Paycard system forgoes paper checks in favor of plastic card
So the 20-year-old, who holds down a pair of jobs at Checkers Drive-In and the Movie Gallery, had to go from direct deposit to cashing his weekly paycheck at a check-cashing storefront. But the high fees took a toll.
“It may not sound like a lot, but for people not swimming in money, it’s a lot,” he said.
Now, Payton has gone paperless, becoming one of 1.8 million workers across the country whose paychecks have been replaced by electronic payroll cards.
The cards, which go by names such as the eCash card, are similar to debit cards. Workers can use them to buy groceries, gasoline, assorted retail items and to withdraw cash from ATMs. But instead of drawing money from their personal bank accounts, they’re getting their pay from a central fund set up by their employers.
Many employers like the cards because the system does away with the cost of printing payroll checks every week or two. It also provides an alternative to check cashing and high fees for workers in the 13 million U.S. households without bank accounts.
“We don’t disclose the amount, but there is a savings,” said Chris Brathwaite, a spokesman for Sears, the Chicago-based retailer. Sears began using payroll cards, also known as paycards, four years ago.
Today, most Sears employees have direct deposit into bank accounts, but about 7,000 use paycards, Brathwaite said.
By 2006, the number of payroll cards in use by U.S. households without bank accounts will double to 3.8 million, said Ariana-Michele Moore, a senior analyst at Boston-based Celent LLC, a financial services research firm.
On the road
Payroll cards are nothing new. The trucking industry started using them in the late 1980s to help drivers who were on the road on payday.
Now, they’re beginning to catch on in other industries, said Carole Ford, a vice president with Comdata Corp., a Brentwood company that handles the processing of electronic transactions on stored-value cards for clients including Sears, Georgia Pacific and Chicago Public Schools.
“When (workers) need their money, they need it now. (Paycards) give them an ability to get money 24 hours a day,” she said.
Ford said that Comdata, a wholly owned subsidiary of Ceridian Corp., has seen a 40 percent increase in its paycard business over the last year and about half a million people get their payroll on cards from Comdata.
Typically, Ford said, employers who use paycards are those with high turnover rates, a large proportion of entry-level workers or geographically dispersed employees. The cards are targeted towards transient workers, immigrants, part-time employees and teenagers.
“(There is) a large percentage of those workers without bank accounts. This is the answer to those people and that’s how we market it,” she said. “This really complements direct deposit, it doesn’t replace it.”
Payton said payroll cards break barriers for people who normally don’t like to deal with banks. “It’s a good way to establish yourself to see how it is using debit cards or if you’re ready for a checking account,” he said.
Teens and transient workers aren’t the only ones with the cards.
“There’s a wide variety of folks who use paycards,” said Brathwaite, the Sears spokesman. For example, “We had one associate who was going through a divorce, and it was easier for her to get a paycard so she could keep her finances separate.”
Ford said paycards began to catch on after the Sept. 11 attacks, when payday was delayed for many workers because their checks were sitting in the cargo holds of planes grounded for security reasons.
But what’s really behind the growth of payroll cards is the need to cut costs.
Converting to electronic pay systems can save employers up to 75 percent on check processing expenses, said Moore.
Two types of payroll cards are available: branded and unbranded. Branded cards have a Visa or MasterCard logo and can be used wherever credit cards are accepted, allowing users to shop online. Unbranded cards are PIN-based, ATM debit cards that can be used at point-of-sale locations.
The paycard system works a lot like direct deposit.
An employer signs on with a payroll firm, which charges an enrollment fee based on the number of workers using the system.
The payroll firm then sends the information to its bank, which loads the employees’ funds onto the cards each pay period.
Most paycards are offered by payroll firms such as Clarity Payment Solutions, Concord EFS and Fiserv Corp.
In the last few years, though, a few banks have jumped on the digital bandwagon and released their own cards. Bank of America has a CashPay card and AmSouth Bank offers a Spectrum card.
Pro and con
Jonathan Flatt, a store manager at a video store on Murfreesboro Pike, said he considers paycards a hassle because often they come with fees attached.
“It’s ridiculous,” he said. “If I wanted a debit card, I would go to the bank and get a bank account.” Flatt usually withdraws all his money on payday to avoid ATM fees linked to his paycard.
Flatt’s card allows one ATM withdrawal at no charge, but subsequent withdrawals or account balance inquiries typically cost a small fee. Fees vary by employer and can range as high as $2 for checking balances or withdrawing funds over a minimum usage.
Geneva Parks, a team trainer at Checkers Drive-in Restaurant on West End Avenue, said paycard fees are nothing compared to those for check cashing — which can take as much as 15 percent of pay.
Still, one big obstacle faces the industry — a lack of consumer awareness about the cards, said Jackie Binks, vice president of business development at Fiserv.
“It’s a ‘cash-and-carry’ world,” Binks said. “The challenge in the industry is getting the cardholder to accept this card rather than cash.”