More Millennial employees are forgoing traditional banks
While a majority of employees in the United States are now paid through direct deposit, nearly one-fifth of the workforce remains “unbanked,” meaning they don’t have a bank account, and as such require physical paychecks. As a consequence, the use of reloadable “paycards” has grown over the past decade as a option to pay employees who don’t hold bank accounts.
In the past, the unbanked population was traditionally lower-wage workers with limited access to transportation, but new research indicates that a growing number of Millennials are intentionally shunning financial institutions.
Supporters say paycards can offer retailers an easy and less costly way to pay unbanked employees, and can also help those employees save money on expensive check-cashing fees. Experts say that as the number of Millennials grows in the workforce, paycards are becoming a more common and in-demand payment method. But critics say the cards have hidden fees for workers and drive up other costs for retailers because swipe fees are charged each time the cards are used to make a purchase.
Paying the “unbanked”
According to the National Automated Clearing House Association, 82 percent of U.S. workers are now paid by direct deposit via ACH. Nevertheless, the 2013 Federal Deposit Insurance Corporation National Survey of Unbanked and Underbanked Households revealed that 20 percent of all American households were underbanked — meaning that, while they had a bank account, they also obtained financial services and products from alternative financial service providers.
More than 57 percent of underbanked respondents said they didn’t have enough money to maintain a minimum balance, while 34 percent said they had a dislike for financial institutions. Slightly more than 30 percent said they remained unbanked because of high or unpredictable account fees.
Many younger workers are intentionally avoiding bank accounts. A new study by the Center for Generational Kinetics and paycard company Global Cash Card found that roughly 5 million Millennials do not have a checking account, and nearly half said it’s due to a “distrust for banks.” More than a third of all Millennials in the survey said it would be valuable to have their paychecks loaded onto a card; 64 percent said paycards should be offered by employers as a payment option.
Jason Dorsey, chief strategy officer and Millennials researcher at the Center for Generational Kinetics, says instead of choosing traditional methods of banking, Millennials are opting for alternative solutions that meet their generation’s needs. “A paycard offers a way for these workers to manage their wages with greater freedom, independent of institutions they distrust,” he says.
Paycards bridge the gap between physical payments and ACH transfers by acting as a prepaid debit card where the employer “loads” an employee’s paycheck onto the card every pay period. From there, paycard holders can withdraw cash at an ATM, use the card to pay bills or transfer funds to other accounts.
The payment option has been gaining traction at large retail companies such as Walmart and Walgreens. Financial research and consulting firm Aite Group forecasts that by 2017 there will be 10.8 million payroll cards in circulation with a volume of nearly $69 billion.
“Our study reveals that the landscape of personal finance management, including pay, is changing dramatically,” Dorsey says, and is “being led by Millennials who are entering the workforce in record numbers.”
Improving efficiencies, reducing costs
Founded in 2002, Global Cash Card is used for paycards by such companies as Claire’s, Chipotle, Uno Restaurant Holdings and Time Warner Cable. Michael Purcell, Global Cash Card co-founder, executive vice president and chief marketing officer, says paycards are an answer to changes in the marketplace where companies want to save money and employees want new ways to be paid.
In theory, paycards can reduce costs for employers by eliminating paper, postage and the infrastructure needed to deliver physical checks. Employers had already heavily moved toward ACH payments in the past decade, but there still wasn’t a way to offer digital payments to employees who didn’t have bank accounts.
“Many employers are still having to mail [paper] checks around the country to different locations and have managers hand them out,” Purcell says. “It’s not very efficient.”
Paycards can offer a higher level of efficiency and cost savings. For a retailer with hundreds of locations and thousands of employees around the country, the fees associated with printing and mailing checks every two weeks can add up to hundreds of thousands of dollars.
Purcell says paycards can streamline payroll administration by replacing paper, including pay stubs and W-2 forms. They can also eliminate the cost of special disbursements such as termination pay, final paychecks and off-cycle payments.
Retailers can also gain operational efficiencies by simplifying payroll distribution for all categories of employees, says Purcell. “It’s a real benefit in time, convenience and cost savings,” he says. “It costs almost $3 to process a paper check and that’s including the printing, time to do it and mail it. A company could be doing this for thousands of employees every other week.”
Convenience vs. high fees
Paycards are not without controversy. Critics say they penalize low-wage workers by forcing them into payment methods with high fees. In September 2013, the Consumer Financial Protection Bureau informed employers through a bulletin that under federal law, workers cannot be compelled to use payroll cards.
While state laws vary, the Electronic Fund Transfer Act requires that employers provide an alternative, and prohibits them from requiring employees to receive their paycheck through only one financial institution.
A 2014 report by the Sargent Shriver National Center on Poverty Law reported that paycard users can be hit with a myriad of fees for checking balances, overdrafting and having a transaction declined. Purcell points out that not all paycards are alike and that cardholders who use Global Cash Card in a certain manner can “avoid paying any fees.”
And paycard fees are not limited to the employees receiving the cards. Despite paycards’ popularity among some retailers, the cards mean that they and other retailers end up paying swipe fees on purchases made with the cards when workers use them to shop.
Global Cash Card says it offers the first transaction per pay period free, and cardholders can use surcharge-free ATMs through MoneyPass or Allpoint, which have nearly 80,000 machines across North America. “We work very hard in educating and helping users not incur any fees. We know it’s important and we want [employees] to want the card, because if they don’t then we don’t have a business,” Purcell says.
Paycards can also eliminate the need for employees to physically pick up a paycheck, as well as the need to use check-cashing services that often charge 5 percent of the check’s value — or more.
While the paycards are stored-value cards, they “act very similar to a checking account,” Purcell says. The card is simply reloaded every pay period through ACH direct deposit. It can be used for point-of-sale transactions, Internet purchases or to withdraw cash from an ATM.
Employees can access their card account information via the web and sign up for alerts, such as when a deposit has been received or when a paycard balance falls below a specific amount.
Global Cash Card earns its revenue on small fees “through volume,” Purcell says. Those fees, which he says are avoidable, include small amounts for point-of-sale declines, over-the-limit-fees, money transfers, convenience checks and negative balances.
A retailer can get Global Cash Card up and running in as little as two weeks.
Purcell says growth in the industry is a combination of increasing demand from consumers and a need for employers to reduce costs on delivering paper checks.
“Millennials want more options and the payment world is changing,” he says.
NRF members come from more than 45 countries and all sectors of retail, from Main Street merchants to online retailers.
Credit and debit card swipe fees cost retailers and their customers $30 billion each year.