they will start offering payroll cards, how soon, and on what terms.  

After reviewing the new definition of “payroll card account” and some background information, I will discuss several aspects of Regulation E’s coverage of these accounts.

1. “Payroll Card Account”

A “payroll card account” is an all-electronic bank account.  The account is replenished by an employer direct-depositing the employee’s payroll to the account.  A “payroll card” (usually the only permitted means of accessing funds in the account) is just a basic ATM/debit card, and can be used in any point-of-sale (POS) or ATM transaction.  

A direct-deposit of payroll to a “payroll card account” is the same as a direct-deposit of payroll to any other bank account. What’s different is that no other kind of deposit is usually permitted to a payroll card account, and (generally) deposited funds can only be accessed by use of the employee’s payroll card in POS or ATM transactions.  

A bank can vary what transactions it allows on payroll card accounts, but the “stripped-down” (standard) version generally allows no checks to be written, no ACH transactions, and perhaps no teller transactions.  When an account’s features are this simple, the bank avoids check-processing costs, overdrafts, overdraft fees, etc.   By drastically limiting an account’s available transactions, the bank also greatly reduces its risk–even when dealing with a consumer who in the past has been unable to manage an account properly.  

To fall within revised Regulation E’s coverage, a payroll card account must be “directly or indirectly established through an employer.”  (Section 205.2(b)(2).)  It must be an account to which the employer electronically deposits the employee’s main form of compensation (wages, salary or commissions) on a “recurring basis.”

A mall-issued Visa gift card (a “stored value” card), for example, might represent a employee’s Christmas bonus—and therefore would be compensation—but it does not fall within the Reg E definition because 1) it is not the employee’s main form of compensation, and 2) there aren’t any “recurring” deposits to the card account.  A debit card arrangement that is set up in connection with an employee’s health savings account is also not a “payroll card account,” even if the employer makes electronic deposits to that account on a recurring basis, because this is not the employee’s primary method of compensation.  The Fed’s “payroll card account” provisions apply only to primary, continuing compensation-related accounts.  The definition deliberately exempts various other one-time or temporary electronic payment cards.

2. DHS Cards vs. Payroll Cards

Regulation E purposely excludes from its coverage any type of government-issued “electronic benefit transfer” (EBT) cards.  Reg E’s new definition of payroll card account continues this same approach.   

 The Oklahoma DHS is currently switching to all-electronic payment of child support (welfare) benefits, and will stop issuing paper checks.  Benefit recipients who sign up for direct deposit to a bank account can receive public child support funds in that manner.  Everyone else, who either does not have a bank account or fails to sign up for direct deposit, will receive a DHS-issued debit card account, to which child support benefits will be electronically credited each month.  These debit cards will be usable at any POS/ATM location, for any purpose.  No funds will be deposited to these accounts except by DHS, and (generally) no funds can be withdrawn except by using the card.

In terms of technological characteristics and basic account features, a DHS-issued debit card (just described) is virtually identical to a payroll card covered by Regulation E.   However, based on definitions, there is a very important difference.  DHS cards are excluded from Regulation E’s definition of payroll cards, because DHS cards will not be set up by an employer and will not represent compensation paid to an employee.  

Accordingly, the DHS cards will not be subject to disclosure provisions, error-resolution procedures, and limitations on the consumer’s liability for unauthorized transactions, as provided in revised Regulation E.  But Reg E’s provisions will apply to the technologically almost identical “payroll card” that is established “through an employer,” and set up for payment of compensation.

3. Is a Payroll Card Useful?

After payroll card accounts are established at a bank, the employer electronically deposits the employee’s wages for each pay period to his payroll card account. The employee spends his “salary” by using the card at POS or ATM locations.  If the employee has expenses (such as rent) that can’t be paid with the card, he simply withdraws cash at an ATM.  He then pays “non-card-friendly” expenses with cash; or he purchases money orders, or sends a wire transfer payment.    

(One factor to consider in offering these cards is what daily dollar limit to place on ATM withdrawals.  Another issue is whether there will be a limit on the number of free ATM transactions per month.)

An employee who currently has no bank account, and cashes each pay check at a check-casher, is already paying all of his expenses with cash, money orders, or wire transfers.  If he instead obtains a payroll card, and still has to withdraw cash at an ATM to pay some of his expenses, this won’t seem like an inconvenience or disadvantage, compared to what he’s already doing. When his payroll is electronically deposited to a payroll card, he avoids paying a check-cashing fee on his paycheck. If he then uses his payroll card to pay as many expenses as possible, he hopefully can avoid some of the money order or wire transfer fees that he previously was incurring. Even if he pays ATM fees to withdraw cash at an out-of-network ATM that is more convenient than his own bank’s ATM, these fees—depending on the number of transactions–may still be less than the check-cashing fee he previously was paying on his full paycheck.

A number of larger merchants, such as Wal-Mart and Home Depot, are allowing customers to take up to $20 “cash back” in connection with a POS transaction.  These merchants are automatically offering an extremely user-friendly service (a POS transaction and “cash back,” all in one) when consumers pay by ATM/debit card—or by payroll card—or by credit card.  

When a consumer “swipes” the card through the card-reader at a register and enters a PIN, the PIN touchpad automatically takes the consumer through a “cash-back” option that must be accepted or declined.  The ability to obtain “pocket money” in this way, in connection with a POS transaction, enhances the usefulness of the debit card by cutting out the need for a separate trip to an ATM (and a possible ATM fee).  The “cash back” obtained in this POS transaction can then be used by the consumer to purchase incidental items at places that don’t take “plastic.” This “tides over” the consumer until he can “leap frog” to the next place that allows “cash back” with POS transactions, and so on.  This consumer would be strongly influenced by the ease of electronic payment, in selecting where he will do business.

Let’s ignore the fact that a person over sixty would probably not approach his purchases and look at his payment methods in this manner—because younger consumers do see it as “value-added” to be able to operate in an “all-plastic” system.  Habits and expectations have changed.  Most people under forty (and many who are older than that) are increasingly using a card everywhere, instead of writing a check.  

It takes thirty seconds less in the checkout line to use a card instead of a check, and the world is moving too fast.  More and more, consumers will say, “What’s the point of writing a check, anyway, if the merchant is going to convert the check to an electronic payment and hand the check back?”  

A young consumer has no hesitation in using “plastic” to pay $1.07 for a soft drink at a convenience store.  It works like money; it is money.  And it’s convenient.  That person probably has never cared about writing checks as a good record of transactions (as older people do), doesn’t like to keep a check register, and would rather leave his checkbook at home.  (He says, “Who wants to carry it?  I don’t need it.”)    

So in considering whether your bank would offer payroll cards (or any other type of electronic payment card), don’t just say, “I personally wouldn’t want it, and I don’t think anyone else would either.”  Five or ten years from now, what we will accept as the “norm” for financial transactions is almost certain to be very different.  We personally may think it’s impossible to use an account without checks, but for many people this may change.     

Payroll cards (and all other types of electronic payment cards) are a “wave of the future.”  The speed with which this product will gain wider acceptance is hard to predict.  Payroll cards do have a number of advantages for some consumers—while other consumers might view these same features as disadvantages.  It all depends on whose viewpoint you use.  

4.  Advantages to Consumers

Generally, payroll cards cannot be overdrawn.  This is a major advantage for the consumer who doesn’t like to add up his account balance or keep a good record of transactions.  (Some students graduating from high school today lack the skills to balance a checkbook—and don’t much care.  The parent may say, “When are you going to learn to balance your checking account?!”  But the teenager’s answer is, “Why should I bother?”)  On an ordinary checking account, this attitude will be highly unsuccessful, and may result in a lot of unnecessary check charges.  The individual, hit with lots of fees, may decide to close his account—because that’s still easier than balancing a checkbook.  Maybe he will even go back to a system of paying with cash and keeping his cash in a shoebox or drawer.  (A shoebox can be empty, but can’t be overdrawn.)

With a payroll card account, there aren’t any checks to result in overdraft charges or returned item charges.  When there’s not enough money in a payroll card account to pay a POS or ATM transaction, it’s simply declined–without a fee.  

With a payroll card, a consumer can write down nothing, balance nothing, and never review the account except to find out the available balance, by telephone or online.   Doesn’t this take all of the work and responsibility out of the account?  Isn’t this what some consumers really want?

A payroll card also solves the problem of “funds availability.”  Funds that are electronically deposited to a payroll card account will usually be fully available on the date of deposit.  A payroll card will seem very user-friendly to a customer who refuses to read or understand the “funds availability” policy. This consumer thinks he deserves access to his money as soon as he makes a deposit, and doesn’t want to be told otherwise.  With a payroll card, this is what he gets.    

Some consumers couldn’t tolerate the features (and limitations) of a payroll card, but for the right person this card can be very useful.

5. Employer Considerations

Because payroll card accounts must be set up through an employer (directly or indirectly), it’s important to anticipate why a particular employer would want or need payroll cards for his employees.   

Payroll cards may greatly assist the employer who wants to pay all of his employees by direct deposit–eliminating the extra processing that paper checks require.  The problem is, some employees don’t want or can’t obtain a bank account. They insist on paper checks, which they can cash. The employer needs to locate a type of account that these employees can be approved for and will use–so that direct deposits can be made to everyone, saving time and expense.

There sometimes can be unexpected delays in preparing or distributing paper payroll checks, due to illness in the accounting office, severe weather, etc. Some employees may not be available to pick up a check on payday, because of vacation, out-of-town business trips, or part-time hours.  This can cause great inconvenience to the employee.  These problems go away with electronic payroll deposits, which are made automatically.  When all of the employees can participate in direct deposit, it eliminates the chance that a particular employee will not get paid promptly.  

 Another, related example is the person working “in the field” who constantly travels from place to place, but has no bank account.  He could be a salesman, truck driver, someone frequently transferred from one construction project to another, or someone always “on call” to handle repairs or emergencies over a wide-ranging territory.  This person may have great difficult obtaining and cashing employer paychecks, because he’s rarely home, and the mail can’t keep up with him.  He badly needs a debit card that will be accepted for payment of expenses wherever he goes—so that he can operate normally and get his job done.  (Writing checks doesn’t work well enough for a person who continually travels.)  Direct deposit of payroll to a traditional checking account, along with an ATM/debit card on that account, would be great, but perhaps won’t be available if he has bad history on a past checking account. When the only other alternative would be to carry a lot of cash, a payroll card is “a lot better than nothing” in meeting his needs.  

In an additional scenario, an employer may find it convenient to use payroll cards for all temporary workers, because doing so allows him to use direct deposits for as many employees as possible. Payroll cards are intended for “recurring” payroll payments (not just one time), but an employer who plans to use temporary help for at least two or three pay periods can legitimately set up payroll cards. If, for example, a group of workers is brought into the community for a span of only several weeks or months to do a special project, and then they will leave, and everyone knows this in advance, it may not make much sense to set them up with traditional bank accounts, a box of checks and a debit card.  (They will probably have to close their accounts afterward.)  It might make good sense to set them up with payroll card accounts, so that they can have easy access to their wages, for spending locally or elsewhere to pay any type of expenses.  

Thinking more “pro-actively,” some employers may look at their employee base and think, “These payroll cards would be good for my employees, because the cards’ features are simple, and can’t get anyone into trouble, and my employees’ needs are simple.  This is something I ought to give them.”  A large grocery store or fast-food restaurant may be employing a few dozen teenagers (or college students) on a part-time basis.  Most of them aren’t paying major expenses (because their parents are), and none make a lot of money, but all of them could use a simple debit/ATM card as a convenient way to spend the money they are making. This may be a “better fit” for their specific needs than either a traditional bank account, or “unbanked” status (operating with cash only).

A variety of other employers have part-time helpers who work short hours for low pay.  These, too, may be good candidates for payroll cards. A few examples are newspaper carriers, persons who deliver advertising circulars, janitorial helpers, lunchroom workers, and groundskeepers.
 
In summary, the characteristics of the employee base may be the biggest factor in determining whether payroll cards are attractive or useful for a particular employer.  Payroll cards may only be desirable for certain consumers, but if a bank has a variety of products available, this one is just part of the range of options that will help to deliver the right product to the right customer.  

The employer’s potential economic savings in avoiding payroll checks— paying as many employees as possible with direct deposit—becomes a bigger issue for larger employers.  (It’s a hassle even for a small company to pay a few employees by check while paying everyone else by direct deposit; but a larger company wastes more processing time and costs, simply because it will tend to have a larger total number of employees who do not receive direct deposits.)  But providing a useful product (payroll cards) to employees who can genuinely use it is something that should appeal to small companies and large companies alike. 

6. Advantages for Banks

Payroll card accounts should bring some increased deposits to banks—because most consumers who set up such accounts do not have a bank account beforehand.  Still, these consumers’ payroll may be fairly small.  

By necessity, the typical payroll card holder, if he had a checking account instead, would be spending most of his money, leaving little “cushion” in the account; and because he would be cutting things so close, he would have a much higher risk of overdrafts (on a checking account) than other consumers if he made any error at all in his checkbook, or failed to write down a transaction.  Because of his income and spending patterns, this customer may have been “burned” in the past with a lot of overdraft charges, and perhaps doesn’t want another checking account.  Worse, he may not have paid his overdraft charges that built up in the past, so that a bank closed his account, leaving a bad credit history that now prevents him from getting another checking account.

A bank probably would not want to open a payroll card account at all for someone who has been involved in account fraud in the past; but a bank probably can see its way around a past history of simple “poor account management.” If what the bank is asked to open is a payroll card account that does not give the consumer any opportunity to write checks, there won’t be any overdrafts, or any deficit balance.  With these restrictions the consumer’s possible bad history on a checking account in the past is unlikely to turn into a repetition of problems.

A payroll card account is an “entry-level” account that can attract new customers (particularly younger persons who have never had a bank account of any kind).  It’s an opportunity to develop an ongoing relationship.  Over time, this person’s income may increase and he may transition into a traditional checking account, or may need other products, such as a car loan.  

Primarily, however, I see the payroll card as a method of strengthening the relationship between the bank and an employer (the bank’s good loan customer).  Especially for an employer with many part-time or lower-paid employees, payroll cards may fill a real need.

The specific terms of a payroll card (for example, whether the number of free transactions of a certain type will be limited or not, and whether a certain charge will be imposed outside of certain guidelines) will depend on what the employer wants, and what the bank is willing to offer to the employer, as part of the overall employer-bank relationship.  This account is not likely to be priced to make sense on a stand-alone basis.  (But “totally free checking” accounts also don’t make economic sense on their own.)

There are some definite cost advantages to a bank in providing a payroll card account, instead of a traditional checking account, and these factors should be considered as part of the “pricing” decision.  A payroll card account eliminates the costs related to handling, imaging, and collecting paper checks, as well as fraud losses on checks, and the costs of preparing and mailing monthly check statements.  It avoids teller time by eliminating deposit transactions made in person.  For either the consumer or the bank (depending on who pays), a payroll card also removes the cost of printing pads of checks.  No matter at whose expense the check-related services on a traditional checking account are provided (by the bank, in offering “totally free” checking, or by the consumer, if he pays monthly service charges for a checking account), check-processing costs will disappear if a customer uses a payroll card account.

7.  Payroll Cards Not Mandatory?

Under revised Regulation E an employer will not be able to require an employee to accept compensation in the form of direct deposits to a payroll card account at a particular bank. The decision to accept a payroll card must be voluntary. And after a payroll card is set up at XYZ bank, the arrangement can be cancelled by the consumer.

Section 205.10(e)(2) of Regulation E states, “No financial institution or other person may require a consumer to establish an account for receipt of electronic fund transfers with a particular institution as a condition of employment . . .”  In bringing payroll card accounts within the definition of “account,” Regulation E will apply this prohibition to payroll cards for the first time.

Payroll card arrangements are set up between an employer and one financial institution.  However, no employee can be required to have a payroll card at that one specific financial institution (but can accept it if he chooses).

The Regulation E Commentary to Section 205.10, in Paragraph 10(e)(2), states, “An employer may require direct deposit of salary by electronic means if employees are allowed to choose the institution that will receive the direct deposit.”  On this basis, an employer apparently can say, “Your choices are either 1) to set up a payroll card account at XYZ bank to receive direct deposit of your payroll or 2) to set up a regular bank account at any bank you like, to which your payroll will be direct-deposited.”  

If an employee can choose either a direct deposit to any bank account of his choice or a direct deposit to the payroll card arrangement, but the employee has bad account history and cannot obtain a checking account, circumstances would force the individual to pick the payroll card option.  

An employer shouldn’t really care that some employees are receiving a direct deposit in a regular bank account and others in a payroll card account.

8. No Periodic Statements

Generally, Regulation E requires periodic statements on all consumer accounts that have electronic transactions. However, for payroll cards, new Section 205.18(b) of Reg E will allow an alternative approach.

A bank does not need to furnish periodic statements on payroll card accounts if it makes three things available to the consumer:

(i) the consumer’s account balance, through a readily available telephone line;

(ii) an electronic history of the consumer’s account transactions, such as through an Internet web site, covering at least 60 days preceding any date when the consumer accesses the account; and

(iii) a written history of the consumer’s account that is provided promptly in response to any oral or written request, covering at least 60 days preceding the date when the bank receives the consumer’s request.

The approach just described reduces costs for banks, while still meeting consumers’ needs.  It eliminates mailing a transaction history to persons who don’t really need or want one, but does require banks to provide the information to someone who requests it—for example, to resolve a billing error.

9. Consumers Who Don’t Want Statements

The Fed’s decision that periodic statements will not be required on payroll card accounts is based on industry comments, as well as input from a focus group of consumers, many of whom stated that they regularly check their balances over the telephone or on-line.

A printed monthly statement, which provides information only at the end of a statement cycle, may actually be less useful to a payroll card holder than the ability to check the balance by telephone whenever desired, and the ability to review a rolling 60-day transaction history online.

Many young consumers (teenagers, college students, and individuals in lower-paying entry-level jobs) are very “computer-savvy,” but don’t make much money yet.  For some, income is fairly low because they only work part-time (students); but others are simply in a low-skill, entry-level job and haven’t worked their way up yet.  (They don’t own a house, their parents are still helping them with certain expenses, etc.)  It’s not a contradiction to say that someone who’s a good candidate for a payroll card based on low income and simple spending habits can be very proficient in accessing account transaction information online whenever it’s needed or wanted.

It’s also true that many younger people have a totally different view of how they should receive information, and even as to what type of information is important or relevant. Older consumers (especially seniors) believe “paper” records of transactions (receipts, paper checks, disclosures, and bank statements) are necessary and valuable.  Younger consumers may view the same documents are “worthless.”  They prefer to receive their information by Internet.  An online history of transactions isn’t “reduced disclosure,” but “better disclosure.”
 
In addition to the “young, poor, but computer-literate” segment of the population, there are low-skilled, lower-educated, near-poverty-level wage-earners of all ages.  These consumers, also, may be good candidates for payroll cards.  Circumstances force them to have fairly simple spending habits. The money often runs out before the month does, and they need a bank account that will keep them from getting into trouble with fees.  

This type of consumer probably doesn’t care about good record-keeping in connection with an account.  Receipts and periodic statements are of little value.  A monthly statement only delivers the bad news that he’s broke.  He doesn’t pay many expenses of a type that might qualify him to itemize deductions on a tax return—mortgage interest, property taxes, charitable contributions—so keeping tax records isn’t an issue. What he really wants to know is, how much money is left in my account today?  (For payroll card accounts, balance information will be available by telephone.)  Everything else is less important.  

Still another possible user of a payroll card is the lower-earning spouse with a part-time job, in a two-earner family.  If this is the wife, she may run a lot of errands for the family, rushing everywhere with kids in tow.  She appreciates the speed of all-electronic payments.  She could use a payroll card as a “household account,” at the grocery store, the gas station, the cleaners, the clothing store, etc., while also carrying some checks on the family’s joint account that receives a direct deposit of the primary wage-earner’s salary.

It’s convenient in a situation like this to use the payroll card for smaller, everyday expenses that are not tax-deductible and do not require documentation.  When a payroll card is used like this, the lack of periodic statements is irrelevant. There generally won’t be any service charges, so using a payroll card account as a second account is “no cost/no risk.” In the past it was common for two-earner families to have two checking accounts, with some expenses paid from one and some from the other.  Managing a payroll card account alongside a checking account is really no more complicated than juggling expenses between two checking accounts.  

The Fed’s “no periodic statement” provision for payroll card accounts is actually still consistent with good record-keeping, if the accountholder wants to work at it carefully.  The holder can regularly print off the 60-day online transaction history (but will have to remember to do so), or can regularly request (one by one) mailed 60-day transaction reports on a account.  (Keeping paper receipts of expenditures, along with a printed history of electronic transactions, is adequate documentation for-tax deduction purposes.)
 
The Fed hints that if this alternative information-delivery method works, it may consider providing relief from the periodic statement requirement for other types of accounts in the future.  (Many banks already provide online transaction history for accounts, as a convenience to customers who prefer to access information in that manner; but that’s not as good as being able to stop sending periodic statements—which would be a great savings on other types of accounts.

10. Error Resolution

Because a payroll card has not been clearly defined in the past as an “account,” Regulation E’s error resolution procedures have not clearly applied until now.  

New Section 205.18(c)(4) provides a somewhat different time period for giving an oral or written notice of error on a payroll card account.  (Because the consumer does not receive periodic statements on the account, the date of mailing of a statement cannot be used as the start of the consumer’s 60-day time period for giving notice of an error.)

The time period for notifying a bank of an error on a payroll card account will end with the earlier of the following two dates (whichever occurs first):

(i) 60 days after the consumer electronically accesses his account, if the electronic history made available to him online shows the particular transaction that is the subject of the error; or

(ii) 60 days after the bank sends (at the consumer’s request) a written history of transactions on the account, if the transaction that is the subject of the error is shown on that history.

Some banks’ online systems may not be able to record when a consumer has accessed his account online; and without this information, a bank cannot measure the timeliness of a consumer’s notice of error by reference to the consumer’s date of online access.

Therefore, as an alternative or “safe harbor” approach, a bank may decide instead to treat any notice of error as timely if it is received within 120 days after the electronic transaction in dispute was credited or debited to the account, and may treat as untimely any error notice received after that 120-day period.

11.  Limits on Liability

A possible “downside” in redefining an “account” under Regulation E to include payroll card accounts, is that the Federal Reserve has now clearly given payroll cards the same limitations on liability that apply to  unauthorized transactions on regular ATM/debit cards.  If a consumer gives timely notice as provided in Section 205.6(b) of Reg E, that individual’s maximum loss on unauthorized ATM transactions is generally $50.  This limit will also apply to payroll cards used at an ATM.  

For POS transactions, the $50 limit on liability imposed by Reg E is reduced by Visa and Mastercard merchant agreements to $0 (for both debit cards and credit cards), and the same will apply to payroll cards issued through Visa or Mastercard.

As with ATM/debit card holders, a bank will not be able to impose liability on a payroll card holder because of customer negligence.  For example, if there is unauthorized ATM activity on a stolen payroll card because the customer wrote the PIN on the card (although the bank warned against this), the customer’s actions are incredibly stupid, but negligence does not change the unauthorized nature of the transactions, and Regulation E will not allow the shifting of liability to the customer.  However, the mostly younger consumers who obtain payroll cards may not be as likely to write a PIN on a card.

Another important potential issue with payroll cards is fraud.  If a customer asserts that an electronic transaction on a payroll card is unauthorized (same rule as for a credit card), and the bank, after investigation, is suspicious of the customer but cannot prove its suspicions, the bank will be required to resolve the issue in the customer’s favor, by re-crediting the customer’s account.  As with ATM/debit cards, banks will take some losses because of payroll card fraud; but the possibility of fraud does not overcome a bank’s need to offer debit cards, and the same reasoning may apply to payroll cards.

In issuing payroll cards, it will be appropriate for a bank to consider whether there is any fraud in the consumer’s past history on an account.  If so, the bank may want to decline to issue a card.  However, if the consumer’s past problems on an account were because of overdrafts, this would not necessarily be a basis for declining a payroll card account, on which overdrafts cannot occur.

As with ATM/debit cards in general, a bank should feel free to cancel a payroll card if there is suspected fraud, negligence, or general inappropriate handling of the account. 

12. Modified Disclosures

As provided in new Section 205.18(c)(1), Regulation E disclosures given to consumers on a payroll card account will be somewhat different from disclosures provided on other account types.

For example, a bank will be required to disclose a telephone number that a consumer can call to obtain the account balance for his payroll card.  The consumer also must have instructions on how to obtain an online account history for his payroll card account.

The Fed has prepared a new Model Clause A-7 (part of Appendix A to Reg E) that is appropriate for disclosing both 1) the applicable telephone number and Internet address for obtaining information on the account (as just mentioned), and 2) proper error-resolution procedures (which use a slightly different method of measuring the time period for giving notice of an error, as outlined under the heading “error resolution,” above.)