Payroll Segmentation: Driving Payroll Cards Beyond the Unbanked

Transcription

1 Payroll Segmentation: Driving Payroll Cards Beyond the Unbanked New payroll card solutions are emerging that offer card providers the opportunity to drive the products up-market towards more rewarding user profiles. The non-traditional approach of offering payroll cards up-market requires payroll solution providers to rethink how the cards factor into the business process and how new solutions can be leveraged to gain greater acceptability across various vertical markets. Introduction Network branded payroll cards have gained significant traction since being introduced ten years ago, but only a small percentage of the market potential has been realized and uneven profitability across employer portfolios is being achieved. A new crop of payroll card solutions are emerging that offer such a compelling value proposition that employees have opted out of the ACH Direct Deposit program and instead switched over to a payroll card program to receive their wages. New functionalities and features, such as Same Day Pay and Merchant Discounts offer card providers the leverage needed to not only penetrate further into down market segments but also drive payroll cards up market; where richer card user profiles exist that will drive more consistent profitability. Payroll card providers and traditional payroll service providers must modify their own behavior before trying to modify the behavior of others if they wish to achieve the real promise payroll cards have to offer. Payroll program managers have shown little interest to date in truly understanding the needs of employers and employees in differing vertical markets, and have also failed to consider payroll card up market opportunities a behavior that is, oddly enough, supported by the brand networks which only seem to view payroll cards as a product fit for the unbanked and underserved. It s apparent that many payroll card providers are so focused on plastic that they do not take the time to fully understand the mechanics of payroll, let alone, the segments they serve. On the flipside, many traditional payroll providers take little time to examine how payroll cards can positively impact the way payroll services are delivered to existing and potential clients or have business models that make it difficult to embrace change. In both cases opportunities are being lost. There are at least two distinctly different approaches to bringing payroll cards to market. One approach is dominated by existing payroll companies and card providers that perceive payroll as a horizontal market servicing all establishments that need to compensate employees while adhering to all state and federal regulations. Due to this entrenched business model, these firms typically remain outside of the business processes that

2 employees perform to earn their pay. It s evident that these providers are challenged to view payroll cards as an agent of change since they remain entrenched in the cutting checks mentality. They fail to understand how a payroll card can be used to create new incentives and deepen communications if these functions are embedded into the way employers pay employees. For example, they miss the opportunity to utilize payroll card solutions to improve the delivery of information through direct communiqué when cardholders access card account information and to tightly integrate their products into the payment process. As noted earlier, there are indicators that the market is evolving and that new card based payroll solutions are being driven by providers that take full advantage of the unique attributes of prepaid cards and the moving parts that can be tied to the cards. These market solutions target employers that need to deliver incentives that help them compete for employees, steer employee behavior, and effectively and efficiently pay for performance. Mercator Advisory Group recognizes that this is an evolving opportunity in that few vertical markets already have a payroll solution tightly coupled to the business process today. Market Size Data The total wages paid in the United States in 2006 was $5.7 trillion. These wages were paid to million wage earners by approximately 6.6 million employers. It is estimated that 65 to 70% of employees are paid by direct deposit, which means 30 to 35% are paid by cash or check. This roughly translates into 38 to 45 million wage earners who are paid by cash or check. In 2006, an estimated 2.8 million payroll cards were issued with $10 billion loaded onto the cards. The estimated average annual load for prepaid payroll cards was $4,300 in Note that these numbers are derived from the total spend reported by processors, issuers and card program managers, divided by the estimated annual load value. It is Mercator Advisory Group s expectation that by 2010 the number of payroll cards issued will reach 8.8 million with loads quadrupling to more than $45 billion. This is a conservative estimate that is more likely to be lower than the actual number and any variation will be on the upside. For example, this conservative estimate does not take into account the turnover rate in some employee segments where Mercator Advisory Group has learned that churn can be as high as 70 to 100%. The prepaid payroll card market in some areas penetrated into white collar markets that include sales agents, professional temporary agencies and other relatively high pay environments. Mercator Advisory Group currently estimates that the market opportunity for payroll cards could be as high as $256.4 billion and this is without even considering upmarket penetration. Segmentation Overview Part Time and Just In Time Employment Solutions Federal Reserve Board research indicates there are roughly 10.3 million households that have no banking relationship, a statistic that is used all too often to define the total market opportunity for payroll cards. A more accurate accounting, however, places the total market opportunity at closer to 43.6 million employees. 2

3 This larger market size includes: Employees that lack banking relationships or have financial difficulties that make them significantly under banked and/or unable to qualify for credit (15 million) Employees that are temporary workers (6.5 million including contingent workers) Employees that are summer help within larger enterprises (1.1 million youths) Employees that work in positions that have a high turnover rate and/or are working in a geographically dispersed enterprise as hourly employees that include fast food chains, convenience stores, regional and national auto repair shops, etc. (12.8 million) Employees that work by the part or by some other production based method and/or are paid as 1099 workers (8.2 million) The 43.6 million potential employees that are targets for payroll cards have average earnings of $12.25 an hour and are employed by that employer for 12 weeks. Based on these assumptions the total addressable load value for payroll cards (excluding benefits and incentives) is conservatively estimated to be $256.4 billion. There is an opportunity for payroll cards to penetrate up market, where employees remain in place for four months or more, replacing direct deposit because prepaid card solutions deliver improved employee communications and can more directly link pay to performance or instant gratification in the case of Same Day Pay. Early reports suggest that these improved benefits may drive the opportunities for payroll cards up market. It is also possible that deploying financial services prepaid cards that offer the employee/employer an opportunity to benefit from interchange and Merchant Funded Discounts may prove more interesting and profitable than current payroll card products that target the unbanked and underserved. Mercator Advisory Group has developed detailed charts that segment the payroll card opportunity according to the North American Industry Classification System (NAICS) code. If you are interested in receiving a copy of this information please contact us. The Contingent Workforce The trend for employers to hire seasonal and contract employees on a need only basis to save time and costs has grown every year since 1996 and these firms are excellent targets for payroll cards. Indeed, some temporary employment agencies now specialize in providing the unique outsourced payroll and human resources (HR) administrative services that are required to specifically support contingent staffing including payroll functions that utilize payroll cards. Contingent staffing includes 1099 workers and temporary W 2 workers. In a 1099 setting, employers report payment to the IRS but they are not responsible for withholding taxes or paying social security. In the 1980s, temporary services developed an offshoot of 1099 compliance called payrolling that involved putting a potential contractor on the W 2 payroll of a temp service to ensure the worker s payroll taxes were paid. This was done to address employee confusion about proper tax filing procedures and to ensure clients avoid getting hit with surprise payroll tax assessments. Employers that utilize a contingent workforce typically try to develop a pool of temporary workers that have the required experience and skills. Significant efficiencies are gained 3

4 when trained employees return as needed, and this helps the company save money on recruitment, orientation, and training costs and payroll cards have been shown effective in developing employee loyalty. For example, the payroll card can be used to implement an incentive program that targets the most valuable skilled workers. Direct communications strategically wrapped around payroll card products can also be a method of building loyalty. When funds are loaded onto a payroll card the employer has an opportunity to communicate directly to employees through web based applications where employees check card balances and other related information and text messaging. High level communications can relay job and career advancement opportunities, or simply offer praises and encouragement as a way of engaging and retaining employees. It is a unique attribute that traditional payroll card providers have shown no interest in, failed to emphasize or failed to strategically build upon. The Gray Market The market data used to measure the number of unbanked families does not identify the number of individuals paid with cash and/or when the income earner was improperly identified as a contractor by the employer. Employers that hire people under the table or as undocumented contract workers will not be interested in using payroll cards because plastic leaves a trail. Transactions on the card can be used to help identify the employee and records will link a particular card back to the employer that distributed the card a trail that gray market employers will reject. According to researchers, the gray market is most active in a variety of manufacturing industries (paper, lumber and wood, metal, glass and concrete, food and tobacco, textile and apparel, plastics) as well as agriculture, construction, hospitality, private household services, miscellaneous retail and restaurants. Emerging Payroll Solutions As previously mentioned in the introduction of this report, emerging payroll card solutions are being ushered in that offer a stronger value proposition and the ability to further penetrate down market and virtually untapped up market segments. Examples of these solutions include Merchant Funded Discount Networks and capabilities that enable wages to be loaded onto the cards daily. Merchant Funded Discount Networks Today, the margin associated with any prepaid card operation is highly dependent on the dollar value deposited on the card, and cardholder usage at the point of sale. Mercator Advisory Group trusts that Merchant Funded Discount Networks (MFDN) will become an appealing value add and differentiator to most prepaid card programs and will ultimately impact the payroll card market. According to research conducted by MasterCard in 2003, offering merchant discounts ranked third among the top ten attributes employers felt their employees wanted in a payroll card. The cost savings on products and services offered and paid for by merchants in an MFDN creates an opportunity for additional revenue through the value chain and aides in boosting employee loyalty and increased card usage by encouraging spend. MFDN is a revenue generating value exchange and process flow used in promotional marketing and incentives to establish or enhance benefits perceived by the consumer, whereby a merchant or group of merchants pays a discount to an intermediary who distributes the discount among all participants in the value chain. An MFDN represents income opportunities that could potentially be used to compensate anyone in the Payroll Card Value Chain, including employers. However it should be noted that in many W 2 environments, cautious employers will avoid any appearance of profiting 4

5 in any way from the form of payment that they demand their employees accept, since doing so could raise significant concerns. However, Mercator Advisory Group is working with providers on several prepaid solutions that will utilize the earnings from a MFDN to deliver a high level of incentives to members of the value chain, including card sponsors, distributors, cardholders and the card acquisition points. It is likely that MFDN will ultimately be implemented with payroll cards however each implementation will likely need to define its own strategy for incenting the value chain players/partners while avoiding all appearance of impropriety that might create a backlash. Observation - The Lure of MFDN Global Cash Card, Inc. is an example of a payroll card provider that leverages a Merchant Funded Discount Network to differentiate its payroll card solution from other products. Global Cash Card offers employers the option of enrolling their employees in the Global Cash Card Rewards Mall, which is powered by the BSP Rewards Network. Global Cash Card reportedly does not participate in the revenue sharing because the company seeks only to make its products more appealing and leverage access to the network as a market differentiator. Since offering merchant discounts is a new approach for Global Cash Card and the payroll card market as a whole, it is too early to tell if the value proposition of only MFDN enhances adoption. The BSP Rewards Network reports a high level of interest in MFDN by employers. BSP discounts are provided from more than 800 merchant and 8,000 restaurants to participating employers and employees. Global Cash Card has layered the BSP Rewards onto payroll cards for Ruth's Chris Steakhouse, Staffmark, and for network marketing payroll systems such as Future Stock and Forum Technologies. For more information on MFDN please refer to Mercator Advisory Group s Restricted Authorization Networks: Winner Takes All (March 2008) and our upcoming report on Merchant Funded Discount Networks. Same Day Pay Capability The ability to pay W 2 employees at the end of their shifts offers employers a value add service that has the ability to reduce churn and increase loyalty and production. In this situation, the card becomes more than a simple payment vehicle but a mechanism for instant gratification. Speed of pay can be a strong differentiator for employers that are constantly under pressure to obtain and retain employees. In fact, the instant gratification is so powerful that in appropriate situations the benefits far outweigh the financial loss associated with the float derived from wages held until the end of the week. Same Day Pay payroll card solutions are primarily being targeted at temporary employment agencies, many of which serve as a gateway to up market opportunities. However, along with a willingness to forgo the float, the ability to offer Same Day Pay also relies on employers having an automated system that tracks time and attendance that can link to a payroll application that supports daily pay. Without a computer based 5

6 management system in place the amount of effort to document time and attendance and make the needed calculations for daily pay would be labor intensive. Conceptually, Same Day Pay can also be applied in multi level marketing (MLM) and manufacturing segments. In these scenarios, commissions based on the number of items sold or produced would be delivered at the end of a shift or upon the submission of payment request. These scenarios would also require and advanced automated accounting system. Observation -Same-Day-Pay Offers Instant Gratification One of the most compelling examples of how new payroll card solutions can drive upmarket opportunities can be seen in the Nursefinders Inc. payroll program. Offering same day pay on payroll cards drove employees that receive wages via direct deposit to payroll cards. In September 2007, Arlington, Texas based Nursefinders Inc., one of the nation s largest healthcare staffing providers piloted a JPMorgan Chase payroll card program in its Forth Worth, Texas branch. The offering provided employees with a Visa branded payroll card on which wages were loaded onto within two hours of their shift being completed. By effectively communicating the benefits of the card, the branch quickly achieved an adoption level of 90 percent by employees. The value proposition of same day pay has been met with great enthusiasm by both unbanked and banked employees. The agency reports that many employees receiving wages through direct deposit switched to using the card for payment because of the instant delivery mechanism. As of May, the program has been rolled out to 55 Nursefinder branches with more than 5,000 cards being activated. The agency places more than 18,000 health care professionals in long and short term healthcare assignments each year. Although the program is highly successful, a drawback is that employees must physically take their approved time sheets to a Nursefinder s field office for processing as part of the agency s payment process. Portable Solutions Payroll card providers have touted having portable payroll solutions that enable cardholders to receive payment from multiple employers. In essence, the payroll card becomes a substitute for an employee s bank account. While providers offering portable solutions view this feature as a winning proposition for adoption, Mercator Advisory Group does not hold the same opinion and cannot point to successful employee selected payroll card programs to date. To Mercator Advisory Group s knowledge close to 100% of payroll card load today is through employer selected programs. Some payroll card providers have unsuccessfully offered portable solutions into vertical specific markets to gain acceptance by employers within a targeted industry. Maybe a more suitable channel for rapid adoption within an industry might be through labor unions that may view the card as an effective vehicle for paying dues and have the ability to put employers in the position of having to accept the card as a means for distributing wages. 6

7 Another foreseeable issue that could challenge the adoption of portable payroll cards is that as payroll card programs become more prevalent among employers the number of employers willing to accept the cards goes down. An employer that invests in a payroll card program will not want to accept an outside payroll card since doing so significantly reduces the benefits associated with the payroll card program they deployed. Due to the existing and potential barriers to employer acceptance, Mercator Advisory Group does not see portability as a driving factor for the adoption of payroll cards. Mercator Conclusion Mercator Advisory Group has already seen payroll card programs that have captured funds from a direct deposit program, proof that when implemented with the right benefits a payroll card program can move significantly up market. New solutions are allowing network branded payroll cards to be tightly integrated into daily business operations, used as a platform for direct communications and provide opportunities to generate added revenue through increased card activity. Even more impressive, solutions such as Merchant Funded Discounts and Same Day Pay present a huge opportunity for payroll card providers to drive the products up market. The opportunity these solutions present will be met by card providers that understand payroll card programs must be more aligned with payroll and incentives and be less about offering plastic as an alternative to paper based payroll systems. Selling business process integrated solutions and communications based solutions does involve a longer sales cycle because there are more departments within a company to sell to and additional groundwork is needed to successfully integrate and deploy products into the business process. Those willing to make the effort are likely to be rewarded with greater adoption and revenues. It s been challenging for payroll card providers to see the opportunity of driving products up market because of the herd mentality that has steered payroll cards down market. This one sided way of thinking can possibly be attributed to the brand networks which have over emphasized payroll cards as an unbanked and underserved solution and potentially hinder out of the box thinking that can push the products up market. Solutions such as Merchant Funded Discounts and Same Day Pay will provide more clarity to the up market opportunity and cut through the various misperceptions. Mercator Advisory Group, Inc 1432 Main Street Waltham, Massachusetts Tel: Fax: Copyright 2008 by Mercator Advisory Group, Inc. All rights reserved. This material may not be distributed by any means without express written permission. Mercator Advisory Group is the leading, independent research and advisory services firm exclusively focused on the payments industry. We deliver pragmatic and timely research and advice designed to help you uncover the most lucrative opportunities to maximize revenue growth and contain costs. Our clients range from the world s largest payment issuers, acquirers, processors, and associations to leading technology providers.