Prepaid Plastic Zeroes in on the Payroll Market

With gift cards accounting for more than $17 billion in retail sales, or about 8% of merchants' total take, during the recent holiday shopping spree, according to the National Retail Federation, the plastic has become a star in the electronic transaction firmament. But while gift cards are stealing the headlines, prepaid products are making inroads in a wide array of markets. One of the most promising is employee wages, particularly for workers who lack bank accounts. Workers with prepaid payroll cards are able to withdraw funds from ATMs and perform debit transactions with signatures and personal identification numbers at merchant locations. In 2003, 8.5% of the 14.2 million unbanked households received prepaid payroll cards, up from 6% in 2002, reports Celent Communications, a Boston-based research firm. Celent projects 12.4% of 14.4 million unbanked households will receive payroll cards in 2004. Companies using payroll cards avoid the costs associated with printing checks, replacing lost checks, and stopping payment on stolen checks, which analysts say often exceeds $20 per check. And dependence on mail or courier services to ensure that employees receive their pay on time also is eliminated, notes Phoenix-based U-Haul International Inc., which launched a Visa-branded payroll card program in late 2001 and now has 17% of the company's more than 17,500 employees receiving their pay via the cards. The remaining 83% are paid by direct deposit. U-Haul payroll cardholders are charged a monthly fee?which is waived the first year?of $1.50 and are allowed one free ATM withdrawal per week. There is no charge for PIN or signature-based point-of-sale transactions. Another payroll card issuer, Seattle-based Amazon.com, is saving more than $150,000 annually by paying its employees via the cards and direct deposit instead of checks, says Douglas Houser, Amazon.com's treasury analyst. About 10% of Amazon.com's 5,200 employees use payroll cards. “The cards also enable unbanked employees to avoid the exorbitant fees charged at check-cashing locations,” Houser notes. “And electronic payments reduce the probability of fraud.” The allure of lower administrative costs and avoidance of check-cashing fees?which can exceed $15, depending on the amount of the check?will result in the distribution of 6.8 million payroll cards by 2006, up from 3.5 million in 2004 and 2.2 million in 2003, projects Aaron F. McPherson, research manager at Financial Insights, a Framingham, Mass.-based research firm.