Experts Say Portability Promises Increased Payroll Card Take-up and Retention.
By Loraine DeBonis, Executive Editor
About 3 million payroll cards were issued in 2007, and that number is expected to reach a little more than 4 million by 2009, according to Mercator Advisory Group estimates. The Waltham, Mass.-based consultancy also forecasts that load amounts on payroll cards will reach $43 billion by 2010, up from $11.3 billion in 2006. But even with the projected 280 percent increase in card loads, payroll card providers are looking for ways to increase card take-up and cardholder retention. One way to do that—particularly in high turnover industries—is to make cards portable, experts say.
Portability offers employees a card product they can continue to use even after they leave a job. For the employer, the portability feature may increase the attractiveness of the card option over a paper check—increasing the potential for more participants, which ultimately could reduce check-printing, processing and mailing costs. For the issuing banks and program managers, a portable payroll card increases the longevity of the product.
“Portability has a lot of benefits, both for the cardholder and the employer, that will extend the utility of the products,” says Frank Dombroski, managing director, commercial card solutions, JPMorgan. The New York City-based bank has been issuing payroll cards since 1987 and in May began offering the portability feature to its 1,000-plus clients. In addition to enabling employees to take their payroll cards with them when they switch jobs, portable cards also support direct deposit of funds from other employers or the government.
“We think portability will increase adoption of the payroll cards as a financial tool that gives value to the cardholder and also accrues some benefit back to the employer,” Dombroski says. “The employers are providing a tool that is saving their employees time and money previously spent on check-cashing and engendering a little bit of good will in the process.”
“I don’t know the number of people who change jobs each year, but it’s got to be pretty substantial,” says L. Richard Fischer, partner in the Washington, D.C., office of Morrison & Foerster and an authority on prepaid cards. “[With portable payroll cards] the incentives for the employer and the employee are clearly there. It’s a matter of getting individuals used to direct deposit and understanding they can take the cards with them.”
According to the Bureau of Labor Statistics, 33.1 million people were hired and 33.8 million people left their jobs between February 2007 and February 2008 in the following industries, which are common targets for payroll cards: construction, retail trade; professional and business services; arts, entertainment and recreation; and accommodation and food services.
Greenwood Village, Colo.-based processor First Data has been offering its Money Network portable payroll card since 2002. “We certainly try to make cards as attractive as possible,” says Mark Herrington, president of First Data’s prepaid business. “In any of the segments or distribution channels for reloadable products, attrition is very high. The life of the account isn’t nearly what it should be,” he continues. “A big part of that is education, and we’re trying to do a better job of letting employees know that they have a portable product available to them and what that means.”
About 40 percent or more of new payroll cardholders are opting for the upgraded portable product, according to Herrington. Employees have to opt-in for the portable card, which involves calling a toll-free number and providing name, address, date of birth and Social Security number. A personalized card along with instructions on how and where to use the card, fee schedules and other disclosure information are sent to the cardholder.
Automatic Data Processing, Inc., with nearly $8 billion in revenues and more than 600,000 clients, is one of the world’s largest providers of business outsourcing solutions. Gary Lott, division vice president and general manager of its TotalPay Card program, says interest in portable payroll cards continues to increase.
“We are seeing an added interest in portability,” says Lott, noting that 18 to 20 percent of ADP’s portfolio is made up of portable cards. “Our programs are supported by FIS Prepaid Solutions, Visa Debit Processing Service and Money Network, with all three programs seeing growth in portability.”
ADP is unique in that about 70 percent of its payroll cardholders are banked individuals often using the card to better manage discretionary spending. “A lot of our cardholders have traditional debit cards, so increasing functionality on our payroll cards is a necessity of which portability is a key component,” Lott adds.
A Question of Compliance
While portability may sound like a win-win opportunity, providers have to be mindful of the compliance issues, which change when cards become portable. “The structure of the account makes a difference from a compliance standpoint,” Herrington notes. Portable cards require compliance in the state in which the employee works, which could change, or the employee could work in multiple states at once. Herrington says First Data is compliant in 49 states.
Two legal and regulatory areas govern portable payroll cards—state and federal laws. First are the state laws, which could cover issues such as fees or even whether or not payroll cards are legal, says Fischer. Second are federal requirements including Regulation E and Customer Identification Program requirements associated with The USA Patriot Act. (For more information on legal issues for payroll cards, visit Paybefore, September 2007.)
Many states distinguish between actual employment and other forms of payment, which sometimes includes bonuses or payments from a different revenue source such as a tax refund. These different forms of payment may have different sets of rules, Fischer explains. “One of the things FIs have to think about is whether or not they want to use a single card for all of these different types of revenue sources and subject themselves to employment restrictions—such as prohibitions against some fees and the requirement that employees have at least one opportunity per pay period to receive funds ‘at par,’ meaning without any fee being charged—that otherwise might not apply. They may very well decide it’s worth it.”
Ultimately, Fischer says ensuring compliance with various state laws is more of an operational hurdle than a barrier to entry, especially since many banks already offer payroll cards to large companies with employees in multiple states.
When cardholders opt for a portable card, they may incur fees that did not exist on their previous payroll card. For example, the Money Network portable card costs $2.95 per month including a printed monthly statement; while the non-portable cards carry no monthly fee. ATM fees remain constant regardless of the card type, Herrington says.
For Chase Payroll Card Plus cardholders, whether or not they incur incremental fees depends on the program. But these fees, Dombroski says, are much lower than those for general purpose cards sold through the retail channel.
“Fees can be quite high on general purpose cards. Usually there is an activation fee, monthly fees and ATM fees. Our distribution costs are much lower per card, so we can offer our cards with lower fees, even portable ones.”
Increasing Card Longevity
Regardless of the fee structure, experts say that the flexibility the portable payroll cards afford consumers is an important added value that could increase the lifespan of the card account.
“Payroll cards without portability basically mean that cards will stay active just as long as the cardholder is an employee of that company,” says Red Gillen, senior analyst for Boston-based financial consultancy Celent. “In the unbanked demographic, where turnover is high, once you leave your employer, the card is only good until you use up all the balance. That doesn’t make the cards very sticky.”
Lott agrees that portability will help make payroll cards “stickier.” Right now, the average lifespan of an ADP TotalPay Card is 14 months. “I’m very confident that portability extends the lifecycle of the card, no doubt,” says Lott.
Gillen says portability will boost cardholder convenience and boost the bank’s revenue at the same time. “I think this is an important key to success—there is a lot of employee turnover in the industries served by payroll cards, and every time a new card is set up, there are associated administrative costs. The longer cardholders keep the card, the less expensive it’s going to be, and the more money the bank can make on float and interchange.” He also recommends that banks offer cash reloads on the cards as another way to increase cardholder convenience.
First Data’s Money Network portable cards can be reloaded with cash at approximately 45,000 Western Union locations. Chase Payroll Card Plus cards are not reloadable using cash at this time; however, Dombroski predicts that JPMorgan will team up with Visa ReadyLink and MasterCard rePower in the future.
Will portability and cash reloading make payroll cards more competitive with the consumer reloadable cards sold in retail stores?
Dombroski says, “Yes.” “It’s primarily to do with the economics of the distribution channel,” he explains. “In the retail environment, program managers have to make money on every click or transaction. And your loss and fraud rates are higher in an unknown commodity. Employers provide a much more cost-effective means to reach unbanked consumers and get them into a bank account type product.”
Still, Dombroski acknowledges the educational challenges when you’re reaching potential cardholders through employers. “The challenge is to make sure that the employers are communicating the benefits effectively to the end user. We don’t have direct access. We’re completely reliant on the employer.” JPMorgan provides marketing materials and training, but making sure that education is sustained, particularly as new employees are hired, is a big issue, he says.
“Frankly, portability is a good idea,” concludes Fischer. “If you think about a financial institution that has a traditional account relationship with a consumer today, if that person has direct deposit, in most cases he has the opportunity to continue that direct deposit when he changes jobs. With payroll cards, once you get through some of the compliance hurdles, there’s no reason not to offer cardholders the same flexibility. Over time, I think you’ll see a lot more portable payroll cards.”