The Changing Dynamics of the Payroll Marketplace

Seth Brennan Vice President – Product Manager Citi Prepaid Services

Mike Pancotto SVP, Compliance and Audit/Moderator FSV Payment Systems

Wednesday, June 26, 2013 Workshop B

Cindy McMullen Payroll Manager Dollar Tree Stores

Dave Hill Senior Director – B2B Product Mgmt. NetSpend Corporation

Cathy Beyda Of Counsel Paul Hastings, LLP

© 2013 Network Branded Prepaid Card Association

Thank You To Our Sponsors

2

Presenting Sponsors

Supporting Sponsor Welcoming Reception Sponsor

Associate Sponsors

Founding Sponsors

The views of the presenters should not be attributed to their respective firm or organization, or to the NBPCA.

The content of this presentation is designed to provide practical information concerning the subject matter covered and is provided with the understanding that none of the presenters are rendering legal advice or other professional services.

This presentation is for informational purposes only and is not a substitute for legal advice or your professional judgment.

You should review applicable law in your jurisdiction and consult experienced counsel for legal advice.

3

Legal Disclaimer

4

Payroll Card Action Group

• Action Group established to focus on the opportunities and challenges of payroll cards

• Participating members representing Issuing Banks, Program Managers, Card Associations, Processors, Attorneys, Employers

• Focus is solely on Payroll Cards as a component of electronic wage payment

The Payroll Card Action Group Mission

5

• To Advocate, Educate, Protect and Promote Payroll Card adoption

• Provide a fact-based voice to government, employers, media and consumers

• To be the Trusted Advisor of the Paycard Industry via continued awareness, monitoring and reporting of Federal & State Legislative initiatives as well as facilitating efforts to clarify and defend our best practices

• To be the recognized gathering coordination point for the industry

Accomplishments

6

• Voice of the consumer initiative

• Marketing studies

• Best Practices Document

INTRODUCTION TO ELECTRONIC WAGE PAYMENT

7

Introduction to Electronic Wage Payment

8

• The “Old Standard”

– Pay Checks

– Direct Deposit

• The “New Norm”

– Direct Deposit

– Payroll Card

What are Payroll Cards?

9

• A practical and cost-effective method to pay employees electronically

• A way for employees to access wages 24 hours via ATMs, over-the counter cash withdrawals and convenience checks

• A way for employees to spend wages at PIN and Association-branded signature-based transaction locations and on the Internet

• A way for employees to eliminate check-cashing fees, waiting for paychecks to arrive in the mail, and other payday burdens

Key Requirements

10

• Free and Clear Access to funds

– ATM

– OTC

– Checks

– Personal Money Orders

• Regulation E

– Dispute resolution process

– Statement availability

• Annual notifications

• Escheatment

11

Key Requirements

• Disclosures

– Front of Card

– Back of Card

– Materials

– Website

– Cardholder Agreements

Payroll Cards vs. GPR

12

Payroll Cards vs. GPR

13

Payroll Cards vs. GPR

14

BENEFITS OF PAYROLL CARD PROGRAMS

15

Issuer, Program Manager - Benefits

16

• Cardholder and Client Value

• Inclusive

• Durable

• Well-known customers

• Brand association

• Recurring revenue streams

– Product leverage

17

Hourly Employee

May work two jobs to make

ends meet. Needs to save time and avoid check cashing fees.

Young Employee

Has after school and summer jobs. Needs an easy way to access money, spend online and in stores - just like an adult.

New Immigrant

No credit record and uncomfortable with financial institutions. Needs to keep money safe and make

purchases.

Payroll cards provide a solution for the varying needs of the underserved segment

Professional Adult

Well compensated. Had prior credit issues but wants to function in the mainstream.

The Underserved Segment

18

Employer’s Perspective

• Motivation for Implementation of a Payroll Card Program

• Known Benefits

• Unexpected Benefits

19

Employer Motivation

• Cost-savings – less expensive than checks

• Security and safety

• Assisting the underserved

• Increased efficiencies

• Ability to pay same-day

• Turnover

• Escheatment

• Disaster recovery

20

Known Benefits

• Safety

• Electronic pay – faster and more secure

• Efficient

• Fit culture of company and employee base

• Cost-effective

21

Unexpected Benefits

• Significantly increased electronic pay participation

• Ease of program management and administration

• Flexibility of services and fee structure

• Employees earnestly accepted

22

Employer Benefits

• Cost-savings - Reduces costs associated with issuing, delivering, replacing and reconciling paper paychecks

• Protection - Reduces duplicate check fraud

• Security - Provides safe and efficient electronic delivery of payroll funds

• Process Improvements – Transfers escheatment liability to the financial institution that actually holds the employee's funds

23

Employer Benefits

• Disaster Recovery Planning - Eliminates issues associated with employee payment following a disabling event that forces office closures

• Environmental Improvement Programs - Enables companies to enhance “green” initiatives by eliminating paper processes

• Improved Benefits Program - Allows every employee safe and immediate access to their payroll -- not just those with a bank account

• Adoption of Direct Deposit – Increases awareness and utilization of direct deposit across all employees through increased communication of payroll options

24

• Each year, as checks travel through the payment cycle, they:

– Use more than 674 million gallons of fuel

– Add 3.6 million tons of CO2 to the environment

Paper check and wage

statement production

• Deforestation

• Paper production

• Printing

Distribution and

transportation

• Raw paper distribution

• Distribution to hiring locations employees collecting pay

when not scheduled to work

• Waste pickup and processing

Check clearing process

• Transportation

• Processing of checks via bank and Federal Reserve

• Waste pickup and processing

Waste • Paper check / wage statements thrown away in landfills

• Electricity requirements • Gasoline

Direct Deposit drastically decreases an employer’s carbon footprint

Employer Benefits – Going Green

25

• Businesses can save $2.87 to $3.15 per transaction by using Direct Deposit instead of checks1

• Increased productivity

– An average of 8.5 - 24 hours of productivity is lost per employee per year cashing / depositing paychecks2

– Estimated $3-$5 billion loss in productivity annually2

Example Annual Cost Savings Using Direct Deposit Instead of Paper Checks

Cost Savings per Check $3.00

Paid Employees 5,400

Annual Paper Check Cost Savings: Bi-Weekly $3.00 cost savings x 5,400 employees x 26 checks

$421,200

1National Automated Clearing House Association 2010 2NACHA - The Electronic Payments Association

Employer Benefits – Cost Savings

26

Employee Benefits

• Ease of use

• Options available for retrieving pay

• Online access and bill pay capability

• Safety and security

• Special programs

• Ability to have a savings account or account for child

• Portability

27

Employee Benefits • Cost-savings - Eliminates check-cashing fees and costs associated with

bill payment (e.g., money order purchases, postage, travel expenses, etc.)

• Money Management - Provides employees a better way to manage their money and track spending

• Safety - Reduces the need to carry large amounts of cash

• Protection – Reg E protects cardholders against unauthorized purchases

• Acceptance - The card is welcome everywhere “Association” debit cards are accepted

• Convenience - Makes wages safely and immediately available on payday

• Faster Access to Pay - Eliminates delays caused by mail delivery

• Prestige - Brings employees into the “mainstream” of society

• Incur higher costs of approximately 2.5% of each paycheck

• Check cashing fees • Money orders • Transfer fees • Subject to increased risk of theft

and financial loss due to employee carrying a large amount of cash

• Turned down for loans due to poor or no credit history

• Face limited options for cashing checks

• Transportation costs

28

Sources: Federal Reserve & McKinsey Quarterly

Underserved - Challenges

29

• It is expensive for low income consumers to have a traditional bank account and use cash

• Prepaid card with direct deposit is an extremely cost effective option

Average Annual Cost of Ownership*

$168

$322

$340

Prepared Cardwith Direct Deposit

Basic BankChecking Account

Cash

*Source: Bretton Woods, Inc., March 2012

Underserved - Costs

30

Two key findings quoted below:

The study found the pay card is more cost effective than receiving a paper check, let alone checking accounts. Annual averages: pay card $83; general purpose reloadable prepaid card $185; cash based lifestyle $256, low balance checking $273. (see chart next page)

Bretton Wood 2011 Payroll Card Study

• Termination Pay – Final Payment

• Weather or other

31

The traditional distribution of paper checks requires 1) the paper check to be delivered

physically and 2) the employee to travel to the delivery point. Natural disasters or personal

challenges could prevent an employee from accessing their paper payroll check.

Employee Benefits – Immediate Payment

32

• Less potential for counterfeit or stolen checks, altered amounts, and forged signatures

• 1.2 million fraudulent checks enter the banking system daily

• Electronic payments reduces exposure to identity theft

Employee Fraud Prevention

EVOLUTION OF PAYROLL CARD PROGRAMS

33

34

Payroll Card Product History

• Product developed with the employer in mind

• Primary product focus: – Employer tools

– Regulations

– Fees

• Market mostly a level playing field with above

35

Growth of Paycards

• 20% CAGR expected through 2016

• Payroll cards about 30% of total prepaid market

• Tipping point (cards vs. checks) in early 2015

36

Source: Aite Group. Feb 2013 Impact Note: “U.S. Payroll Card Programs: Paving the Path for New Revenue”

Payroll Card Up, Checks Down

37

Source: Aite Group. Feb 2013 Impact Note: “U.S. Payroll Card Programs: Paving the Path for New Revenue”

Payroll Card Loads

38

Payroll Card Features

Transaction Types • Signature, PIN, ATM transactions • ACH Credits/Debits • Convenience Checks Features • Online Account Center • Bill Pay • Customer Service (IVR and Live Agent) • SMS alert on account balances and deposits • Account-to-Account Transfers (P2P) • FDIC Insurance

• Arizona

• Colorado

• Delaware

• Florida

• Kansas

• Maine

• Maryland

• Michigan

• Minnesota

• Nevada

• New Hampshire

• New Jersey

• North Dakota

• Oklahoma

• Oregon

• Tennessee

• Utah

• Vermont

• Virginia

• West Virginia 39

More States Recognize Payroll Cards in their Statutes or Regulations

COMPLIANCE

41

42

Compliance Issues

• Wage and Hour Requirements

• Common State Law Requirements

• Banking Laws

43

Wage and Hour Requirements

• Federal Wage and Hour Law – The Fair Labor Standards Act

• State Wage and Hour Law – 20 states have addressed payroll cards in their statutes or regulations

– Most of the remaining states have issued enforcement positions on payroll cards

44

Common State Law Requirements

• Full and Free Access to Wages

• Employee Consent

• Disclosure of Terms and Conditions – Including Fees

• Employee Ownership of Funds

• Compliance with State Paystub Requirements

AK

HI

OH

WA

CA VA

MI

GA

KS

IA PA

WV DE

MS

OR SD

MO

WI

MN

KY

SC

FL

NC

UT

AZ

ND

NM OK

TN

NE

WY

LA

IL IN

AR

VT

NY

CO

AL

MT

ID

NV

TX

MD

ME

NJ

DC

MA RI

CT

NH

State Approach to Paperless Pay

45

█ Paperless Pay Permitted Unclear Treatment of Payroll Cards

█ Partial Paperless Pay █ Paper Paycheck Option Required

Voluntary

46

Banking Laws

• Regulation E

• The Durbin Amendment

• Bank Secrecy Act

• FDIC Insurance

47

Regulation E

• Compulsory Use Provision

• Periodic Statements – Flexibility for Payroll Cards

• Error Resolution Requirements

• Disclosure Requirements

48

The Durbin Amendment

• Establishes a cap on interchange fees

• Many feared that Durbin would impact payroll card programs by: – Decreasing functionality

– Increasing cost to employers

– Increasing cost to employees

• Post-Durbin Observations

49

The Bank Secrecy Act

• The Prepaid Access Rule

• Customer Identification Programs – Reliance on I-9 Verification

– Recent Department of Justice Letter

50

FDIC Insurance

• General Counsel Opinion No. 8

• State Law Requirements

THE FUTURE OF PAYROLL CARDS

51

52

The Future of Prepaid Cards

• Value prop shifts from employer to employee No longer just about cost Employer views the card as a benefit, not just a requirement for payroll

• Better user experience:

Customer Touch Points (Account Center, Mobile, Messaging) Customer Service Portability

• Better features:

Money Management Mobile Applications Remote Deposit Capture Savings Rewards

53

What’s Next: The Cardholder

QUESTIONS?

54