Prepaid Cards Get Down to Business

  To those who think gift cards and similar consumer-directed stored-valued cards are a hot commodity, you ain't seen nothing yet. Keep an eye on payroll cards and other stored-value cards used in the work place.
  Many payment experts believe that the wide range of possible applications for such cards give corporate partnerships in stored-value cards even more potential than cards sold directly to consumers-one of the card industry's fastest-growing sectors ("Those Proliferating Prepaid Cards," February). They can be used for anything from payroll to insurance benefits to paying the costs of infrequent travelers, work projects and meetings.
  Leading the way on the corporate side of stored-value cards are payroll cards. Boston-based financial researcher and consultancy Celent Communications predicts that more than 26% of U.S. employees who do not have bank accounts will be paid with payroll cards by 2006 (chart, page 46). The Celent projections show that about 3.8 million payroll cards will be issued by then.
  The way these cards work is simple. Employees fill out application forms that give their employers permission to put the value of their payroll funds onto a magnetic-stripe card-the forms are similar to those used to initiate automated payroll deposits. Then each payday, that value is put into an account accessed by the card. Employees can access cash at automated teller machines. And in many cases, common debit and credit card logos on the card permit the employee to use it to pay for purchases at stores that accept payment cards.
  Payroll cards appeal both to employees without bank accounts and the corporations that employ them. In most cases, the cost to an unbanked individual for accessing cash through a payroll card is less than that of cashing a payroll check. In a December report, Celent estimates that the unbanked today pay an average of 2.5% of their payroll to check-cashing firms-with some fees hitting as high as 8%. Even at the 2.5% average, there is considerable room for banks or employers to charge employees a fee for the service and still come in at less than what check-cashing firms assess.
  In addition to the cost savings, many employees perceive payroll cards as being more convenient in accessing cash than checks. Also, cards offer employees better protection against loss or theft. And if the cards have the Visa and MasterCard logos, employees who might otherwise not be approved for a credit card can receive the convenience of a general-purpose payment card.
  Extra Benefit
  Corporations may gain even more from payroll cards. Celent estimates it costs corporations $1.90 to cut a paycheck in-house, an expense that can be reduced by as much as 70% by moving to cards. Plus, payroll cards eliminate the need to replace lost or stolen checks, an amount estimated at between $10 and $12 per check or $50 million annually to corporations nationally, says Celent researcher Ariana-Michele Moore.
  Some corporations also are finding that the payroll card is an extra benefit they can offer to employees and serves as a retention tool, says Jack Williams, senior vice president of relationship management for Louisville, Ky.-based National Processing Co. and a long-time promoter of stored-value cards.
  With so much appeal to corporations and employees, it is not surprising that banks and private companies alike moving into the payroll card business.
  "Over the next three years, we expect nearly every bank in the U.S. that has a significant commercial banking business will be offering payroll cards to their corporate customers," says Robert H. Baker Jr., senior vice president of stored-value initiatives for First Data Corp.
  Electronic Payroll
  Already, First Data is working with eight large banks that offer such cards. Baker expects to expand the offering to a significant portion of the 1,400 banks for which First Data processes payments.
  One such bank offering payroll cards to businesses is Charlotte, N.C.-based Bank of America. The push for such a product came from the bank's corporate customers who wanted help in moving toward 100% electronic payroll, says Joseph Lyons, business manager for Bank of America's commercial prepaid product.
  Many of the corporations that had been encouraging employees to get automated payroll deposits felt they had hit the end of the line in terms of new sign-ups because most of the employees who did not already have automated deposits also did not have bank accounts. These companies wanted a product that could give them the cost benefits of automated deposits while serving the needs of the unbanked, according to Lyons.
  Indeed, Celent research indicates that about 13% of U.S. households are considered unbanked. About 78% of these households have incomes below $25,000 annually.
  As a result of these findings, corporations most likely to issue payroll cards are those with employees who are low income, work part-time, are temporary or are teenagers. Workers in such industries as food service, cleaning services, retail or agriculture often are prime targets.
  In early February, North Olmsted, Ohio-based payroll and merchant processor Heartland Payment Systems Inc. came out with its PayDay Visa aimed at small and mid-sized companies with many unbanked employees. The card, issued by Bank of America, has both signature and personal identification number functionality for use in stores and at ATMs.
  That's just one example among a growing tide of cards. Others include offerings from Detroit-based Comerica Bank, which has issued cards for employees of McCalls Auto Group and La-Z-Boy Recliners. And processor Comdata Corp. has developed payroll cards for Sears, Roebuck and Co. and Movie Gallery. St. Louis-based First Banks has issued payroll cards for Franklin Covey, the printer of the popular daily planners. All of these are branded with the MasterCard logo.
  But while most banks are promoting payroll cards to corporations, some other firms are going directly to consumers.
  New York-based Clarity Payment Solutions has developed a number of prepaid debit card applications, including payroll cards, that it sells through third parties. While many of the payroll cards are promoted to corporations, Clarity also works with several third parties that market payroll cards directly to the workers.
  In the latter case, these third parties sign up employees who then take the necessary completed forms to their payroll departments. While Anil Aggarwal, Clarity chief executive, concedes that marketing payroll cards to corporations is more expedient in that a company can often convince hundreds of its employees to participate at one time, he believes there is potential elsewhere.
  Moving the Market
  "Much of our focus right now is at the corporate level, but there is a lot of interest with third-party companies that want to market these services directly to employees," Aggarwal says. "I think we'll see some combination of these two approaches taken to move the market."
  And while most programs are only targeting the unbanked for payroll cards, Bank of America's Lyons believes that is shortsighted.
  "Payroll cards not specific just to the unbanked," he says. "There are a lot of people who for whatever reason have bank accounts but don't have automated deposit. They might be more interested in the convenience of a payroll card."
  Lyons adds that "any company with a large number of employees that is cutting a lot of checks should look at this, even if most of their employees already have bank accounts."
  Beyond the basic payroll function, several payments companies already are looking at adding other value to the cards. Large employers could form relationships with certain retailers so that if an employee uses a payroll card to make a purchase at one of that retailer's stores, the employee could get a specific discount, says First Data's Baker. While there are no companies doing that at the moment, First Data has the capability to offer such services if clients request.
  "There are a lot of different ways you can add value to these cards," he says.
  With the early success of payroll cards, banks, processors and payment associations have been looking for other ways to use stored-value cards within the workplace. For example, when its payroll card program was only about six months old, MasterCard International decided to augment that effort with a host of so-called workplace solutions products.
  Included in the new offerings that debuted last December were incentive cards, flexible benefit cards, supply-chain cards, meeting cards, project cards, relocation cards and travel cards. Banks supporting the offerings include ABN Amro and its LaSalle Bank unit, Bankfirst, Citibank, Comerica, First Banks, and J.P. Morgan Chase.
  Visa U.S.A. also has similar offerings for many workplace applications.
  One of the most popular of the workplace cards is the incentive card. Rather than giving out cash bonuses, companies can issue cards with either the Visa or MasterCard logo. The cards can be used to make purchases at locations that accept those cards and often can also be used to access cash from automated teller machines. MasterCard estimates that employee incentive programs total more than $3.6 billion annually.
  Steve Abrams, senior vice president of MasterCard's global commercial card programs, explains that incentive cards are a good way for corporations to separate rewards from payroll, and that incentive cards are less expensive to administer than cutting checks.
  Comerica has issued incentive cards for Little Caesars and La-Z-Boy Recliners and has issued a petty-cash card for the employees of a large chain of home-building services, which it wouldn't identify.
  Insurance and medical applications also provide a range of uses for prepaid cards. Some financial institutions are promoting stored-value cards to casualty insurance companies. Then, someone who has filed a claim with an insurer could receive a card with the value of the claim loaded onto the card. The consumer would then use the card to pay for home or auto repairs as needed.
  Also related to insurance applications are flexible spending account (FSA) cards. While FSAs have become a popular means for employees to pay for out-of-pocket medical expenses, most existing programs are tedious or difficult to oversee. In order to avoid paying taxes on funds used to cover medical expenses, employees have pretax funds taken out of their paycheck every period. But many programs require employees to pay medical expenses themselves and then submit receipts to get reimbursed.
  With a card program, the cost of the expense can be deducted directly at a doctor's office or pharmacy. MasterCard estimates that out-of-pocket medical expenses account for $200 billion annually.
  More Work Needed
  But while FSA cards have many supporters, Celent's Moore is not one. She thinks the cards need more work.
  "This application is very hard to control without the benefit of a chip card," says Moore. "It is very difficult to make sure the consumer at the pharmacy is only using the funds to pay for allowed expenses. Most pharmacies, for example, don't transmit the product code, so it is difficult to see if a customer is using his flex card to pay for a prescription or a pack of cigarettes."
  Besides flexible spending, another prepaid medical application is a pharmacy card. MasterCard estimates the prepaid pharmacy market is worth up to $50 billion. An early example is a card program developed by Fairfield, N.J.-based Macaluso Group, a distributor of pharmaceutical products. Macaluso's program allows physicians to hand out cards to patients that permit them to receive samples of a prescription at pharmacies. The cards are issued by The PrivateBank and Trust, Chicago
  Traditionally, doctors who wanted to see if a medication benefited a patient before writing out a prescription would hand the patients small samples. But Joe Macaluso, head of his namesake firm, says pharmaceutical companies had no way to monitor who was getting their samples. The card also helps pharmacists detect if there is a potential for dangerous drug interaction.
  Key to making this card work, according to Macaluso, was the partnership with MasterCard.
  "Working with MasterCard made this simple," he says. "We didn't have to go out and sign up the pharmacies because nearly all of them already accept MasterCard. And pharmacists can use the same POS terminals and the same network that they already have in place to take credit cards."
  Other up-and-coming applications of corporate-sponsored cards include those for paying employee expenses such as travel, meetings and projects. Though many corporations already provide employees with commercial cards to pay for travel, such cards are typically limited to senior executives or other employees who travel often and expensively. But corporations that can't justify issuing credit cards to employees that might only travel a few times a year might find the benefit in prepaid cards.
  By tying in with a MasterCard or Visa logo, employees can use such a card to pay for hotels, rental cars, limousine services, restaurants and other travel-related expenses. The company can set limits on spending as well as get the same reports that come with commercial cards.
  For corporate meetings, some developers are proposing that meeting planners use special cards to pay for facilities expenses, food and related costs. Similarly, project cards can be issued to allow employees to pay for necessary computer software and other supplies needed to complete a project.
  Comerica has also issued an interesting stored-value card to MI WORKS!, an employment-services association that issues grants to assist the unemployed re-enter the job force. The card allows job seekers to use the card to pay for services, but the association can restrict the use of the card by merchant category.
  Whether it is paying for travel or handling out payroll benefits, card executives and industry observers expect prepaid cards to play big roles in the next few years with corporations.
  "There is a phenomenally diverse number of applications that can be made with these cards across so many different vertical markets," says Moore of Celent Communications.