Payroll cards eager to deal in Canada

Major credit card companies all on board

Touted as efficient, inclusive, cost-saving devices — allowing employers to put work pay on a card instead of in a bank account or on a cheque — prepaid payroll cards are just starting to emerge as a viable option for Canadian employers.

That’s in contrast to the United States, where the cards are expected to grow from 812,500 cards in 2004 to 14.2 million by 2008 (according to a July 2006 report by Mercator Advisory Group in Waltham, Mass.) or from 2.2 million in 2004 to 17.5 million in 2010 (according to a 2005 study by Pelorus Group of New Jersey).

“Payroll cards in Canada are a relatively new phenomenon,” said Stephen Jack, vice-president of marketing at Mint Technology, a payment solutions company in Toronto. “We’re a fairly well-banked society so there hasn’t been a screaming need for it, unlike the U.S., where a lot of businesses are cheque-based or cash-based.”

In addition, the U.S. is more advanced than Canada thanks to its clearing-house system. South of the border, it is easier to attach an account number to the cards while in Canada the employer has to use a special processor as a go-between because “no one’s built the software,” said Jack.

But with well-known brands such as MasterCard, Visa and RBC getting involved in Canada, the going should get easier.

“The market is really geared to using a branded card. The cardholder feels much more at ease because they know the logos, the reputation, they have a sense of security,” said Yves Rimard, financial director at CashValet Financial Services, a Laval, Que.-based direct deposit solutions company.

“The use of prepaid cards for payroll is one of the fastest-growing prepaid card segments in the United States and we expect similar adoption in Canada,” said Céline Charlebois, chief executive officer of CashValet.

Having a big name like MasterCard also guarantees tight security, as the card issuer or bank must be approved, along with the platform or software and distributor, said Rimard.

“When you’re talking about payroll, this is one of the most important expenses in any company so the last thing they want is to fool around.”

Adoption in Canada has been slow because none of the big banks has previously gotten involved, said Ian McNeil, president and CEO of Pay Linx, a mobile banking and stored-value card financial transactions company in Edmonton partially owned by RBC. It plans to launch a Visa-branded payroll card in the fall.

“It’s more credible if the bank they deal with on an everyday basis is getting involved,” he said. “The funds are held by the financial institution, so everybody wants to know the money is secure.”

The back-end processes are still being streamlined, said McNeil, as the various parties figure out how to smoothly allocate the funds and get the money onto the cards. But he said Pay Linx payroll cards will allow payroll to enter the total amount of hours and automatically calculate the source deductions.

Growth in Canada should also by precipitated by U.S. subsidiaries in Canada that use payroll cards south of the border and want the same option here. The greatest interest comes from employers with workers who lack, or have trouble accessing, a traditional bank account for direct deposit. This includes part-time, seasonal, mobile or foreign employees, along with industries that often see high turnover, such as retail.

“It’s much easier to issue a prepaid card than ask for a bank account because you have to enrol them in a direct-deposit program and that means they have to bring in a blank cheque, which they forget, or they forget to inform the employer of changes to their address,” said Rimard. “It’s not as easy as it used to be to open a bank account.”

The impact is minimal when it comes to inputting payroll, said Jack, as prepaid cards are treated as another account or entry field. And the advantages are numerous, he said, in cutting down the time usually devoted to dealing with paper cheques — such as mailing, address or account changes or dealing with duplicate, lost or counterfeit cheques.

“These are stories we hear in legion from medium and small payroll companies,” said Jack. “This is a cleaner way to do things.”

Prepaid payroll cards can also be a safe and inclusive alternative for employees who cash their cheques, carrying vulnerable cash around in their pockets. The fees charged at ATMs are also lower than those at cheque-cashing stores and the cards can be used at point-of-sale, on the Internet or for mail and telephone-order transactions. They also improve monitoring of expenses and fraud control, say providers, while the convenience of the cards can help build employee loyalty.

The cards can also be used to directly reimburse expenses or pre-load amounts for employees. And one of the biggest areas of growth in the U.S. is partial deposits, said Jack, with a portion of pay deposited on the card and the rest into a bank account.

But there are complexities. For one, there are the costs for employers and employees, ranging from start-up costs to usage fees for ATMs, point-of-sale or customer service. The contract can also be long, much like those for a credit card or bank account, and obviously requires more attention, initially, than the traditional paper-cheque route.

And training is required to show payroll, HR and employees how the product can be used, something not traditionally done with direct-deposit programs. People need to be welcomed and guided through the program, said Jack.

Further complicating the situation have been concerns about unused funds in the account. Employees must be able to easily access their balance which, for now, can be done by checking online, by phone or by mail but not at point-of-purchase.

“The employer wants to ensure the beneficiary is getting 100 per cent of the funds due to them (so) you’re not trying to make money off breakage, which is those unused funds,” said McNeil.

Pay Linx hopes to solve this by providing mobile banking, so the balance is shown in a text message on a cellphone.

“Especially when dealing with prepaid cards, the demographics can be somewhat different,” said McNeil. “They may or may not have computers but everybody has a cellphone, even under-banked individuals.”

ADP does quite a bit of business with prepaid payroll cards in the U.S., said Rod Dobson, president of ADP Canada in Toronto, but in Canada it is still trying to determine whether there’s a significant market opportunity since the unbanked population is considerably smaller.

“That said, clearly there are some and clearly it could be a convenience and we’ll keep an open mind about it,” said Dobson.

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