Ecount News & Press Releases

Pay Via Plastic

More employers are turning to debit-style cards to pay workers who, for a variety of reasons, lack bank accounts

September 1 2006 by Tom Starner - Human Resource Executive

Employers seeking ways to trim costs and streamline the payroll process, thereby making employees happier at the same time, need only follow a simple dictum: It's all in the cards.

Paycards, that is.

Although the paycard -- a plastic card that acts and looks pretty much the same as a bank debit card once it is "funded" by an employer with an employee's net salary -- is hardly overtaking direct deposit as the basis of a paperless payroll strategy, it is growing in popularity.

Aaron McPherson, a research director in the payments advisory service at Financial Insights, a Boston-based financial research and advisory firm, says research he conducted earlier this year revealed there are currently about 21 million people using payroll cards in the United States. Interestingly, just a few years ago, McPherson predicted there would be 6.8 million paycards in use by 2006, so the growth of this paper paycheck alternative has surprised even him.

"The number has really shot up quite a bit, much more than I expected," McPherson says. "It's more than doubling every year, and I am getting a lot more questions about paycards from employers."

McPherson says paycards, which employees receive in lieu of paper paychecks either as a stand-alone solution or in conjunction with direct deposit, seem particularly appealing to employers who have a large transient or part-time workforce.

This employee group often falls into the category of "unbanked" workers for a variety of reasons. (The FDIC estimates that 13 percent of American families have no bank accounts, while the Pew Research Center reports there are 25 million Americans without bank accounts.) Without a paycard option, unbanked employees typically pay an average of 2.5 percent in fees to check-cashing businesses -- hardly a good deal.

In fact, more than 10,000 check-cashing/loan services in the United States process more than 180 million checks annually, earning $60 billion, much of it at the expense of the unbanked.

"Many people who use paycards may not have bank accounts or can't get a bank account for a number of reasons," says McPherson. "Or, they may work in an industry where the workforce is widely dispersed or travels a lot. In those cases, it's easier to issue a paycard."

Reasons for not having a savings or checking account include a distaste for dealing with banks, finding service charges too high, poor account management or credit problems. Another factor is age, as younger part-time employees often don't yet have bank accounts.

Building a Case

Oddly enough, McPherson says his research, conducted in February 2006, showed no significant difference in paycard use by income level. He speculates this could be the result of more and more mid- and higher-earning employees using paycards if employers make them available.

"Early on, it was primarily the unbanked or lower-income employees, but today, the differences are not statistically significant," he says.

McPherson cites the comfort level consumers have with bank debit cards as a potential driver in the paycard upswing. Plus, the number of places that accept debit cards (and paycards) -- retailers, restaurants and even corner grocery stores, for example -- are growing as well.

Of course, while giving employees more flexible payroll options is a plus, employers also are looking to trim costs associated with issuing paper checks, which the American Payroll Association estimates at anywhere from $2 to $10 per check.

Journal Communications Inc., a media and communications company headquartered in Milwaukee, views paycards as a "value-added" feature that has helped increase direct-deposit participation among its 5,200 employees, says Orin Glaeser, the firm's corporate payroll and HRIS manager.

However, in 2005, before the company launched its paycard option (offered through Ceridian, the HR and payroll outsourcing firm based in Minneapolis), Glaeser and Christine Reichardt, Journal Communications' benefit communications specialist, had to create a strong business case for the push to boost direct deposit and paycards.

"When we first decided to increase direct deposit and offer paycards, the concern was the campaign might irritate the workforce," Glaeser says. "But once we created our business case, and showed how direct deposit and paycards could deliver substantial savings, we changed management's mind."

Paycards, says Reichardt, go hand-in-hand with direct deposit to deliver cost savings mainly because paycards can be split between the direct deposit and the card, giving employees a flexible solution.

When the company launched its direct-deposit/paycard communications strategy, it first sent out a mailer to all employees, encouraging people who did not have direct deposit or a bank account to consider the direct deposit with a paycard option. Reichardt says the payroll staff sent three more mailings, and also discussed the situation with managers across the country. (Journal Communications operates in 22 states and has more than 50 locations.)

"We also sent reports to local managers and recalculated how much they were spending on live checks," she says. "When they saw some of them were spending $46,000 annually to hand out checks, we got their attention."

Paycards were offered as an option on the direct-deposit form, Rechardt adds, with the choice of salary splitting, whereby a portion of overall net pay could be allotted to a paycard. The form also offered a list of key reasons why employees should consider a paycard, such as having a student or spouse in the family who might need direct and easy access to cash.

The effort has paid off, Reichardt says, as Journal Communications boosted direct-deposit participation rates from 50 percent to 93 percent within a single year. So far, about 200 employees are using paycards -- about 5 percent of the workforce.

Employees at Journal Communications can use paycards for any point-of-sale purchase without charge. They also get one free withdrawal per pay period (the fee is $1 per automatic-teller machine transaction after that).

The company also offers employees a list of some 40,000 ATMs around the country that do not charge a fee. Most paycard providers offer one or two free ATM withdrawals, and some offer unlimited withdrawals, provided the employees use the vendor's network.

Paycards offer Journal Communications employees an inexpensive alternative to check-cashing fees, Reichart adds, and a recent survey conducted by the APA bears that out.

The APA found that with check-cashing fees averaging 2.5 percent, and average bi-weekly net pay at $506, monthly fees are $27.41 -- a $329 annual tab.

Legal Concerns

According to the APA's "paycard portal" Web site, most state labor laws and regulations are silent or unclear on the use of paycards as a legal payroll-delivery method. A few states have taken official legislative or regulatory actions that permit the use of paycards, while Vermont has taken the position that an employer may not pay wages to its workers using paycards. Other states have recently proposed legislation concerning the use of paycards.

Yet, while legal uncertainty may cause some hesitation on the part of some employers, McPherson's statistics indicate there is a strong push to include paycards as part of a paperless compensation strategy.

"The paycard is just another piece of the puzzle, but without it, we wouldn't have been as successful in our drive to increase direct deposit," Glaeser says.

Scott Wisdom, paycard manager at Ceridian, says paycard usage varies quite a bit among clients, but more and more of them are starting to take the option seriously.

"Some clients' employee populations are above the 50 percent mark on paycard participation, as they have been very aggressive on rolling the program out," he says, adding that most employers are within the 5-percent-to-10-percent range, and see paycards as an inexpensive, attractive employee benefit.

Donny Frissell, operations manager at Corestaff Services, a national staffing company headquartered in Houston, reports that between January and October of 2005, the number of Corestaff employees using paycards jumped from fewer than 1 percent to 11 percent, with the current number around 13 percent. That roughly translates to 1,200 Corestaff employees, out of 8,000, who are using paycards.

Frissell says Corestaff, which uses Roseland, N.J.-based Automatic Data Processing as its paycard vendor, is making a concerted effort to persuade employees to switch to paycards.

"There has been a real marketing effort around this initiative. It's now part of our business culture," he says. "People are more familiar with it."

Gary Lott, general manager of ADP's Total Paycard products, says his firm does not charge employers to enroll in its paycard program, and there are no fees to sign up for a paycard and make purchases. The only time employees may encounter a fee is if they use an ATM outside ADP's designated network. Employees can find out the balance on their pay card both online and over the phone Corestaff hopes to have between 15 percent and 17 percent of its temporary workers using paycards by the end of 2006. Frissell says he's confident the goal will be reached.

"We're adding 100 to 150 new paycard users each week," he says. "We still offer paper checks, but 75 percent of our pay is distributed electronically, which is the exact reverse of 2005. Paycards are very flexible for associates, and even the out-of-network ATM fees, if they have to pay them, are below check-cashing charges."

No More Paychecks

Stein Mart Inc., the 265-store upscale retail chain based in Jacksonville, Fla., wanted to move its employees away from paper paychecks to direct deposit, says Greg Lohman, the company's director of compensation and benefits. Its solution? Completely discontinue paper paychecks. That delicate transition, says Lohman, was helped greatly by the paycard option.

"In our case, the concept of getting pay to associates on time, every time, was the main priority," says Lohman, adding that Stein Mart chose Ecount, of Conshohocken, Pa., as its paycard provider. "Saving money really was secondary."

So in 2005, Stein Mart rolled out an intensive communications/educational campaign to its 18,000 employees.

"We had a major campaign about payroll choices, and we had no specific interest how it ended up. If everyone went to direct deposit, no problem. If everyone chose paycards, no problem either," says Hunt Hawkins, Stein Mart's senior vice president of HR.

As it turned out, by July 2005 about 85 percent of employees chose direct deposit and 15 percent went with paycards -- a number that's since crept up to 19 percent.

Lohman says Stein Mart's experience dovetails closely with card companies' predictions: Word of mouth will spread and more people will want the paycard. In this case, the card itself is Stein Mart-branded, including a picture of a store and the company logo.

"It's important for our associates, it's something they are very proud of," Hawkins says. "Our younger folks really like the card."

The company's experiences during hurricanes in Florida in 2004 and Louisiana in 2005 really proved the value of paycards, says Lohman, as Stein Mart associates with cards had easy access to pay compared to those who relied on paper checks. With the Ecount paycard and direct-deposit product, employees can also request paper "pre-checks" that can be used as regular paychecks, but the small number of associates choosing that option is slowly dwindling.

"The paperless pay phenomenon is really catching on, and we're pretty much out front on it," Hawkins says. "We also got the story out there. Not only did we go out and communicate, but we had store managers and assistant managers, field HR people and everyone else be part of the campaign."

On the cost side, Stein Mart has realized about $75,000 to $100,000 in savings during the first year.

"We took a real shot, a leap of faith, that we could do payroll in one seamless process, and it's worked," Lohman adds. "There is nothing we mail out anymore [employees can access their pay stub information online], and paycards helped us achieve that goal. This has really revolutionized what we do."

Financial Insight's McPherson says while paycards are on the upswing, that growth is probably approaching an upper boundary for the near term.

"Paycards will never replace direct deposit," he says. "But the percentage of employees using them could grow to 25 percent. There is still growth ahead."