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From Paycheck to Plastic

More Companies Opt for Cards as Cheaper, Paperless Process

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By Caroline E. Mayer
Washington Post Staff Writer
Tuesday, January 6, 2004; Page E01

Payday used to be a logistical challenge for Anthony Barnes. With no bank account, the 20-year-old U-Haul employee couldn't have his pay electronically deposited overnight to his own account. So he'd wait four extra days to get a paycheck -- and then pay high fees to get it cashed at a nearby store. Sometimes, to avoid the fees, he'd deposit his check in his mother's bank account. But then he'd have to wait another week for the check to clear before he could get the cash.

Today, however, payday has become the pleasurable experience it is supposed to be, after Barnes's decision to take advantage of an innovation that is growing in popularity with companies and workers: the payroll card. U-Haul electronically credits his pay to a special debit account and Barnes then uses a plastic card to gain immediate access to his funds -- either withdrawing cash at automated teller machines or paying for goods at store checkouts, swiping his card like any other debit or credit card.

"I use it every way I can; I love it," said Barnes, who is general manager of U-Haul Storage Intown at Fifth Street and Rhode Island Avenue NE. In fact, Barnes loves it so much, he has persuaded all the other store employees to use the card as well. "I have 11 staff members and everybody has a pay card."

Introduced in the late 1990s, payroll cards have taken off in the past two years, especially as the two major credit card companies, Visa and MasterCard, started offering their own branded versions. That enabled workers to cash their pay wherever major credit and debit cards are accepted.

Payroll cards are just one of the many ways employers are now trying to turn the entire pay system into a completely paperless process. And most of the growth has been prompted by companies eager to trim payroll costs, not by workers' demand.

Currently, about 2.2 million payroll cards are in use, double the number in circulation a year ago, according to Aaron F. McPherson, research manager at Financial Insights, a Massachusetts market research firm. By next year, McPherson estimates, there will be 3.5 million cards in use, and he expects that number to double by 2006. The list of companies offering payroll cards includes such well-known corporate names as United Parcel Service Inc.; Blockbuster Inc.; Sears, Roebuck and Co.; Coca-Cola Co.; McDonald's Corp.; and Domino's Inc.

The card is primarily designed for what the financial services industry likes to call the "unbanked" -- those nearly 14 million households that don't have bank accounts. And as such consumers have become increasingly accustomed to using plastic gift cards, the acceptance of plastic payroll cards has become more widespread, industry officials say.

"We're in the infancy of the way these cards can be used," said Michael Brewer, spokesman for Comdata Corp., one of the nation's largest providers of gift and payroll cards. Companies are also using plastic to reward commissions, pay upfront for travel and relocation expenses, and issue royalties or year-end bonuses.

As use of the cards grows, so do concerns about the lack of consumer protections that go with them, because the cards are completely unregulated. "Payroll cards offer all the problems of a bank account without the benefits -- all the fees and costs without the opportunity to save and build wealth," said Ed Mierzwinski, consumer program director for the consumer advocacy group U.S. PIRG.

For companies, the opportunity to save money makes the cards attractive. The cost of writing a check ranges from $1 to $2, while the cost of making an electronic payment -- either to a bank account through direct deposit or to a payroll card -- runs about 20 cents.

U-Haul spokeswoman Joanne Fried said that 3,000 of the company's 17,500 employees have payroll cards; the rest are on direct deposit -- a move that in total saves the company about $500,000 a year.

Amazon.com Inc. began its paperless conversion in March and figures it will save $150,000 to $200,000 a year by eliminating paper checks. "We save on time, administrative costs -- and especially overnight mail" charges that have to be paid to deliver a new check if an employee's pay is incorrect, said Douglas Houser, Amazon's treasury analyst. Houser figures it costs about 80 cents to adjust an employee's payroll card or bank account (through direct deposit) but about $5 to process and write a check and an additional $15 to $20 for express mail.

Selling the card to employees was not easy, Houser added. "I got a lot of opposition initially," he said, and most employees opted for direct deposit. The first week the program went into effect in March 2003, Houser got about 180 calls, many complaints about bank tellers who wouldn't cash the card for its total value. Houser said that was because tellers were unfamiliar with the card -- and because employees did not realize they did not need to cash out the entire value at once. The second week, calls dwindled to 18 and the next week, only three. "Over time, employees started using the card as it was supposed to be used -- as a debit card," withdrawing a little at a time.

Houser said 523 of Amazon's 5,200 employees have payroll cards; almost everyone else has direct deposit.

Some financial institutions that issue pay cards to companies charge employees a monthly maintenance fee, ranging from $1.50 to $4, although the fee is often waived for the first year. Many firms set up the cards to also allow employees one free ATM transaction per pay period, with regular ATM fees charged for each additional withdrawal. And some employees also incur a small fee, from 25 to 50 cents, every time they use the card at a store checkout.

Sometimes, the fees can total more than it would cost to have a bank account, or even cash a check at a store -- a concern of consumer advocates and state regulators.

"There are no controls on how these cards operate," added Ronald A. Reiter, a supervising deputy attorney general in California and chairman of the Federal Reserve Board's Consumer Advisory Council. Reiter has no doubts that these cards can benefit employees, by cutting the time and expense of getting paychecks cashed and often making it easier for immigrants to transfer money abroad.

But because financial firms are marketing these programs to employers as a way to reduce costs, companies may tend to exclude consumer-protection provisions that add to those costs, Reiter said. As a result, he worries that some programs may have high fees, limited access to funds and inadequate disclosure -- particularly to workers who do not speak English. Additionally, with no state or federal regulations, it is also unclear what happens to an employee's money if the card is lost or stolen. "It's all so unregulated that anything can happen," he said in a telephone interview.

Reiter has urged the Fed to make it clear that electronic-banking rules that apply to bank and debit cards also cover payroll cards. So far, the Fed has not done so.

It is not just the regular paycheck that is being converted to plastic. Employers are also using the cards to issue awards to key employees.

Mazda Motor Corp., for example, uses plastic to reward car salesmen for selling certain models. Depending on production and sales, the carmaker sometimes will offer salespeople a $75 to $100 incentive for every Protege sold in December, for example, or for every MPV minivan sold in January. It used to take the company about two months to write and mail a bonus check, which "was not very motivating, especially when salesmen would get upset when they didn't get the check in time," said Eric Johnston, Mazda's marketing director.

Michael Johnson, sales manager of Brown's Mazda of Alexandria, said he now gets his reward money within a few weeks. In the old days, he said, "you cash a check, spend it and forget you got paid so you'd bug the accounting office to try to track it down, only to have them tell me I got paid two weeks ago. Now, I can go to a restaurant, flip the card out and feel like Mazda is taking care of dinner. It makes you feel more important . . . and builds loyalty as well."

To some companies, the payroll card is the first step to eliminating paper pay stubs. American Greetings Corp. has already eliminated pay stubs, saving about $20 annually for each of the company's 32,000 employees, who can gain access to their payroll account either on the Internet or over the phone.

"I had anticipated a lot of resistance, about 2,000 to 3,000 calls the first month, but I got fewer than 100 calls," said Mark Hopton, director of the company's payroll system. Sears, which has already gotten 83 percent of its workforce to accept direct deposit or the payroll card, said it hopes to eliminate even the paper stubs these employees receive in the next two years.

But acceptance is not universal. Hilton Hotels Corp., for instance, decided against the payroll card after a survey of employees showed overwhelming opposition. "The consensus was it cost them too much" because of the fees, said Hilton spokeswoman Kathy Shepard. FedEx Corp. made a similar decision two years ago.

Although most payroll cards do not let employees get in debt by withdrawing more than is on their account, some consumer advocates worry that employees will treat their card like a credit card, building little in savings. But Visa said that is not what it has found. "We're seeing cardholders leave balances on their cards," said Nizam Antoo, Visa USA's product director.

U-Haul's Barnes agrees. "I would spend more if I had cash in my pocket. It's easier to save with my card."

Posted by Craig at January 6, 2004 05:10 PM