Payroll card is for people without bank accounts

Hat Tip: Gannett News Service

For 71 percent of America's workers, payday means an automatic direct deposit into a bank account.

But for as many as 28 million people in the United States who don't have a bank account, payday means cash or a paper check.

Those paper checks aren't convenient for so-called "unbanked" people, who end up paying exorbitant fees to cash a check or pay bills. And it's not great for employers, either, who pay $1 to $2 per paper paycheck and up to $9 to replace one if it's lost. An increasing number of employers are now finding a solution in a new type of plastic: the payroll card, a pre-paid card that employees can use just like a regular ATM/debit card, and employers can reload with the same ease as direct deposit into the bank.

"Better, faster, safer, more secure," is how William Dunn of the American Payroll Association describes the payroll card option. The association estimates 4 million paychecks are lost or stolen annually.

"The paycard helps employers increase the number of electronic payments they make to employees," Dunn says. "You don't have to deal with check fraud; if they lose a paycard, it's easier to replace; and it's really good for the employee as well."

Similar to ATM cards, people using the payroll cards to withdraw money are subject to fees at ATM machines not in their network. The money is debited directly from their card accounts.
Employees benefit because they no longer have to pay $5 or $6 fees to cash their paychecks, says Tom Crowder, Discover's general manager of prepaid products. Employers benefit because they save money by depositing money directly into the card account instead of cutting a check every week. (It can cost as little as 20 cents to issue a payment through a card, studies from VISA have shown.)

Discover also benefits by having more branded cards in the hands of more consumers, says David Robertson, publisher of the Nilson Report, a newsletter on the payment cards industry.
"If you're a card company, you're looking to get as many pieces of plastic out there with your name on it" as possible, Robertson said. "There is an opportunity to put a payment card into the hands of America's poorer population. They are cash-oriented spenders and this is a way to maybe make them card-oriented."

Card issuers can also gather data on cardholders over time, learning more about their spending patterns and habits, Robertson said. That allows card issuers to eventually use that information to develop and market new products in the future.

Employers loaded about $6.3 billion on about 1.5 million payroll cards in 2005, according to the Mercator Advisory Group, a Waltham, Mass.-based payments industry research firm. Those numbers are expected to increase to 3.2 million cards and $12.1 billion in payments by the end of 2007, and could reach 4.6 million cards with $17.4 billion in payroll deposits by the end of 2009.

It's not only the unbanked population that uses the cards, says Tim Sloane, who directs the Mercator Group's debit and prepaid advisory practice.

Employers also like to use payroll cards when an employee is part-time or works on an as-needed basis, if the employee moves around a lot, or if payments are irregular, such as with contractors or salesmen who earn variable commissions, Sloane said.

JPMorgan Chase & Co. issued its first VISA-branded payroll debit cards in the late 1980s, said Ted Grunberg, the New York bank's product manager for prepaid products.
But only in the last three years have the cards really taken off, Grunberg said. He attributes that to consumers' increasing comfort with plastic. Now more than 1,000 employers — from large corporations to mom-and-pop shops — use Chase's VISA-brand payroll cards, Grunberg said.

"People are getting used to this," he says. "Gift cards have just flown through the ceiling."