Payroll Cards for Everyone?

thePoint
July 22, 2005

Payroll cards offer the promise of a win/win/win: considerable new revenue streams for financial institutions, reduced payroll expenses for corporate customers, and significantly reduced costs for employees, according to a recent article in Banking Strategies magazine.

The premise behind payroll cards is simple. The issuance of plastic cards can provide low-paid, temporary, or part-time employees, as well as recent immigrants and students who typically do not have bank accounts, a better way to get their payroll funds. Studies show there are 80 million persons in the U.S. who currently receive their wages via paycheck. Of that amount, 28 million are unbanked and 40 million are underbanked.

The target users then are "underbanked folks who usually hate banks, mostly for good reasons. It will take time, effort, ingenuity and even courage to figure out how to market to this demographic," says Steve Mott, principal of Stamford, Connecticut-based payments consulting firm BetterBuyDesign.

But Mott predicts that the potential for prepaid card transaction volumes/revenues and heightened corporate customer satisfaction may provide just the motivation required.

In a 2004 survey of 22,000 members of the American Payroll Association, a trade association of payroll executives of large corporate employers, MasterCard found that 28% of the members said they had or were intending to implement a payroll card payment option.

Workers who don't have a relationship with a bank inevitably pay high fees—typically between 2% and 10% of the value of each paycheck—to cash their checks at a currency exchange or other private company. And, once they cash their checks, they incur the risk of carrying the cash. Such employees typically can't qualify for the credit and debit cards that other consumers rely on for retail purchases.

To employers, the payroll card is a cost-cutting solution. Paying employees by check is expensive, and replacing lost or stolen checks is even more expensive.

Both employer and employee save when, in lieu of a check, payroll funds are electronically transferred into a bank account that the employee can access using a special debit card. Employees can use the card at ATMs to gain access to their pay or they can use them at point-of-sale terminals either to get cash or to pay for purchases. Most cards have either the Visa or MasterCard logo, which allows them to be used to pay for purchases at any retail location that accepts the cards. The financial institution earns income in the following ways:

• Charging a monthly card fee ($1 to $2) for the service. This fee is paid either by the corporation or the cardholder.
• Charging employees each time they use an ATM or point-of-sale terminal to access their funds.
• Collecting interchange that is typically comparable to what they get on debit cards—1% to 2% of the value of the transaction—when the card is used to make a purchase. That fee is paid by the merchant that accepts the card for payment.

While most employees initially use their cards to get all the cash from an ATM as soon as it's available, employees do show more interest over time in using their cards as traditional debit cards, Nora Arpin, first vice president of commercial card products for Comerica Inc., tells Banking Strategies.

In the case of employees who have had their cards for at least three months, about 60% to 70% of the transactions on Comerica-issued payroll cards occur at the point-of-sale, she says, indicating a substantial revenue potential. The average card generates four point-of-sale purchases per month, indicating that institutions are indeed collecting interchange revenue, according to Visa data.

For all of the potential of this new product, the industry's ultimate success is expected to depend on its ability to market and sell payroll cards. As of mid-2005, employers have been more receptive than employees.

Financial institutions are using the payroll card service as an enticement to obtain new corporate cash management businesses by showing corporate clients how the institution can save them money on their payroll.

While payroll cards were once seen as giving a provider an edge in the market, they have quickly become a "must have" product, says Andrew Dresner, vice president of First Manhattan Consulting Group, New York. "Payroll cards have become a defensive product. Banks feel they're expected to offer these cards now or they won't be competitive," Dresner says.

KeyCorp has developed a card internally that it sells directly to its corporate clients. It also has a third-party agreement where private payroll card companies sell payroll card services to corporations. These third parties then administer the programs, but Cleveland-based KeyCorp holds the funds.

Because surcharge and foreign ATM fees can add to the cost of a payroll card program and make it less attractive to employers and employees, ATM availability is a consideration. This is generally not a problem for regionally based employers because their institution most likely has several ATMs deployed in the region.

In some cases, it may make sense for an institution to deploy additional ATMs in or near the corporation's operations. Or, the institution might form an alliance with other institutions or entities that have ATMs in the region to allow sharing of ATMs without surcharges.

Employee interest, however, has not matched the corporate interest. "Usage tends to be much less than what banks were projecting when they first initiated the card programs," according to Edward Neumann, managing director of Javelin Strategy & Research, a Pleasantown, California-based payments consulting firm.

"Payroll cards are definitely an idea whose time is coming, but it's taking us longer to get where we want to be with this program than we thought," agrees Arpin. "There's a reason that these employees currently get a check and even when you show them there are advantages to getting a card over a check, the employees still want that paper check," she claims.

Arpin believes that employees will need convincing to get them to accept a card. "These are employees who have chosen not to have a relationship with a financial institution,” Arpin says. “They're not unbankable in the sense that they can't be served with bank products. It's just that they have made a choice not to use those products.” Getting such employees to use a card takes more marketing power than originally thought, she adds, and while success is possible, it requires the joint effort of financial institutions and employers.

This article was prepared by the staff at the Point for Credit Union Research and Advice and is published online at http://thepoint.cuna.org/. Reprinted with permission.