Payroll Cards Offer Convenience at Lower Cost

For most of the last century, employers paid their employees in one of two ways: either they issued paychecks or they gave workers an envelope of cash. Those payroll basics didn't change much until the 1980s and the advent of electronic deposits from an employer directly to an employee's bank account. Now employers in the 21st century are eagerly adopting another tool: payroll cards.

Instead of issuing a check or cash, the employer deposits a worker's wages into an account it establishes tied to a payroll card, which is a type of debit card that can be used at an ATM to withdraw cash or at any merchant that accepts debit cards for purchases. The result is that employers can eliminate costly and cumbersome checks, and workers, especially those who don't have bank accounts, have the convenience and safety of debit cards.

The advantages for "unbanked" employees is that they don't have to patronize costly check-cashing outlets or carry large amounts of cash after cashing their paychecks.

According to Visa USA, Americans without bank accounts spend about $1.5 billion annually in check-cashing fees. Plus, if the card is lost or stolen it can be more easily replaced than a check and at lower cost to the issuer. Visa estimates that 4 million checks are lost or stolen each year and generating a replacement costs employers an average of $8 to $10 per check.

The allure of payroll cards for employers is that they can significantly cut their costs. According to a report by the U.S. Comptroller of the Currency, direct deposit to a bank account costs employers about 20 cents per transaction, while the processing cost of paychecks ranges from $1 to $2 for each check. In contrast, the cost of posting to a payroll card falls somewhere between the two. Add in the fact that payroll cards eliminate the recurring cost of paper for checks, envelopes and postage, not to mention the cost of replacing lost paychecks cited above, and it's easy to see why employers like payroll cards.

A Real-World Scenario:

Stein Mart, a retailer headquartered in Jacksonville, Fla., converted to payroll cards in early 2005. The majority of the company's stores are located in the southern tier of the United States, but it has locations as far north as Wisconsin, Michigan and New York. The company used to cut payroll checks in Jacksonville and ship them to its stores around the country via UPS, but a series of events prompted the company to look for a better way, says Hunt Hawkins, executive vice president of operations.

"Our decision was driven by the fact that on multiple occasions, beginning with 9/11, we had problems getting paychecks to our associates," Hawkins says. When the government closed U.S. air space immediately after the terrorist attacks in New York and Washington, barring all but the military from flying, the company "had to scramble to set up a pretty unsecure cash payroll system," Hawkins says. "We were centralized and had backup for the generation of checks, but not for distribution. Then, about a year later, a freak snowstorm resulted in the checks being caught in UPS' hubs." 

The program that Stein Mart selected saves about $100,000 in payroll costs.  Stein Mart's Hawkins said the transition from payroll checks to pay cards went much more smoothly than the company anticipated. They brought in a third-party firm to create and deliver a presentation to Stein Mart's employees around the country on how the new program would work. "There was absolutely no resistance -- we were stunned," Hawkins says. "We received a question from one associate in one store, that was it." The real payoff came when hurricanes Katrina and Rita devastated the Gulf Coast; Stein Mart was able to pay employees without interruption because it had the program in place, Hawkins says.