Payroll for the unbanked

Northwestern Financial Review, May 15-May 31, 2003 by Bengston, Tom

There is a growing population of unbanked people in this country, including here in the Upper Midwest. Many people in this group are immigrants who are unfamiliar with American customs and cultural norms. Technology may be giving the banking industry an important opportunity to reach out to these folks.

Companies that hire unbanked people face a perplexing payroll challenge. Employers can give employees checks, but then the employee usually has to pay a fee somewhere to get the check cashed and, more significantly, ends up carrying around a large amount of money. People who carry around a lot of cash become a robbery target and risk misplacing or losing the money. Banks can help companies pay their employees in a way that doesn't put the unbanked at risk.

Some employers are paying employees not by check or cash, but by issuing funds to the employee via a pre-paid debit card. When the employee is hired, he or she gets a plastic card that can be used at the point of purchase at any merchant who accepts debit cards. The card can also be used at automatic teller machines. On payday, the employer "reloads the card" with a sum of money equal to the employee's wages, less taxes and other deductions. A statement issued to the employee describes the wage amount, and any funds that are accumulating from previous pay periods. The card is far more secure for the employee than cash, and more convenient. No longer does the employee need to cash a payroll check. Funds can be easily spent at merchants. Cash can be retrieved from an ATM.

The bank works with the employer to maintain the payroll account. The bank might even offer to conduct training sessions for the employees using the cards, as a lack of understanding about the electronic payments system could emerge as an issue. If banks can help the unbanked employee overcome misconceptions about debit cards, then employees will have a much more secure way of managing their income.

I was exposed to this idea at a convention for community banks. In other words, a bank of almost any size could provide this service, if it has a commercial customer in its marketplace that could make use of it. Although large banks are offering such services, smaller banks can too.

I see the use of a pre-pay debit payroll service as win-win, all the way around. The bank builds an important relationship with an employer by providing a valuable service. The company builds a better relationship with its employees, offering them a secure way to receive their wages. And unbanked employees get the security and convenience of a bank without opening an account. Such a payroll approach may even acclimate employees to the electronic economy and attract them as independent customers to the bank.

By Tom Bengtson, Publisher