The Changing Dynamics of the Payroll Market Place
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The Changing Dynamics of the Payroll Marketplace
Seth Brennan Vice President – Product Manager Citi Prepaid Services
Mike Pancotto SVP, Compliance and Audit/Moderator FSV Payment Systems
Wednesday, June 26, 2013 Workshop B
Cindy McMullen Payroll Manager Dollar Tree Stores
Dave Hill Senior Director – B2B Product Mgmt. NetSpend Corporation
Cathy Beyda Of Counsel Paul Hastings, LLP
© 2013 Network Branded Prepaid Card Association
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Thank You To Our Sponsors
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Presenting Sponsors
Supporting Sponsor Welcoming Reception Sponsor
Associate Sponsors
Founding Sponsors
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The views of the presenters should not be attributed to their respective firm or organization, or to the NBPCA.
The content of this presentation is designed to provide practical information concerning the subject matter covered and is provided with the understanding that none of the presenters are rendering legal advice or other professional services.
This presentation is for informational purposes only and is not a substitute for legal advice or your professional judgment.
You should review applicable law in your jurisdiction and consult experienced counsel for legal advice.
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Legal Disclaimer
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Payroll Card Action Group
• Action Group established to focus on the opportunities and challenges of payroll cards
• Participating members representing Issuing Banks, Program Managers, Card Associations, Processors, Attorneys, Employers
• Focus is solely on Payroll Cards as a component of electronic wage payment
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The Payroll Card Action Group Mission
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• To Advocate, Educate, Protect and Promote Payroll Card adoption
• Provide a fact-based voice to government, employers, media and consumers
• To be the Trusted Advisor of the Paycard Industry via continued awareness, monitoring and reporting of Federal & State Legislative initiatives as well as facilitating efforts to clarify and defend our best practices
• To be the recognized gathering coordination point for the industry
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Accomplishments
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• Voice of the consumer initiative
• Marketing studies
• Best Practices Document
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INTRODUCTION TO ELECTRONIC WAGE PAYMENT
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Introduction to Electronic Wage Payment
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• The “Old Standard”
– Pay Checks
– Direct Deposit
• The “New Norm”
– Direct Deposit
– Payroll Card
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What are Payroll Cards?
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• A practical and cost-effective method to pay employees electronically
• A way for employees to access wages 24 hours via ATMs, over-the counter cash withdrawals and convenience checks
• A way for employees to spend wages at PIN and Association-branded signature-based transaction locations and on the Internet
• A way for employees to eliminate check-cashing fees, waiting for paychecks to arrive in the mail, and other payday burdens
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Key Requirements
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• Free and Clear Access to funds
– ATM
– OTC
– Checks
– Personal Money Orders
• Regulation E
– Dispute resolution process
– Statement availability
• Annual notifications
• Escheatment
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Key Requirements
• Disclosures
– Front of Card
– Back of Card
– Materials
– Website
– Cardholder Agreements
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Payroll Cards vs. GPR
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Payroll Cards vs. GPR
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Payroll Cards vs. GPR
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BENEFITS OF PAYROLL CARD PROGRAMS
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Issuer, Program Manager - Benefits
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• Cardholder and Client Value
• Inclusive
• Durable
• Well-known customers
• Brand association
• Recurring revenue streams
– Product leverage
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Hourly Employee
May work two jobs to make
ends meet. Needs to save time and avoid check cashing fees.
Young Employee
Has after school and summer jobs. Needs an easy way to access money, spend online and in stores - just like an adult.
New Immigrant
No credit record and uncomfortable with financial institutions. Needs to keep money safe and make
purchases.
Payroll cards provide a solution for the varying needs of the underserved segment
Professional Adult
Well compensated. Had prior credit issues but wants to function in the mainstream.
The Underserved Segment
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Employer’s Perspective
• Motivation for Implementation of a Payroll Card Program
• Known Benefits
• Unexpected Benefits
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Employer Motivation
• Cost-savings – less expensive than checks
• Security and safety
• Assisting the underserved
• Increased efficiencies
• Ability to pay same-day
• Turnover
• Escheatment
• Disaster recovery
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Known Benefits
• Safety
• Electronic pay – faster and more secure
• Efficient
• Fit culture of company and employee base
• Cost-effective
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Unexpected Benefits
• Significantly increased electronic pay participation
• Ease of program management and administration
• Flexibility of services and fee structure
• Employees earnestly accepted
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Employer Benefits
• Cost-savings - Reduces costs associated with issuing, delivering, replacing and reconciling paper paychecks
• Protection - Reduces duplicate check fraud
• Security - Provides safe and efficient electronic delivery of payroll funds
• Process Improvements – Transfers escheatment liability to the financial institution that actually holds the employee's funds
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Employer Benefits
• Disaster Recovery Planning - Eliminates issues associated with employee payment following a disabling event that forces office closures
• Environmental Improvement Programs - Enables companies to enhance “green” initiatives by eliminating paper processes
• Improved Benefits Program - Allows every employee safe and immediate access to their payroll -- not just those with a bank account
• Adoption of Direct Deposit – Increases awareness and utilization of direct deposit across all employees through increased communication of payroll options
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• Each year, as checks travel through the payment cycle, they:
– Use more than 674 million gallons of fuel
– Add 3.6 million tons of CO2 to the environment
Paper check and wage
statement production
• Deforestation
• Paper production
• Printing
Distribution and
transportation
• Raw paper distribution
• Distribution to hiring locations employees collecting pay
when not scheduled to work
• Waste pickup and processing
Check clearing process
• Transportation
• Processing of checks via bank and Federal Reserve
• Waste pickup and processing
Waste • Paper check / wage statements thrown away in landfills
• Electricity requirements • Gasoline
Direct Deposit drastically decreases an employer’s carbon footprint
Employer Benefits – Going Green
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• Businesses can save $2.87 to $3.15 per transaction by using Direct Deposit instead of checks1
• Increased productivity
– An average of 8.5 - 24 hours of productivity is lost per employee per year cashing / depositing paychecks2
– Estimated $3-$5 billion loss in productivity annually2
Example Annual Cost Savings Using Direct Deposit Instead of Paper Checks
Cost Savings per Check $3.00
Paid Employees 5,400
Annual Paper Check Cost Savings: Bi-Weekly $3.00 cost savings x 5,400 employees x 26 checks
$421,200
1National Automated Clearing House Association 2010 2NACHA - The Electronic Payments Association
Employer Benefits – Cost Savings
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Employee Benefits
• Ease of use
• Options available for retrieving pay
• Online access and bill pay capability
• Safety and security
• Special programs
• Ability to have a savings account or account for child
• Portability
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Employee Benefits • Cost-savings - Eliminates check-cashing fees and costs associated with
bill payment (e.g., money order purchases, postage, travel expenses, etc.)
• Money Management - Provides employees a better way to manage their money and track spending
• Safety - Reduces the need to carry large amounts of cash
• Protection – Reg E protects cardholders against unauthorized purchases
• Acceptance - The card is welcome everywhere “Association” debit cards are accepted
• Convenience - Makes wages safely and immediately available on payday
• Faster Access to Pay - Eliminates delays caused by mail delivery
• Prestige - Brings employees into the “mainstream” of society
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• Incur higher costs of approximately 2.5% of each paycheck
• Check cashing fees • Money orders • Transfer fees • Subject to increased risk of theft
and financial loss due to employee carrying a large amount of cash
• Turned down for loans due to poor or no credit history
• Face limited options for cashing checks
• Transportation costs
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Sources: Federal Reserve & McKinsey Quarterly
Underserved - Challenges
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• It is expensive for low income consumers to have a traditional bank account and use cash
• Prepaid card with direct deposit is an extremely cost effective option
Average Annual Cost of Ownership*
$168
$322
$340
Prepared Cardwith Direct Deposit
Basic BankChecking Account
Cash
*Source: Bretton Woods, Inc., March 2012
Underserved - Costs
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Two key findings quoted below:
The study found the pay card is more cost effective than receiving a paper check, let alone checking accounts. Annual averages: pay card $83; general purpose reloadable prepaid card $185; cash based lifestyle $256, low balance checking $273. (see chart next page)
Bretton Wood 2011 Payroll Card Study
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• Termination Pay – Final Payment
• Weather or other
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The traditional distribution of paper checks requires 1) the paper check to be delivered
physically and 2) the employee to travel to the delivery point. Natural disasters or personal
challenges could prevent an employee from accessing their paper payroll check.
Employee Benefits – Immediate Payment
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• Less potential for counterfeit or stolen checks, altered amounts, and forged signatures
• 1.2 million fraudulent checks enter the banking system daily
• Electronic payments reduces exposure to identity theft
Employee Fraud Prevention
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EVOLUTION OF PAYROLL CARD PROGRAMS
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Payroll Card Product History
• Product developed with the employer in mind
• Primary product focus: – Employer tools
– Regulations
– Fees
• Market mostly a level playing field with above
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Growth of Paycards
• 20% CAGR expected through 2016
• Payroll cards about 30% of total prepaid market
• Tipping point (cards vs. checks) in early 2015
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Source: Aite Group. Feb 2013 Impact Note: “U.S. Payroll Card Programs: Paving the Path for New Revenue”
Payroll Card Up, Checks Down
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Source: Aite Group. Feb 2013 Impact Note: “U.S. Payroll Card Programs: Paving the Path for New Revenue”
Payroll Card Loads
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Payroll Card Features
Transaction Types • Signature, PIN, ATM transactions • ACH Credits/Debits • Convenience Checks Features • Online Account Center • Bill Pay • Customer Service (IVR and Live Agent) • SMS alert on account balances and deposits • Account-to-Account Transfers (P2P) • FDIC Insurance
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• Arizona
• Colorado
• Delaware
• Florida
• Kansas
• Maine
• Maryland
• Michigan
• Minnesota
• Nevada
• New Hampshire
• New Jersey
• North Dakota
• Oklahoma
• Oregon
• Tennessee
• Utah
• Vermont
• Virginia
• West Virginia 39
More States Recognize Payroll Cards in their Statutes or Regulations
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COMPLIANCE
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Compliance Issues
• Wage and Hour Requirements
• Common State Law Requirements
• Banking Laws
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Wage and Hour Requirements
• Federal Wage and Hour Law – The Fair Labor Standards Act
• State Wage and Hour Law – 20 states have addressed payroll cards in their statutes or regulations
– Most of the remaining states have issued enforcement positions on payroll cards
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Common State Law Requirements
• Full and Free Access to Wages
• Employee Consent
• Disclosure of Terms and Conditions – Including Fees
• Employee Ownership of Funds
• Compliance with State Paystub Requirements
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AK
HI
OH
WA
CA VA
MI
GA
KS
IA PA
WV DE
MS
OR SD
MO
WI
MN
KY
SC
FL
NC
UT
AZ
ND
NM OK
TN
NE
WY
LA
IL IN
AR
VT
NY
CO
AL
MT
ID
NV
TX
MD
ME
NJ
DC
MA RI
CT
NH
State Approach to Paperless Pay
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█ Paperless Pay Permitted Unclear Treatment of Payroll Cards
█ Partial Paperless Pay █ Paper Paycheck Option Required
Voluntary
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Banking Laws
• Regulation E
• The Durbin Amendment
• Bank Secrecy Act
• FDIC Insurance
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Regulation E
• Compulsory Use Provision
• Periodic Statements – Flexibility for Payroll Cards
• Error Resolution Requirements
• Disclosure Requirements
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The Durbin Amendment
• Establishes a cap on interchange fees
• Many feared that Durbin would impact payroll card programs by: – Decreasing functionality
– Increasing cost to employers
– Increasing cost to employees
• Post-Durbin Observations
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The Bank Secrecy Act
• The Prepaid Access Rule
• Customer Identification Programs – Reliance on I-9 Verification
– Recent Department of Justice Letter
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FDIC Insurance
• General Counsel Opinion No. 8
• State Law Requirements
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THE FUTURE OF PAYROLL CARDS
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The Future of Prepaid Cards
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• Value prop shifts from employer to employee No longer just about cost Employer views the card as a benefit, not just a requirement for payroll
• Better user experience:
Customer Touch Points (Account Center, Mobile, Messaging) Customer Service Portability
• Better features:
Money Management Mobile Applications Remote Deposit Capture Savings Rewards
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What’s Next: The Cardholder
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QUESTIONS?
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