Ecount News

Tapping Benefits With Prepaid Cards

Dow Jones

NEW YORK (Dow Jones)--A growing number of workers are tapping their benefits with a swipe of a card.

Under mounting pressure to cut costs, employers are rolling out a variety of "stored value" or prepaid cards that employees can use to spend their paychecks, cash bonuses, flexible spending accounts and other fixed allowances. Workers can conveniently access their funds. Employers, meanwhile, cut their processing, distribution and administration costs.

Payroll, incentive and flexible-spending cards represent the fastest-growing opportunities, but issuers say they're also seeing interest in prepaid cards for general business expenses, such as relocation, travel and other project costs.

Douglas Lancaster used to get his paycheck deposited directly into his checking account. But when he heard about a new debit card from Ecount that was being offered by his employer, EB Games, last fall, he closed his account. Now, his paycheck is electronically loaded twice a month onto a debit card. "It's a lot easier than using a check," said the 30-year-old Houston store manager, who now uses his payroll card to pay his bills online.

For employers, the cost savings of adopting payroll cards and moving their employees to electronic payments can be significant. U-Haul International Inc., which started offering Bank of America Corp.'s (BAC) payroll cards about two-and-a-half years ago, estimates that it saves about half a million dollars a year by moving its employees to electronic payments instead of issuing paper checks. Indeed, it costs employers between $1 and $2 for every paycheck it processes (and between $8 and $10 to replace a lost or stolen paycheck) compared with 20 cents per transaction for direct deposit, said Andrew McDevitt, American Payroll Association's manager of government relations.

Payroll cards are also a way for businesses and financial-services firms to target the "unbanked" population that includes students, part-time or low-income workers. At least 14.2 million households fall into this category, said Ariana-Michele Moore, an analyst at Celent Communications, a Boston research firm. Within that category, about 12.4% are expected to have payroll cards by the end of 2004, up from about 8.5% last year, she said.

Over $500 billion is being distributed by check to "unbanked" employees, according to Visa® USA, which offers payroll cards to more than 1,000 employers and payroll providers. Meanwhile, corporations are handing out incentive cards - a market Visa estimates at $125 billion - to employees for meeting sales and performance goals.

Trey Rodgers, a 32-year-old sales manager for Browns Fairfax Mazda in Fairfax, Va., said that dealer salespeople used to have to wait up to two months before they got bonus checks from Mazda. Now, bonuses are reflected on incentive cards within a week to 10 days of making a sale. Rodgers, for example, saved up bonuses on his incentive card until he was able to buy his wife a pair of diamond earrings as a present last Christmas.

Indeed, segregating incentive dollars from the employees' paychecks serves aNorther purpose. "If you put that (bonus) into someone's paycheck, the value tends to get lost," which is why some companies still hold onto recognition programs such as catalogs and incentive card plans, said Patricia Loria, vice president, research and development at MasterCard Inc.

Incentive cards at Ecount, which provides the cards to many auto manufacturers such as Mazda, make up more than 90% of its existing 1 million cards outstanding. The company's total revenue is expected to increase by 100% in 2004 over 2003, and the company expects to distribute 40,000 cards a month on average this year, said Matt Gillin, president of the Conshohocken, Pa., provider of stored-value cards.

ANorther type of debit card that's gaining traction is a card that lets employees spend money in their flexible spending accounts - employer-sponsored plans that let workers put aside pretax money from their paychecks to pay for medical costs that their insurance doesn't cover. Visa, for example, offers FSA cards to about 50 companies.

Claiming insurance payouts also is likely to get easier. "Insurance claim is aNorther big opportunity if you look at the rising cost of workers' comp," said Visa's Todd Brockman, vice president of prepaid products. The company is working with insurers to develop programs that would electronically disperse funds onto a card in lieu of a check. Other insurance carriers are offering prepaid cards to pay out claims on homeowners insurance and disaster relief, he added.

Meanwhile, more employers are also interested in giving workers prepaid cards for general business expenditures. So, instead of requesting a cash advance, employees who travel infrequently could use prepaid cards to pay for hotel rooms, or meeting planners could use the cards to reserve conference facilities. Cendant Mobility, a relocation consulting concern owned by Cendant Corp. (CD), is considering adding a prepaid relocation card for its customers, according to a company spokesperson.

Other companies use supply chain incentive cards as a way to distribute marketing and advertising dollars to their suppliers, said MasterCard's Loria. A company might give the cards to its distributors, who would use the cards to pay for advertising or to manage co-op programs; franchisers might use the cards to give incentives to its franchisees, she added. Government entities also are expressing interest in project cards, since the cards enable project managers - who are often under pressure to make sure funds are spent appropriately - work within a budget and track expenditures, she said.

But consumer advocates say it's important to watch out for any fees. Those who use payroll cards, for example, typically pay a monthly service charge and ATM withdrawals fees - although proponents point out that total fees on average are still lower than many of the Fulfillment Housescashing services. Employees also won't be able to build up their credit or earn frequent flyer points.

"The main risk is in having a meager paycheck eroded by ATM paycheck fees," said David Heim, deputy editor for Consumer Reports. "You don't realize that you're paying a very high price for this convenience."

(Jane J. Kim is one of four Getting Personal columnists who write about personal finance issues ranging from new tax proposals to education-funding strategies to estate planning.)

- Jane J. Kim