Wal-Mart to Staff: Bye-Bye Paycheck, Hello Debit Card

Say goodbye to the paper paycheck.

More and more companies are now forcing their employees to switch over to direct deposit or some other type of electronic payment as part of a larger cost-cutting effort.

The latest company to make such a switch is Wal-Mart. The nation's largest employer will now pay workers via a debit card if they decline to sign up for direct deposit.

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And it's not just paychecks that are disappearing. Some major airlines are now only accepting credit and debit cards for purchase of meals or headphones on planes. And many states are now providing welfare and food stamp benefits only through direct deposit and debit cards.

"It's definitely part of a growing trend toward doing away with paper paychecks. That's true with some employers as well as government benefits that used to be given out with checks," said Gerri Detweiler, a personal finance author and credit advisor at Credit.com.

Wal-Mart would not say how much money it would save with the switch, but the world's largest retailer said that by eliminating checks in the United States it plans to save 257,572 pounds of paper a year.

Wal-Mart has more than 1.4 million employees in the United States and roughly half of them have not signed up for direct deposit, according to company spokeswoman Daphne Moore. The debt cards are being phased in over the next few months.

The cards will make it more convenient to workers who now have to come into their stores to pick up paychecks, Moore said. It also falls in line with the company's goal to "eliminate waste wherever we can," she said. Wal-Mart has, for instance, is asking its suppliers to start using less packaging.

Some employees avoid direct deposit because they like getting a physical check. But others simply don't have a bank account.

An estimated 10 to 25 percent of Americans do not have a bank account, according to a 2007 report from the Federal Reserve Bank of Boston. These so-called "unbanked" Americans resort to check-cashing businesses and grocery and convenience stores to convert their checks into cash.

The unbanked, according to the Fed report, have lower incomes, less education, are younger, more likely to reside in urban areas, and disproportionately nonwhite compared to those who have bank accounts. These consumers typically don't trust banks or think they are afraid of the perceived cost of bank accounts, such as monthly fees, minimum balance requirements and possible overdraft charges.

But not having a bank account also has its costs.

The fee check-cashing businesses charge to cash personal checks can be as high as 10 percent of face value while government or payroll checks cost up to 1.5 percent of face value, according to the Fed.

"One of the big concerns with these pre-paid cards is that the fees can really add up very quickly," Detweiler said. "It is true that these employees were probably paying check cashing fees but at the same time employees want to make sure they don't see their pay check nickel and dimed away with fees that may be associated with using these cards."

Wal-Mart employees will be able to use the cards anywhere that accepts MasterCard and also be able to get cash from ATMs.

There would be no fee from Wal-Mart or MasterCard – who is providing the cards – for the first ATM withdrawal in a pay period. (Banks could charge their own fees for using their ATMs.) After that first withdrawal, each additional one would be $2. Employees can also purchase something at Wal-Mart or Sam's club stores and get cash-back above their purchase without any fees. Workers can also get checks to pay people who don't accept debit cards.

Detweiler said for some people it is harder to track their spending with a debit card.

"It adds a layer between you and your money," she said.

But if "you lose cash, it's gone." With a debit card, if you register it, you can usually get the full balance restored.

Michael W. Brandl, an economics professor at the University of Texas at Austin's McCombs School of Business, questions if this will lead employees to save less.

He said it would be "much easier just to spend it, as opposed to going to the bank, cashing the check and putting $20 into the 'rainy day' fund or jar."

Brandl also said that debit card use provides a large paper trail.

"Who gets access to it and what are they going to with you?" he said. "Banks know a frightening amount about you."

Many companies are now doing credit checks before hiring new employees. The theory is: if you can't handle your own personal finances, why should we let you handle our company's money.

"Can Wal-Mart then take this to the next logical step and see how people are using this debit card?" Brandl asked. Will the company notice that you paid a therapist for a session or that he might be stopping by your local liquor store every night?

Wal-Mart's Moore said that would not be the case, saying that the program is "administered by MasterCard and First Data and we won't have the ability to see that information."

Mark A. Calabria, director of financial regulation studies at the Cato Institute, said that such a move by Wal-Mart will ultimately be a convenience for workers.

"This is clearly something that will save the stores themselves money. It's ambiguous to say whether it's going to be necessarily a bad thing for employees. I can see lots of reasons why it would be a positive for them," he said. "There are more protections on the card than there is on cash, there are incentives now to go out and set up a bank account but on the other hand I certainly understand people's concerns about fees."

But he noted, those fees are probably less than workers are now paying at check cashing businesses.

He said some people might not have bank accounts because their "immigration status is questionable" but said that is one extreme and a small number of the country's unbanked.

"I think a lot of people just never get around to thinking that the bank is going to work for them," Calabria said. "I think there is some skepticism about setting up an account, if you actually need one."