Paychex’s Payroll Cards Program Could Have Little Impact On Its Revenues

Paychex (NASDAQ: PAYX), a leading payroll and human resource outsourcing company, recently announced the launch of a payroll card program, Skylight® PayOptions™ Program, which allows small and medium-sized businesses to deposit their employee’s wages directly onto the Skylight ONE® Prepaid MasterCard®, a convenient alternative to traditional paychecks or direct account deposits. ^[1] NetSpend, a leading provider of general purpose reloadable prepaid debit cards and wholly-owned subsidiary of TSYS (NYSE:TSS), will serve as the manager and processor for Paychex’s Skylight® PayOptions™ Program. BofI Federal Bank will issue the payroll card.

Paychex’s payroll card program may help increase its popularity in the payroll outsourcing industry and give it a competitive edge. However, in terms of revenue generation, we believe the impact will be small since 70% of the U.S. population already have at least one bank account, ^[2] and it would be hard for employers to enforce the use of payroll cards, given the cases of state action regarding hidden charges. Additionally, revenue generated per card would be low since Paychex has waived of most of the revenue generating aspects of payroll cards such as monthly maintenance fees and enrollment fees.

See our complete analysis of Paychex here.

Payroll cards offer benefits for employers and employees

Payroll cards operate in a manner similar to debit cards. On the payday, employers deposit salaries onto the payroll cards. Employees may then choose to withdraw their wages from an Automated Teller Machine (ATM) or through over-the-counter cash withdrawals at a bank or use the card at retail locations to make payments.

Payroll cards will be an attractive option to the ‘underbanked’ and ‘unbanked’ population, which only account for 30% of the total U.S. population. ^[2] Unbanked people are those who do not have a bank account and the underbanked have a bank account but rely on alternative non-banking financial services such as payday lenders and check cashing firms. With Paychex’s Skylight ONE® Prepaid MasterCard®, employees will also have access to features such as budgeting tools, text and email alerts and online bill payment. This will make it convenient for employees to keep track of their expenses and manage them.

Using payroll cards is not only convenient for employees but efficient for employers as well. Employers stand to save an estimated $2.75 each time they avoid making payments to their employees through paper checks. ^[3] These cost savings will likely be attractive to small and medium-sized businesses since keeping costs low is critical to them.

Hidden charges have made payroll cards unpopular

Payroll cards have recently been in the news due to a law passed in Illinois regulating the use of payroll cards to pay wages. ^[3] Hidden charges, which would often eat into a large portion of an employee’s salary were the primary concern behind payroll cards. Also, payroll cards were often being used as a condition for employment. The recently passed law has made various amendments to the State’s Wage Payment and Collection Act to check such problems. In the past, the use of payroll cards has led to federal court lawsuits and investigations. ^[4] Such cases and the need to regulate the use of payroll cards indicate that there is a growing resentment against the use of payroll cards.

In its Skylight® PayOptions™ Program, Paychex has attempted to deal with the concerns of employees by providing a detailed fee schedule and waiving fees for services such as monthly statements, card replacements and balance enquiry, along with enrollment and monthly maintenance fees, for which most other payroll card programs charge hefty fees. ^[5]

The removal of such fees may lead to Paychex’s payroll card program gaining popularity. However, it will add very little to its revenues.

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1. Paychex Announces Payroll Card Solution for Small- and Medium-Sized Businesses, August 5 2014, www.marketwatch.com [↩]
2. Consumers and Mobile Financial Services 2014, March 2014, www.federalreserve.gov [↩] [↩]
3. Gov. Quinn signs payroll cards bill into law, August 6 2014, www.chicagotribune.com [↩] [↩]
4. Illinois joins other states restricting employer use of pay cards, August 7 2014, www.lexology.com [↩]
5. Paychex Skylight® PayOptions™ Program, www.paychex.com [↩]