Wal-Mart Stores Inc. recently announced that it will no longer pay associates with paper paychecks. Instead, it will issue Money Network MasterCard Paycards for the approximately 700,000 associates not already enrolled in direct payroll deposit. As a result, the country's largest private employer will use nearly 260,000 fewer pounds of paper per year. And, all of its U.S. employees will receive their paychecks electronically.
So perhaps paper paychecks are on their way out.
That could be a great thing for consumers, employers and financial institutions.
Receiving income by direct deposit — whether via a debit card or a bank account — is more convenient, safer and cheaper for individuals than receiving paper checks. But, more important, direct deposit is a pathway that enables more people to use the types of financial services that improve financial prosperity.
According to a study by Nacha, the electronic payments association, individuals who split their direct deposits into two accounts — one a transactional account and one a savings account — saved $90 more per month for education than those who used another method to save for education. They saved $25 more per month when saving for other purposes.
This result shouldn't surprise anyone: directing part of employees' pay into retirement savings, via 401(k) plans and Simple IRAs, accomplishes the same goal.
The idea is that by leveraging a one-time decision to save in the future, we can make regular savings automatic — relieving both individuals and financial institutions of the challenges in conducting many small savings transactions.
Unfortunately, however, while the Federal Reserve reports that 70% of Americans use direct deposit nationally, according to the Consumer Federation of America only 23% of employees split their direct deposit into separate accounts. These numbers are even lower for low-income employees. According to the Center for Financial Services Innovation's research with underbanked individuals, only 44% receive income through direct deposit.
There are several reasons for this variation in direct deposit rates; one is that lower-income individuals are more likely to work in industries where cash is the norm and where turnover is higher.
But, lower current usage rates also point to greater need, greater opportunity — and the requirement for greater creativity in developing and marketing direct deposit options.
CFSI has been researching the effort, and recently published a report documenting the creative strategies that have worked. These include:
- Incorporating sign-up directly into the new employee on-boarding process.
- Engaging in conversations with employees to understand the barriers to direct deposit use.
- Equipping supervisors (in addition to human resources professionals) with the information and tools to encourage enrollment.
- Conducting events and information sessions that prioritize financial health and give employees the tools to achieve it.
- Changing defaults so that more employees are automatically enrolled rather than needing to take action to enroll.
Financial institutions have a critical role to play by partnering with employers to implement these types of strategies. Direct deposit itself raises account profitability by increasing account longevity, but that is only the beginning of why financial institutions should partner with employers to provide a full range of financial services to employees.
Employers can be an unparalleled distribution channel for financial services. They have strong incentives to help employees achieve financial well-being, because it has a direct impact on employee retention and productivity. They also often have scale, a position of trust and a built-in infrastructure that can be leveraged to offer new information and services.
Wal-Mart's Paycard, for example, uses the distribution of payroll as an opportunity to introduce individuals to a new way of conducting financial transactions. Some employees will simply withdraw 100% of their pay from the card in cash at a Wal-Mart checkout line. Others, however, will likely use the Paycard to make purchases, pay bills using the Paycard's associated courtesy checks, load additional funds onto the card and withdraw cash from ATMs.
For these employees — many of whom may have been previously underbanked — the Wal-Mart Paycard creates new and useful options, representing meaningful improvements in functionality and customer experience.
Financial institutions that partner with employers to innovate in this way will be able to realize an extraordinary unmet opportunity, finding new markets, lowering costs and strengthening their own product offerings and customer relationships.