As loan growth picks up at banks, we see more attention turning to gathering low cost, high duration deposits. One of the best ways to do this is through grabbing the operating account at businesses. One of the best ways to get the operating account is to offer an online, low cost set of payroll services. This is why the offering of online payroll services is picking up for community banks.
For the business, offering an online payroll service integrated into an operating account makes some sense. Companies like the cost savings, the control, the reporting and the ease of use compared to non-online services that mostly tend to be local in nature. Since payroll is such a big chunk of a business’s expenses, being able to integrate future payroll and tax cash flow needs is an important component to the future of cash management.
Through the advent of technology, costs have come down and capabilities up. New payroll services not only come with robust reporting on mobile devices, but a set of analytics that help employers benchmark their compensation costs, manage future cash flow and enhance hiring by providing the employee with payroll alternatives that have been unavailable in the past such as prepaid cards, foreign currency sending, savings and philanthropy options.
There are now several vendors that offer banks an affordable, private label version of the service for a set-up and a per user fee basis. We have looked at PayChoice, ADP, Paycor, Surepayroll and others to evaluate which one is the best for certain needs. The basic payroll offering comes with the following attributes:
- Free transfers of funds from an operating account to a payroll account
- Online W2s and 1099s for the business and employees
- Tax-filings and notifications
- Email confirmations to the business and employees of payments
- The ability to print checks and payroll stubs at the office
- Automatic payroll tax calculating, filing and payment
- Integrated HR tools and compliance resources
Banks are charging between $29.95 and $59.99 for the service for 10 employees plus $1.50 per employee for everyone over 10. The average payroll account will generate about $17 per month in addition to fees for the bank and will save the small business approximately 45% and 3 hour per month compared to traditional services.
Some banks offer a 30 day trial (good) and about half will waive the monthly fee for accounts with average balances greater than $50,000. Other banks offer a 6-month money back guarantee (better).
What payroll does is add an average of about $38,000 in balances for a small business account and $348,000 for a mid-sized business. Liability duration extends from around 3 to 5 compared to a non-payroll business DDA and the positive convexity increases from 2.3 to 5.7. Further, not only do the value of payroll serviced accounts increase as rates rise, but they increase with any interest rate volatility. Payroll also increases retention rates and terminal life of the account by almost double. Combined with fees, this increases ROE of a typical account from 5% to 40% or greater. Most importantly of all, having the payroll and tax data can now help a bank forecast its liquidity better as it looks ahead.
If you are looking for a product to dramatically increase value to the customer, generate fees and deposit balances for the bank while proving integrating an important data stream, offering online payroll services is a must for a future build out of treasury management services.
Submitted by Chris Nichols on February 25, 2014