What Is the Best Way to Run Payroll for Unbanked Employees?

What employees do with their money once you hand it over to them may seem beyond your organization’s purview. Unbanked employees, however, face unique challenges that can add stress and affect their work performance.

With 6% of adults in the U.S. unbanked in 2022, it’s crucial your organization’s payroll processes are set up to support their needs. Establishing these processes decreases the likelihood of employees experiencing disruptions to their paychecks.

While there is no silver bullet or perfect payroll for the unbanked, understanding your unbanked employees’ challenges will better prepare you for conversations and questions about payroll issues. As you work with your unbanked employees, knowing the different options available may help you find a payment solution that minimizes their financial risk and fees.

We’ll cover what it means for employees to be unbanked or underbanked and why it matters before reviewing the merits of several ways to run payroll for unbanked employees.

What Is the Difference Between Unbanked and Underbanked?

The Federal Deposit Insurance Corporation (FDIC) defines unbanked as a household where no one has a checking or savings account at a bank or credit union. As of 2021, 4.5% of U.S. households were unbanked.

Underbanked, on the other hand, refers to a household that “[has] an account at an insured institution but also [obtains] financial products or services outside of the banking system.”

In our discussion, we’ll focus on unbanked employees specifically, but some of what we cover may also apply to your underbanked employees. While underbanked individuals may have a basic bank account, they face similar problems as those who are unbanked because they also rely on alternative financial services like money orders, payday loans, check cashing, etc. Additionally, underbanked employees may very well become unbanked. About half of unbanked households previously had a bank account.

What Are Some of the Reasons That People Are Unbanked?

Overall, strained finances seems to be one of the main reasons people are unbanked.

The top five reasons given by unbanked respondents in the 2021 FDIC survey were:

• 49% don’t have enough money to meet minimum balance requirements
• 36% don’t trust banks
• 36% avoid banks to have more privacy
• 34% think bank account fees are too high
• 31% think bank account fees are too unpredictable

How Does Being Unbanked Affect Employees—and How You Run Payroll for Them?

Alternative Financial Services Are a Financial Burden

Going off the grid, as it were, isn’t cheap, but people without bank accounts don’t have many options. Without a bank account, they can’t deposit a physical paycheck or set up a direct deposit. If they have a problematic banking history or a low credit score, they can’t easily access their money with a debit card or borrow against it with a credit card, and they don’t have the same fraud or consumer protections that come with these traditional financial services.

Wherever they turn for alternative financial services, unbanked employees face steep fees. If they get a paycheck, they have to get it cashed by a third party. Walmart, for example, charges $4 for checks under $1,000. Unbanked employees face additional hurdles if they want to transfer their money, which they have to do with a money order. These cost anywhere from $1 to $10 per money order.

Prepaid cards are another alternative payday option (more on these below) because they work like debit cards and have some fraud protection. However, prepaid cards carry a myriad of fees for checking the card’s balance, withdrawals, etc. Over time, all these fees eat away at unbanked employees’ wages.

In addition to fees, translating paychecks into accessible funds without the security provided by a bank involves unseen costs in time and a greater risk of losing their pay. They have to go in person to get a check cashed, which means waiting in line and maybe leaving work. And they could also misplace that cash or someone could steal it—both situations that would leave them with no way to recover their paycheck.

Financial Stress Negatively Impacts Employee Performance

Most employers recognize that their employees’ financial worries don’t stop when they clock in. In fact, there’s been an 11% increase in employees’ financial stress since 2021.

As evidenced by the fact that many who are unbanked can’t afford banking fees, your unbanked employees are much more likely to have additional financial stress hanging over them. Unbanked rates are also higher among lower-income households. Put it all together, and you’ve got a recipe for financial precariousness.

It’s in your organization’s interest to lower your employees’ financial stress since it will also help them be happier and more productive at work. You can reduce the number of hoops unbanked employees have to jump through to access their money, saving them time and making it less likely they’ll miss work.

How Can You Run Payroll for Employees Who Do Not Have a Bank Account?

There’s not much you can do to solve the general lack of trust or the high fees that may be causing some of your employees to be unbanked.

While you can’t fix all their financial problems, you can offer your unbanked employees better options for accessing their pay. We’ll review some of the available options so that you can make the best decision for your unbanked employees.

Consider: Paper Checks

Pros of paper checks:

• Employers have a paper trail (unlike when you pay employees with cash).
• Employees get a pay stub.
• Employees don’t need a bank account or direct deposit.

Cons of paper checks:

• Employees need to pay fees to cash the checks.
• Employers need to get them printed or mailed, which requires special equipment if done in-house and takes time.

Consider: Prepaid Cards or Paycards

Pros of prepaid cards:

• Employers can deposit wages directly into their employees’ cards.
• Employees can use these cards like debit cards in stores, online, at ATMs, etc.
• Employees have immediate access to the funds.
• Paycards are cheaper to administer than paychecks and come with fraud protection.

Cons of prepaid cards:

• Depending on the provider, paycards can charge a lot of so-called “junk” or hidden fees, e.g., for participating in the program, checking card balance, withdrawing money, having low balance, overdrafting, etc.
• Employers can’t require their employees to accept paycards and must offer an alternative method of payment.

Avoid: Money Apps

Pros of money apps:

• Employees have many options to choose from—e.g., PayPal, Venmo, Cash App—most of which are free to use.
• Employees have direct access to their pay without needing a bank account.
• Employees can generally just give employers their account information, as they would for their bank account, to set up a direct deposit.
• Some apps offer payroll integrations.

Cons of money apps:

• Employees need an internet connection and a smartphone.
• Employees can’t use these apps to pay for everyday purchases because many businesses don’t accept them.
• Employees’ ability to set up direct deposit through an online app usually depends on the type of account, which may mean they have to pay a fee.

Some of these apps, like Venmo, warn against using them for business purposes since they essentially work like cash transactions and leave no paper trail.

What About Cash Payments?

While it may be tempting to pay with cash because it seemingly cuts out the middleman, it’s a payroll no-no for several reasons.

Paying with cash is a very risky transaction for both employers and employees because neither of you get a paper trail. In other words, it’s much harder to stay compliant, it makes the IRS suspicious, and, when things go wrong, it makes it very hard to prove any kind of fraud. And as we discussed earlier, cash just isn’t a convenient or secure payment method for employees.

The Current State of Unbanked Employees and Employee Compensation

An already difficult and stressful financial situation is likely getting worse and more stressful for some of your employees.
Despite the average number of unbanked employees being at the lowest rate since 2009, the FDIC 2021 report stresses the importance of providing “bankable moments” for all employees. The report states, “The financial services marketplace continues to become more disaggregated, and consumers are bundling services and providers (bank and nonbank) in new and interesting ways.”

More disaggregation provides more choices for consumers while simultaneously making it more difficult for consumers to distinguish between banking and nonbanking products. Ultimately, how you choose to do payroll for unbanked employees can help relieve some of the ambiguity around banked and unbanked products as well as reduce some financial stress.

As an HR team, you can help alleviate financial concerns by empowering your employees to make better financial decisions by offering financial education training as a benefit.