Banks that are moving away from being transactional have recently been promoting more bundled accounts. For example, banks on their game actively market a high-net-worth elite checking product to the principals of their commercial accounts and commercial account packages to their high net worth business owners. This tactic can dramatically increase both new account growth and lifetime value. Many banks build on this concept and offer a reduced-fee, employee core banking package (checking, savings, debit, credit, online banking, and bill pay) and turbo charge profitability. Today, we show those banks how we add one more layer to further boost profitability.
Before we continue, in the name of full disclosure, we want to make sure you know we are biased as CenterState offers wholesale prepaid card services. This is one of our many lines of business, and we do so because we strategically believe in the product. We don’t offer this product directly to banks, but we provide the engine for two great companies that do offer prepaid payroll cards to financial institutions - Prepaid Technologies and FlexWage.
Using Prepaid Payroll Cards
Consider that 10 million workers currently use prepaid cards. Certain businesses have a large set of their employees that are underbanked. Manufacturing companies, agriculture, construction, call centers and hundreds of other employers have this composition. Any user of overdraft protection is a candidate as are employees that don’t have a formal banking relationship. For that matter, once a business has about 60 employees, it is likely that a portion of these are in need of greater banking help and suggesting leveraging prepaid payroll cards can make significant sense.
The statistics below are from the Pew Charitable Trust in a study they did in 2014. The data paints a picture that your average prepaid card user is single, a renter, has a high school education, makes less than $25,000 per year and is between 30 and 49 years of age. While that is a pretty standard picture of a payroll card user, we quickly point out that those statistics are just the median. More than 25% make over $50k, 49% are homeowners, and 19% have a college degree or higher. What most of these users struggle with is either gaining a banking relationship or keeping a banking relationship. These users are not the un-banked, but the underbanked as 88% have or have had a checking account.
Where most of these users struggle is with managing their money or not making enough to make ends meet. 63% of prepaid card users report that they have paid overdraft fees in the past, and 41% have either closed their account or had their account closed because of overdraft fees.
For The Employee
Each payday, instead of cutting a paper check or transferring funds via direct deposit, employees could opt in to receive their wages on a prepaid payroll card. For the employee, the prepaid card provides better convenience, enhanced control and at less expense.
For many employees, the alternative is to get a paper check cashed, a process where they could lose 25% of the amount at some check cashing establishments. The payroll card functions in a manner similar to a debit card in that the employee can use the payroll card to withdraw funds from an ATM, make point-of-sale purchases and electronically transfer funds.
Even if these employees do have a banking relationship, if they consistently have NSF or overdraft charges, the prepaid card can substantially save costs. In addition, unlike a basic checking account, payroll cards are not subject to minimum balance or creditworthiness requirements, which can be difficult for some users to fulfill.
As a result of the above, 54% of these employees take their checks to a store like 7-11 or Walmart to purchase a prepaid card getting charged fees in the process (usually a $3 monthly fee and a $3 fee to reload the card each month). Only 9% of these prepaid card users go to a bank or credit union, and only 9% get their prepaid card from their employer. These statistics point to a significant unaddressed market for community banks to take advantage of.
For The Employer
Where a check costs about $2.20 for a business to cut, a payroll prepaid card deposit costs around $0.35. Not only does the employer save money, but this is a more convenient option for many due to the above. Providing a reloadable card is not only more efficient but also allows the faster transfer of funds thereby getting money in the hands of the employee quicker than a check. If direct deposit isn’t an option, the reloadable payroll card is usually the next best method.
By offering reduced fee banking services through the Company, employers can not only better attract quality workers, but can aid them in managing their money which makes for a more stable employee. Given the low rate of unemployment, this is increasingly important, and banks can take a leadership role in helping companies both save costs and attract a more qualified workforce.
For The Bank
For the bank, prepaid payroll cards do four things that are particularly critical to long run success: 1) Having prepaid payroll cards helps attract commercial customers to the bank; 2) Having prepaid cards attract retail depositors that often desire companion savings accounts; 3) Prepaid cards increases the life of the customer AND increases balances thereby resulting in lifetime value that is approximately 30% greater for just the commercial account than not having a prepaid payroll card offering and, 4) having payroll cards helps attract retail balances and fees.
There is one other aspect of using payroll cards that could be the most important. The downside of many commercial accounts is account balance volatility. Payroll is usually the single greatest expense and paydays tend to materially reduce cash balances. By including payroll cards in the account package offering, funds flow from the commercial account into the employee’s account thereby limiting the volatility of balance fluctuations from the bank perspective. This means longer duration balances, greater positive convexity, and higher investable balances. All this adds up to creating more franchise value for the bank.
The Offering – Beating Large Banks And Alternative Lenders
Using the prepaid payroll card, community banks have the ability to offer a product that is unique to the industry. Community banks can package the payroll card with a savings account to assist in building balances, online bill payment, check cashing services, money transfer, and foreign exchange.
Further, banks can offer a variety of credit building products such as a secured line of credit or a deposit secured advance which offer an important feature for the customer and a profitable line of business for the bank.
This combination is extremely potent as only one or two banks come close. For the most part, this combination of products is in the domain of alternative lenders, and while some offer high interest rates on their savings accounts, they charge even higher rates on their cash advanced funds and steeper fees on their services. These alternative financial institutions also provide limited banker contact and nothing near the service as a community bank. A community bank with its service-orientation, branches, bankers, call centers, online and mobile offerings can run circles around the competition.
Where community banks have the strategic advantage is that it is wrapping up the commercial account, the principal’s account and the employee standard accounts in addition to the underbanked product. By enrolling the company in the product, community banks dramatically reduce customer acquisition cost, the largest functional expenditure for these alternative financial institutions.
How We Would Price It
For the reasons mentioned above, community banks have a material pricing advantage since the underbanked offering is packaged with the lucrative commercial account plus the fact of the reduced acquisition/maintenance costs. If you handle cards internally or if your volume and structure with your card provider allows it, we believe the below pricing approach is a good balance between demand and supply.
To be attractive and profitable, we suggest banks charge the business a one-time setup fee per payroll card account of $10 and then $4 per month paid by the employer or by the employee. We would not charge any reload fees, and we would include online banking and bill pay in that monthly, non-waivable service charge. Since we would include online and mobile banking for that monthly account fee, we would charge an additional $4 per month for paper statements.
With a minimum of $50, we would suggest providing a free savings account with no monthly fee and allow free transfers to savings up to the regulatory limit (six) and then charge $12 for each transfer or withdrawal.
In terms of savings account interest, this is an interesting one. We suggest you offer some of your highest rates in the bank to the underbanked as a way to break them into the mainstream. For example, if your normal rate is 0.05% on a basic savings account, we would offer 0.25% on the first $2,500 tier, 0.35% for the next $2,500 up to $5,000, and then 0.10% thereafter. The unusual aspect here is that you want to incent enough balances to reduce the amount of shortfalls in the prepaid payroll card as that usually generates the most customer service contact. By helping the underbanked build balances, banks help support their community while reducing their contact volume.
Putting It Into Action
Using prepaid payroll cards are not for every bank. However, if your bank wants to boost profitability and has a commercial orientation, capturing the operating account of a business is the fastest and safest way to become an above average performing bank. By bundling commercial accounts with retail accounts and fee services, your bank can get the best of all worlds as not only does it capture large deposit balances, but adds stability, fee income, lowers acquisition costs and increases retention.
If you don’t offer a combination business / employee bundle, you should put that into your strategic plan. If you do offer a package already, consider adding prepaid payroll cards if it fits your client base. Few banks do and as we have demonstrated above there is a huge need. The best of all, your bank can take an educational and thought leadership position which will further strengthen your standing in the business community and make your Bank the bank of choice.
Submitted by Chris Nichols on August 30, 2016