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Payroll Cards: The Next Generation E-Pay Solution


June 2004 (SmartPros) About 56 million Americans don't have a bank account, and just 55 percent of American workers are enrolled in direct deposit. These statistics indicate that the two main forms of paychecks -- direct deposit and printed checks -- leave room for yet another paycheck solution.


Enter stored-value payroll cards. First launched by Visa in 2001, today approximately one million Americans have their paychecks loaded onto a plastic card. Celent Communications predicts that number will grow to 3.8 million workers by 2006.
 
In particular, payroll cards are a great option for employees who don't have bank accounts -- typically teenagers, low-wage workers and part-time workers in industries such as retail, agriculture, food service and maintenance. But they are also a good alternative for banking employees who want to avoid hefty bank fees.
 
To meet the demand, several banks and companies have added payroll cards to their product list. Generally, here's how a payroll card works: Employees get a Visa- or Mastercard-branded card. Each pay period, the card is loaded with the employee's net pay. Employees can withdraw cash as they need it from local ATM machines, or use the card at any merchant displaying the Visa or Mastercard logo. They can also use the card to make PIN-based transactions, where they can get cash back from participating merchants.
 
Cost savings is the main incentive of a payroll program for both employees and employers. The New York Public Interest Research Group says check cashing costs the average worker $324 a year. That cost could be cut in half with a payroll card, according to Consumer Reports, which estimates a payroll card averages $164 a year in card-usage fees. For the employer, it costs about $2 to issue a paper paycheck. Converting to a payroll card could save up to $100 per year per employee, according to Consumer Reports.
 
An American Payroll Association poll found that employers would be motivated to implement a payroll card program primarily in order to benefit employees (73 percent). Other reasons include to reduce costs (61 percent), improve logistical efficiency (48 percent), and reduce payroll check fraud (38 percent).

Later we'll highlight the main benefits to employees. But first, let's explore the benefits to employers: 

  • Payroll cards are up to 75 percent cheaper to issue than checks, Celent estimates. Companies save money by eliminating check stock, printing, envelopes and stuffing, and by bypassing check processing at the bank.
  • By eliminating these logistics of check processing, a payroll card program lightens employer workload. Managers don't have to pass out paychecks on pay day. Reconciliation is simplified.
  • There is less risk of theft when employees can't lose their checks. The PIN-protected card is an added security feature for the employee, as well.
  • A payroll card program gives employees more options and is therefore a useful employee-retention benefit.
Benefits to Employees
  • Unbanked employees can avoid check-cashing fees, which can be as high as 10 percent of the check's value. In addition, employees receive a monthly paper statement and have phone or Web access to their account information.
  • Banked employees can avoid, or reduce, banking fees.
  • Employees who have traditionally relied on checks now have instant access to their money. The card can be used at ATM machines to withdraw cash or at stores to make purchases.
  • A payroll card can be used as a budgeting or savings tool. For instance, the employee can opt to have a certain amount per paycheck loaded onto the card for vacations, holiday shopping, etcetera.
  • A payroll card offers additional security: it requires a PIN and therefore reduces exposure to fraud that a paper check presents.
  • Additional perks may be available to certain workers. For instance, employers can opt to pay their sales associates their commission within 24 hours of a sale rather than waiting for payroll to process a check.

Steven M. Bragg, author of Accounting Best Practices, Third Edition, writes that transferring payroll to credit card balances is a low-cost payroll solution that requires little installation time. For more information about payroll cards, look to see if your company's bank offers the program, or check out companies that have added payroll cards, including ADP TotalPay Card and Paymaxx.com.

2004 SmartPros Ltd. All rights reserved.

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