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Payroll Cards Improve Direct Deposit Participation

This is a growing trend as there are many benefits to employers and employees alike. Direct deposit involves a series of steps that culminates in the employee receiving wages electronically into their bank account, whether they are paid on an hourly basis or salaried.

For the staffing industry in particular, this trend poses a significant potential for savings as the volume of payroll checks for external staff is far greater than that of internal staff. For example, a staffing firm with 20 staff members may employ as many as 500 to 1,000 temporary employees per pay period. The costs associated with paying this many employees is on par with much larger organizations outside the staffing industry who, like you, strive to provide superior service at a minimal cost. By providing direct deposit to your employees, you will experience dramatic savings as well as improve relations with your employees by providing this valuable benefit.

Background on the Market
Over the past eight to ten years, we have all had experiences with either pre-paid telephone cards, gift cards or the omnipresent debit cards. These are all convenient ways to store money that can be utilized either by a specific individual or by the person possessing the card. More recently, the concept of payroll cards has been introduced as an alternative way to provide payroll funds to individuals. These cards are a fairly basic concept that may sound familiar. Load an employee's payroll funds onto a card that can then either be withdrawn from an automated teller machine (ATM) or used to purchase goods and/or services up to the amount associated with the card, just like a debit card. The card, once all funds have been used, can either be re-loaded with funds or discarded. Therefore, instead of an employee receiving a paycheck they receive payroll funds in an account via direct deposit and they are able to retrieve their funds through their payroll card.

 

The issuance of payroll cards to employees is not completely new. The U.S. government, for example, maintains several contracts among the four branches of the military to provide an efficient, electronic means of distributing funds to service men and women. This is particularly helpful when those employees are overseas or aboard ships where access to banks is limited or non-existent. By providing an electronic means of distributing funds, this eliminates the need for currency, coins, vouchers, money orders, etc.

In addition to the convenience of use, payroll cards offer an added level of security. Typically, the cards use a multilayered integrated chip, which controls access to the funds. The chip is programmed with a user key or personal identification number (PIN). Funds cannot be distributed without the use of the PIN, which only the cardholder knows.

From a much larger perspective, there are about 50 to 60 million people within the U.S. who do not have a traditional bank account. Many of these same individuals do not have credit cards either. We live in a culture that revolves around transactions; transactions that are, by design, quick and convenient. Individuals without a traditional bank account are unable to participate in a large amount of transactions such as general eCommerce, point-of-sale transactions, electronic payment to creditors, etc. Basically, anything where cash is not either accepted or a viable option is simply not available to these individuals. More importantly, individuals who do not possess a bank account are unable to participate in traditional direct deposit offerings.

According to the Federal Reserve Bank of New York, there are approximately 20 million users of these types of cards and that number is expected to increase to more that 49 million by 2008. Obviously, the trend towards a greater level of acceptance is growing. In 2003, these types of cards were used to make $42 billion in transactions. By 2006, more than $72 billion worth of transactions are expected. Experts have indicated that the industry is in the introductory stage of its life cycle, which suggests that there is still substantial growth potential in the near future.

Problems and Solutions

Currently, you may be offering a direct deposit solution for your employees. Direct deposit is a method of payment to your employees which electronically credits their checking or savings account or possibly both. This is a service that you may provide as a benefit to your employees who have been with you for a defined period of time. Even though it may be a benefit to your employees, it also provides a tremendous benefit to your organization. The benefits of such an offering include decreased processing time for payroll, increased security as the funds go directly into an account, reduced fees for stop payment of checks, no lost checks, decreased employee payroll issues, etc. According to the American Payroll Association (APA), these savings equate to approximately $2.00 per contingent employee per pay period.

Many firms have the desire to move towards a greater level of employee participation in direct deposit since the efficiencies are proven and dramatic. The reasons for both employee and employer to find value are obvious. But sometimes just encouraging the idea with your employees is simply not good enough. In many cases, it needs to be a policy of education and commitment to increase participation. However, this is assuming that all of your employees can participate in direct deposit. That may not be the case; take those employees who do not have a checking or savings account, regardless of education or policy, these employees cannot participate.

One new solution for firms desiring to increase employee participation in direct deposit is what is commonly referred to as Payroll cards. A Payroll Card is, in essence, just like direct deposit as funds are electronically deposited into an account that the employee can access. The major differentiator is that payroll cards can accommodate those employees who do not have bank accounts.

Major Benefits of Payroll Cards

For Employees:

1. Funds are immediately available in account
2. No approval needed; everyone is qualified
3. No check cashing fees
4. No waiting in lines to cash checks
5. PIN protected; which provides added security
6. Purchasing power through POS vendors
7. No lost checks
8. ATM withdrawal
9. No need to carry cash on hand
10. Funds are FDIC insured
11. Transfer funds
12. Pay bills online

For Staffing Company Employers:

1. Decrease cost of distribution of checks
2. Fills gap in direct deposit participation
3. Increases efficiency of payroll
4. Decreases potential check fraud and lost checks
5. Eliminates stop payment fees for lost or stolen checks
6. Timely payroll even when employees are away
7. Provides major benefit at minimal cost
8. Improves employee loyalty

Challenges for the 'un-banked' provide opportunities for better service

 

There are not many categories that you can split your employees into easily; however, one thing is true...either your employees have a bank account or they do not. Those employees that have a bank account are commonly referred to as 'banked' and those that do not have a bank account are referred to as 'un-banked' or 'self-banked.' For banked employees, in most cases, their bank will accept direct deposit of funds. It saves their financial institution money just as it saves your organization money.

Un-banked employees face many obstacles in managing their payroll checks. Simply cashing their checks may induce charges such as check cashing fees from the bank issuing the check or check cashing services. Many banks are now charging a $5 per check cashing fee to non-customers in an effort to decrease their operating costs and minimize teller transactions. The other option is to use a check cashing service, which may charge from two percent to seven percent or more. That translates to $5 to $17 a week for a $250 check. Both of these options are drawing significant fees just for the purpose of turning electronic funds into cash.

While for some this may be something worth paying for, it may be a major penalty to others who desire a different way of managing their money other than carrying cash around. On the employer side of the equation, there are significant costs as well. The cost can be associated with several aspects of administrative duties, including processing time of payroll, lost checks and their associated costs, etc. From the perspective of the employer's potential savings, there was a study conducted in 1999 by the National Automated Clearing House Association (NACHA), which indicated that an employer would save an average of $48 per year per employee by eliminating the process of generating paper paychecks.

From another perspective, there are many individuals that may have a bank account but may not have a credit card or, if they do possess a credit card it may be so close to the limit that making a transaction is not possible. Among individuals in the U.S. with credit cards, more than 40 percent are within five percent of their credit limit. That means that the credit provided by the card for a transaction has been basically exhausted. The credit card is then working like a debit card since the user must pay down the limit on the card in order to make a transaction. Making larger purchases requires a good credit score. Simply possessing a bank account does not necessarily improve a credit rating.

The credit-challenged need the opportunity to improve their credit scores. Tom Miezejeski, Vice President of Research for The PELORUS Group has indicated, "due to this situation, a possibility exists for a major shift from credit to debit cards. The potential intensifies when one takes into account the recent settlement by Visa® and MasterCard® with regard to processing debit card transactions, which could encourage retailers to promote debit cards at the expense of credit cards, thereby actually eroding the number of credit cards issued annually."

Understanding Payroll Card Options: SVC's or Bank Cards

In order for employees to participate in our growing, non-cash, transaction-based society and for employers to capitalize on these trends, there needs to be an option that will allow them to leverage the flexibility of electronic fund distribution. Payroll cards address this need head-on for both employees and employers.

There are a couple of offerings from vendors when it comes to payroll cards. The two main offerings can be categorized as either stored value cards (SVCs) or bank cards.

First, let's explore a stored value card. Just as it sounds, it holds a stored value of funds that has been associated with the card. Once loaded, or associated with a pre-determined dollar value, the card can be used to make withdrawals from ATMs. To better understand this option, let's look at the setup. The employer sets up one major account with the bank and each employee has access to what is referred to as a sub-account under that one major account.

With SVCs, the employer directs funds through the major account and each sub-account, and then maintains the balance for each individual employee. The employee does not actually own the sub-account; they only withdraw funds from that account. The employee is not able to participate in point-of-sale or retail transactions as one would with a true debit card or bankcard. Although the major account is FDIC insured, the sub-accounts are not individually insured. For example, the Federal Deposit Insurance Corporation (FDIC) insures deposits up to $100,000.00. That means that if there are 100 sub-accounts for the one major account, each one is only insured for $1,000.00. The employee does not have much protection in the event the issuing or sponsoring bank fails. Also, most SVCs do not provide protections under Regulation E, which provides provisions for fund replacement in the event of lost or stolen cards. VISA branded cards, i.e. bank cards, and offer zero-liability policies.

Bank cards are similar to SVCs in that each is loaded with a pre-determined dollar value and can be used for withdrawals from ATMs. There are, however, dramatic differences between these two types of cards. First, with a bank card the employee is able to participate in any point-of-sale or retail transaction as one would with a true debit card or bank card. Second, the employer sets up an actual account with the bank for each employee who then has access to the account itself whereas with a SVC, the employee is accessing a sub-account under a major account. The employer is responsible for directing funds to the individual account. Third, the employee actually owns the account and is able to build a credit history based on their use of the account which may lead to a greater level of financial independence. Finally, the individual account deposit is FDIC insured up to $100,000.00 and the employee can enjoy the protections issued under Regulation E.

Conclusion: Better participation equals better service at lower cost.

If your organization would like to increase employees' participation in direct deposit, the employees that do not have a bank account have traditionally not been able to participate. The un-banked employees now have an offering that will enable them to leverage the benefits of direct deposit. By providing a payroll card offering, these employees will be able to help your organization increase the percentage of participation in direct deposit. If you wish to encourage your employees (banked and un-banked) to participate in direct deposit, it is a matter of educating them on how to accomplish this and explaining the benefits in a way they can appreciate and understand.

For more information regarding VCG, or our WebPAS and StaffSuite products, visit http://www.vcgsoftware.com or call 800-318-4983.

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