Benefits and Compensation

What Employers Can Do to Fight Back Against Banking Junk Fees

Everyone’s talking about junk fees these days. Even the president called them out in his State of the Union Address. One of the worst offenders is the banking industry, which makes money from overdraft, bounced check, and credit card fees. Junk fees cost your employees money and eat into their paychecks, but employers have a lot of power when it comes to helping employees avoid these fees so they can keep more of the money they need to be financially healthy. Here are three ways employers can protect employees from losing money to banking junk fees:

Offer a Free, No-Surprises Bank Account

Employees need access to bank accounts that don’t mandate balance requirements or charge fees for basic banking transactions. Employers can help counteract this by offering employees access to a debit account option that’s free and easy to use—and completely free of charges like overdraft fees, insufficient funds fees, and bounced check fees.

Don’t add a check-writing feature on the account unless you have a plan to prevent bounced checks. Bounceable checks harm well-intentioned consumers when payees wait too long to cash them, create temptations for abuse, and raise the costs of the program.

If check-writing capabilities are a must for your employees, include an account feature that requires users to set aside the money for each individual check upfront so it can’t bounce because of insufficient funds when it’s cashed. This feature should be much more common than it is, and employers can play a role in increasing its adoption. Without a proactive strategy to prevent bounced checks, employees can unintentionally fall into financial distress.

Preempt Payday Loans and Overdrafts with Fee-Free Earned Wage Access

Not all abusive fees are surprises. When employees are desperate for overdraft protection and the lifeline of credit it can provide, they have no choice but to stomach overdraft fees. But employers are in a unique position to help meet employees’ short-term cash needs. Unlike payday lenders, banks, or third-party overdraft apps, employers know how much employees accrued in pay each week. Giving employees early, fee-free access to the money they’ve earned, without penalty or cost, can have a dramatic impact on preventing acute financial stress.

As an employer, you don’t have to go all the way to a full instant pay solution to be useful to your employees. In fact, there’s reason to be cautious about full transition to instant pay. At minimum, you’ll need to make sure you have solutions to mitigate the downside risks of full instant pay before you change your approach.  

If you’re skeptical of earned-wage access with high caps on what’s cashed out, can’t make the economics work yet, or aren’t ready to decide or proceed, there are alternatives. For example, you can implement an earned wage access solution with a low cap, like $100 per pay period, to help employees cover many emergencies. One Consumer Financial Protection Bureau study found the median transaction amount that led to an overdraft was about $50.

According to the Federal Deposit Insurance Corporation (FDIC), a typical fee for such an overdraft is $35, which is effectively a sky-high annual percentage rate (APR) for such a small, short-term loan. And that’s not even counting other fees employees might have incurred because of what they couldn’t pay, like credit card late fees. Don’t underestimate the impact a timely advance can have on the 7 out of 10 employees who live paycheck to paycheck.

Help Employees Choose Better Accounts by Making Direct Deposit Switching Easy and Safe

This one’s obscure so far, but it’s a secret, untapped weapon for employers.

As an employer, you can generally assume employees are using the bank their payroll direct deposit funnels to as their primary (and possibly only) bank. Banks have happily relied on this direct deposit switching friction to bind reluctant consumers to them. A captive consumer is a consumer who pays junk fees.

But there are ways employers can help make direct deposit switching easier and safer. For example:

  • The fee-free employee bank account provider can build a hookup to the employer’s system so employees can redirect their payroll to this hand-selected account with just one click.
  • Employers can partner with a new generation of third-party payroll automation platforms that compete on transparency and low prices (like Argyle, Pinwheel, and Atomic ). These are not to be confused with the platform you use to pay your employees.

Truly breezy direct deposit switching would make banks quite nervous if it really caught on, particularly at the nation’s largest employers.

You or your debit account vendor can also bake safeguards into employees’ experience to prevent common pitfalls of account switching, such as warnings about updating billers, and help with the administrative burden of transitioning accounts.

As an employer, you won’t be able to save every employee from every junk fee. But as the provider of the paycheck, you are well positioned to play an important part in the fight against junk fees and better support holistic employee financial health.

Sophie Raseman is the Head of Financial Solutions at Brightside, a financial care platform for employers. She was formerly the director for Smart Disclosure in the U.S. Treasury Department’s Office of Consumer Policy and served on the U.S. Consumer Financial Protection Bureau’s Consumer Advisory Board.

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