Payroll cards appeal to employers for a number of reasons - cost-containment and ease of administration, chief among them - but the cards also find employers pulled into a national discussion on how to extend financial services and education to underbanked and unbanked Americans.

Unbanked employees are those without a checking or savings accounts at a traditional banking institution. Underbanked workers, however, may have a savings or checking account, but they also depend on non-bank companies for financial services or high-cost credit products.

Employers generally use payroll cards for workers who don't have a direct deposit account at a financial institution. The worker's paycheck amount is deposited on the card, which acts like a prepaid card and can be used where payment cards are accepted.

Payroll consultants say the cards can help companies to reduce their costs on payroll administration by eliminating paper checks, improving payroll security and control and making it easier make it easier to keep track of unclaimed wages. While the cards may reduce the administrative costs to the payroll process, they also provide unbanked and underbanked workers access to the mainstream banking system.

Calling on employers

"Employers can play a critical role in helping underbanked workers gain access to the financial services that facilitate greater stability and prosperity. In some cases, this will mean a relationship with a bank. In other cases, a prepaid card will be a useful option," says Rachel Schneider, innovation director at the Center for Financial Services Innovation.

The Chicago-based organization focuses on financial services for underbanked consumers. In 2008, CSFI estimated that 40 million households are underbanked, while the Federal Reserve Board projects that up to 10% of American families are unbanked.

Schneider explains that the delivery of a paycheck represents a meaningful opportunity to connect employees to financial information and to easy ways to budget or save. "Employers have scale and a position of trust that makes them an important delivery channel for financial institutions and an important ally for underbanked employees," she adds.

According to the American Payroll Association, employees without an electronic deposit account will save up to $500 per year by switching to payroll cards instead of using financial services outside of a traditional bank, such as a cash-checking outlet.

Wal-Mart taps cards

In September, Wal-Mart Stores, Inc., the world's largest retailer, rolled out a payroll card system in which workers without a traditional banking account can receive their paycheck on a payroll card. The Arkansas-based company operates nearly 8,000 stores and employs more than 1.4 million associates in the United States and more than 2 million worldwide. The electronic payroll program only applies to U.S. associates.

Wal-Mart wanted to reduce the number of paycheck and pay stubs it distributed to its associates and provide a fast, convenient and safe way for workers without a banking account to access their payroll funds, explains Michelle Bradford, spokeswoman for Wal-Mart Stores.

Moreover, "associates don't have to worry about overdraft banking fees with the cards. "It's a debit card and you can't 'overdraw' it," notes Bradford, adding that about 50% of the company's workforce has a direct deposit account. Also, under the program, associates with the cards don't absorb any maintenance fees on the card.

Some payroll cards, however, do have overdraft fees, prompting consumer advocates to question whether it's a good idea to transfer workers' pay on a card that comes with overdraft fees. The Center for Responsible Lending reports by allowing customers to overspend on their accounts, banks and credits unions earned $23.7 billion in overdraft fees in 2008, a 35% increase from 2006.

Still, payroll-card vendors explain that not all cards come with overdrafts fees and that it depends on the card provider. Additionally, they assert that it's difficult to create an overdraft condition on most payroll cards, given that all transactions occur in real time and will be denied if there are insufficient funds, thus no overdraft occurs and subsequently no fees.

Working with banks

Meanwhile, employers that offer financial education programs to their workers may have to fine-tune those programs to address underbanked and unbanked employees. The Federal Deposit Insurance Corporation recently issued the first national survey on U.S. banks efforts to serve unbanked and underbanked individuals and families.

Only 37% of banks established financial education or outreach efforts with other organizations to improve services to unbanked and underbanked consumers, according to the survey's report. This included working with employers that use payroll cards. The FDIC, which insures deposits in banks and thrift institutions for at least $250,000, recommends that banks step up their efforts in working with employers, community organizations and nonprofit sector to improve services for the unbanked and underbanked market. "Access to a basic bank account and to financial services is a starting point for economic opportunity," said Martin J. Gruenberg, FDIC vice chairman, in a statement on the report.

Evolving cards

"The benefits [of the cards] are certainly something that many employers will stress to their employees in order to boost enrollment, but the driving factor behind using paycards for businesses is the cost savings and reduction in administrative burden," explains Mark Coindreau, spokesman with the American Payroll Association.

APA's research shows that 90% of employees receive either direct deposit or a payroll card, with the remaining 10% being paid in the form of a paper check. An employer can face up to $2 in administration to issue a paper payroll check and between $8 and $10 to replace a lost or stolen check, according to the trade association.

"For those employers that have workers who can't get or who don't want to get a checking account, than the cards make it a lot easier for those businesses to offer payroll cards to those associates," says Gary Lott, a division vice-president and general manager at ADP, a provider of outsourced business solutions including payroll cards.

Lott believes a small segment of employers understand that the cards benefit workers who incur costly expenses for cashing their payroll checks. Those employers view the cards as a better way for workers without a bank account to receive their pay checks, while at the same time, bringing those workers into the electronic banking world, explains Lott. "It's better to have the card than going to a check-cashing store or carrying a large sum of money around," he adds.

Initially, large employers and businesses with high-employee-turnout rates adopted the card to reduce payroll administration costs and eliminate the logistical hassles of distributing checks to off-site workers. Now, more midsize employers are implementing the cards and for similar reasons, Lott says.

"The art of implementing the payroll card in the workplace is trying to figure out how the employer communicates with its workers." Some employers will have workers sign up for the card after attending educational programs about the card's features, while other organizations will embedded information about the card in the new hire process.

Even if workers have a banking account, it may be easier for some employers to disburse payroll checks through the cards, explains Jim Contardi, senior vice president and prepaid division manager at First Data. The Atlanta-based company will provide the payment processing services for the Wal-mart payroll care program.

For instance, employers in the trucking and HR staffing industries, where workers are out in field, see the cards as providing those workers with convenient access to their payroll funds, Contradi says.