Empowering the Masses with Payroll Cards

By Lauri Giesen

The product promises to be a win/win/win for employee, employer and bank. But driving adoption will require marketing might.

|SYNOPSIS| Payroll cards seem a promising platform for financial institutions to serve a new customer segment — the underbanked — while addressing the needs of the corporate customer, an important customer segment. Payroll cards are a means for workers to receive their pay without having to maintain a bank account or use a check-cashing operation, and access can be through an ATM or point-of-sale terminal. Pro formas for the programs suggest significant revenue to be earned, but banks are in for a marketing challenge: To date, employers have been more receptive to the cards than employees. Several institutions, including large banks eager to win remittance business, are finding ways to build scale — if not at the growth rates originally projected.

Few new products look as good on paper as payroll cards. They offer the promise of a win/win/win: considerable new revenue streams for banks, reduced payroll expenses for corporate customers and significantly reduced costs for employees.

Early experience in the product, however, suggests that significant groundwork needs to be laid before the promise can be realized: At the risk of stating the obvious, the ultimate end-user of the product is a customer segment that banks have not successfully communicated with. The target users, says Steve Mott, principal of Stamford, Conn.-based payments consulting firm BetterBuyDesign, 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.”

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

SIZING THE OPPORTUNITY

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. Mott points to studies that show there are 80 million persons in the U.S. who currently receive their wages via paycheck. Of that amount, he estimates 28 million are unbanked and 40 million are underbanked. Those two are the prime markets for payroll cards.

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 to pay 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 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 bank earns in the following ways:

• By charging a monthly card fee ($1 to $2) for the service. This fee is paid either by the corporation or the cardholder.
• By charging employees each time they use an ATM or point-of-sale terminal to access their funds. As the table (on page 48) shows, the fees can be 30% of what the employee would pay to cash their checks in a year. Some banks do not charge cardholders as long as the cardholder uses their ATMs. Others will give one or two monthly transactions free and then charge for additional use.
• By 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 is available, employees do show more interest over time in using their cards as traditional debit cards, says Nora Arpin, first vice president of commercial card products for Comerica Inc.
  
  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. According to data collected by Visa, the average card generates four point-of-sale purchases per month, indicating that banks are indeed collecting interchange revenue.
• Interest on funds held in the account.

THE MARKETING CHALLENGE

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

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

“This is definitely part of our corporate relationship strategy,” says Arpin. “We see the biggest advantage of this card is to serve the needs of our corporate clients.”

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 M. Dresner, vice president of First Manhattan Consulting Group, New York (FMCG).

“Payroll cards have become a defensive product; banks feel they are 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.

ATMS NEEDED FOR EASY ACCESS

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 bank most likely has several ATMs deployed in the region. But the regional bank serving the payroll card needs of a national corporate customer may be constrained.

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

One such alliance is the Allpoint Network, a coalition of more than 50 banks that jointly own 32,000 ATMs nationally. While the initial goal of the organization was to expand the availability of free ATMs for the banks’ checking account customers, facilitating payroll cards has become an important goal, says Ben Psillas, president of Allpoint.

“Payroll is a natural part of our association,” he says. “When banks issue payroll cards to Fortune 1000 companies, they have to deal with how to provide ATM access nationally and we allow them to do this without incurring a lot of expense for the cardholders.” One out of 11 ATMs in the U.S. is affiliated with the network, according to Psillas.

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 L. Neumann, managing director of Javelin Strategy & Research, a Pleasantown, Calif.-based payments consulting firm.

Neumann says he has advised three different banks, all in the $10 billion to $100 billion asset range, in developing payroll card programs. While not revealing specifics, he says all three banks found the number of employees who signed up for the cards to be considerably less than projected. The result was lower revenues coming from issuing the cards.

“Payroll cards are definitely an idea whose time is coming, but it is taking us longer to get where we want to be with this program than we thought,” agrees Arpin. “There is 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 bank-issued card. “These are employees who have chosen not to have a relationship with a bank. They are not unbankable in the sense that they cannot be served with bank products. It’s just that they have made a choice not to use those products,” she says. Getting such employees to use a bank-issued card takes more marketing power than originally thought, she adds, and while success is possible, it requires the joint effort of banks and their corporate clients.

Mott, however, says the speed at which payroll cards are being accepted is to be expected. “It took 20 years for the industry to get 25% of employees on direct deposit. Any new payment product is going to take time. This product is only two years old,” Mott says. He estimates that payroll cards have the potential to create additional revenue of $9.5 billion for banks based on fee and interest revenue.

Taylor Vaughan, senior vice president of treasury management systems for First Horizon, notes that none of the corporate clients his bank signed up for payroll card programs has met its goals for employee participation. But he says the bank is still making money even on the lower numbers. “You have to price this so that you can make money on a single account. If you need to reach a certain volume to break even or make a profit, you need to rethink your model.”

In addition to serving the needs of corporate clients, some banks are hoping to use the accounts as a means to get the unbanked to start using their bank services. By allowing such employees to become comfortable with using a bank-issued card, banks could conceivably up-sell these employees on traditional check and savings products as well as sell them credit products as the employees show responsible money management skills with their payroll cards (see “Incent, Educate or Mandate”).

Some banks, however, have their doubts. “We typically find if these customers don’t already have bank products, there is probably a reason — they don’t want them,” says Sarah Grotto, senior vice president of consumer payments for KeyCorp. “So, we don’t spend a lot of time trying to market services we believe they don’t want.”

Because Comerica has positioned its payroll card as part of its corporate services, it has not tried to cross-sell or even communicate directly with the cardholders. However, Arpin says the bank is looking at using the card program to establish additional retail business and may make such an effort to cross-sell bank services to cardholders in the future.

Dresner argues that banks need to look closely at who is using their payroll cards and target those employee segments that are more likely to be future bank customers rather than use the same marketing message to all the cardholders. He notes that recent immigrants might be a lucrative bank market for the future while temporary employees and others who have simply chosen not to open bank accounts in the past may continue to be the most resistant.

Ms. Giesen is a freelance writer based in Libertyville, Ill.

Copyright © 2005 by Banking Strategies, published by BAI.

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