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White Paper 1: Banking Unbanked Employees (Into Direct Deposit) Creates a Winning Scenario for Franchise Businesses (CLICK TO DOWNLOAD PDF)

In recent years, there has been more use of the term "unbanked" to describe individuals and families who, for various reasons, do not have a traditional banking relationship. The U.S. General Accounting Office has estimated that there are almost 60 million unbanked individuals in the U.S., including approximately 24.2 million households that do not have a checking account. More than 30 percent of these households have an annual family income of $25,000 or less. Typically the unbanked workforce is comprised of lower paid individuals, including temporary and part-time workers in hourly and entry-level positions.

Unbanked workers can be found in all industry segments. The greatest concentration of unbanked workers can be found in industries such as construction, staffing, hospitality, and franchise businesses.

In a sector like franchising, which employs more than $8 million people domestically while generating retail sales in excess of $1 trillion annually, it is important to recognize that transitioning unbanked individuals into direct deposit can have a significant positive impact on bottom-line results. This is true for franchise businesses and their unbanked employees.

To appreciate the dynamics of this process, it is necessary to understand the positive impact of direct deposit on these businesses.

The Direct Deposit Experiment

Over a period of more than two decades, direct deposit has become an important element in the financial infrastructure that connects companies, their employees, and financial service institutions that serve them. Simply put, direct deposit is the electronic transfer of payments from a company into the checking or savings accounts of its employees.

Each year, the ACH (Automated Clearing House) Network, the proprietary system for electronic funds transactions, processes billions of transactions worth trillions of dollars. The Direct Deposit Coalition, whose members include the Federal Reserve Bank, provides telling facts on the growing acceptance of direct deposit:

  • More than half of all workers in the U.S. use direct deposit in one form or another.
  • 97 percent of employees who sign up for direct deposit are very satisfied with it, and more than 70 percent of employees who have access to direct deposit use it.
  • The chance of having a problem with a check is 20 times greater than with a direct-deposit transaction.

How Direct Deposit Works

Typically, direct deposit involves several simple steps, and the process can usually be completed within one pay period. The steps include:

  • Completion of an enrollment form by the employee authorizing the employer to direct deposit the payroll check of the employee into his or her checking or savings account.
  • The employer then completes Prenote (test) by sending the employee account information to their financial institution via the ACH Network.
  • As the next payroll period approaches, the employer payroll department or company prepares an ACH file and submits it to the employee financial institution. The financial institution then processes the information, and at the appropriate time, posts the payment to the employee account.
  • The cycle ends with the company providing the employee with a paper record (check stub) of the transaction.

Banking the Unbanked into Direct Deposit

In past years, unbanked employees were unable to participate in direct deposit (whether they wanted to or not) due to the lack of a banking relationship. In other words, there was no account into which payroll could be deposited. This was a negative for companies and their unbanked workforce.

For example, industry research by Celent Communications (Payroll Cards: A Direct Deposit Solution for the Unbanked) shows that it costs companies approximately $1.90 to print an in-house paycheck, which includes the costs for administration, materials, printing, and distribution. Compared to the average cost of $0.15 for a direct deposit transaction, the disadvantages of not having direct deposit are obvious.

Unbanked employees who are paid by paper check often resort to "check cashers" or check-cashing services. These services charge as much as 8 percent of the face value of the check as a cashing fee. This is an expensive transaction, especially for individuals who can least afford it.

As a result of Federal government mandates in the 1990's and growing national concerns for the unbanked population, the so-called payroll card provider industry began to develop.

One of the initial third-party financial service providers was Skylight Financial, Inc., founded in February 1998. Skylight, through its strategic partnership with U.S. Bank, one of the 10 largest banking institutions in the U.S., has created a unique package of services for the unbanked population. The company's Skylight "bank account in a card" provides a range of financial services that benefit corporations and their unbanked employees. The Skylight account allows unbanked employees and their employers to participate and share in the benefits of direct deposit.

For companies, the key benefits of direct deposit include:

  • Reducing the high cost inefficiencies and paperwork involved in managing payday.
  • Elimination of paper checks and significant cost savings per transaction.
  • Cost savings in mailing and overnight delivery fees.
  • More efficient management of exception pay, such as reimbursement, commission, termination, bonus, and vacation pay.

For unbanked employees, primary benefits are:

  • Access to account-based service, the funds in which are FDIC-insured, and can be used as a reference for mortgage and other loan transactions.
  • Elimination of the need for high-cost check-cashing services.
  • The convenience and security associated with an individual bank account, such as availability of services wherever PIN-based debit transactions are accepted.
  • Automatic bill-payment capability.
  • Personal, portable financial service accounts that stay with the employee even after he or she moves to a different employer.
  • Cost savings for money transfers compared to the cost of stand-alone wire services.

When viewed from this perspective, it is clear that offering unbanked employees direct deposit provides lasting benefits for franchise businesses and their unbanked employees.

White Paper 2: Focus on Your Direct Deposit Program Pays Dividends (CLICK TO DOWNLOAD PDF)

Some time ago, your company probably made a business decision that promised to improve the bottom line with minimal investment of time and money. The decision was quickly implemented, but no one has monitored results since. So, no one in your company knows whether the project is a success or failure. You are confident that money is being left on the table. The question to ask is how much money.

Top executives rightfully focus the bulk of their time on decisions and resulting projects offering the greatest opportunities for improving their profits and competitiveness. Consequently, small projects may go unmonitored for years after their initial implementation, even though brief, high-level attention can regularly ratchet up the benefits. Direct deposit of payroll checks is a case in point. It's one of those easy-to-make, easily forgotten decisions that need to be revisited from time to time.

Direct deposit stands in stark contrast to the higher-profile and higher-payoff, yet riskier, projects that absorb most of management's attention. The cost of implementation is low. Beyond announcing the direct deposit option, explaining it, signing up employees, and maintaining an ongoing positive communications program, there is little more to do. Direct deposit is an opportunity where you can find significant savings at virtually no cost and no risk. In addition, you can continue to realize savings for as long as the program is effectively managed and promoted.

Let's recall the benefits that you found attractive in the first place. A direct deposit payroll system slashes the costs, inefficiencies, and paperwork associated with payday. It minimizes lost checks, stop payments, and escheatment. It dramatically reduces reconcilement time and delivery costs to outlying offices. The savings represents approximately $2.50 per check, per pay period, and that's before factoring the efficiencies of online pay stubs into the equation, not to mention how the program benefits your employees. The savings are considerable and go directly to your bottom line. While larger, longer, more resource-intensive projects carry bigger potential benefits, direct deposit is truly low-hanging fruit waiting to be picked.

What will you find when you take a fresh look at your company's direct deposit program? Chances are you'll find a hidden profit center, quietly languishing, waiting for just a modest dose of management attention to blossom into its full potential. Although you expect to find a program where everyone is benefiting because the company is saving money and the employees don't have to rush off to the bank every payday, instead you'll find a program where everyone is not benefiting because many are not participating! That's the downside of what you'll find. In this article, however, you'll discover new ways to significantly expand program participation and realize additional savings.

What went wrong?

When direct deposit was first launched, you expected 100 percent participation. Actual participation has always been far less than 100 percent. Why? Here are the probable root causes:

  • When direct deposit was introduced, the company presented the program to stable employees who have established banking relationships. The "unbanked," many of whom are temporary workers, interns, recent graduates, or people with bad credit, were ignored.
  • Since the initial sign-up, the company has promoted direct deposit only to new employees. Those who turned it down previously were never re-solicited.
  • Direct deposit is presented to new employees as a take-it-or-leave-it option with little selling.
  • Since implementation, top executives have not monitored the ongoing operation or the participation rate of the program to determine if additional attention is necessary.

Participation = Savings

There is no question you would love to discover an area where considerable savings are possible. That's exactly what the direct deposit program offers for most companies. For every employee not on direct deposit, the company is squandering money that could be going straight to the bottom line.

It's easy to pay lip service to the idea of having 100 percent participation in direct deposit. However, without a well-conceived approach to encourage participation, few organizations will exceed a 60 percent level of participation.

What can you do differently today?

Become a program sponsor. The benefits of a strong direct deposit program may be small potatoes compared to other things on management's plate, but few corporate initiatives can offer such a fast, easily-achieved positive ROI. Here's a small niche where a well-planned enrollment process will translate directly into measurable bottom-line profits. Best of all, your CFO can capture these benefits for any employee, including those with no bank accounts, without buying or installing any software at all.

Cast a broader net with your direct deposit program. Encourage participation from all employees, not just the ones with bank accounts. Many of your employees may be among the 55 million adults in the U.S. who have never had a bank account, have been rejected by the traditional banking system, or simply don't feel comfortable in a traditional banking relationship. Now your company can give these employees the convenience, security, and flexibility with the Skylight paycard as a bank account alternative. The Skylight card may be used anywhere PIN-based debit transactions are accepted, so your employees can use their paycards to buy groceries, clothes, gasoline, and much more. After taking advantage of the free upgrade to a Visa-branded card, employees are able to sign for transactions at stores and restaurants and make purchases over the phone and online.

Communicate the benefits

Middle management, store management, factory supervisors, and employees all need to understand why the program is important to the company and to each employee personally. Use announcement letters, posters, placards, and envelope stuffers to describe the many benefits of direct deposit to employees. Everyone will appreciate the convenience and the fast availability of funds at any ATM without special trips to the bank or a check-cashing service. For unbanked employees, the benefits are even greater because they will eliminate check-cashing fees and gain security and credit references they've never before had.

Use incentives and disincentives

Participation will soar if you use the right combination of carrots and sticks to encourage participation.

Examples of incentives: Absorb the one-time cost of the employee's paycard, plus a few of the transaction (ATM) costs for each pay period. Offer a $10 enrollment bonus. You'll recoup it within a few months. Run contests for middle management with enticing prizes for those with the largest increases in participation.

Examples of disincentives: Mail checks in batches to remote offices instead of using express shipments. Require employees to sign an acknowledgment form if they decline participation. Mail checks to declining employees' homes. Let decliners know that it will take up to four weeks to reissue lost checks.

Expand the program's scope

Use paycards as an alternative way to manage the requirements of expense account advances, reimbursements, commissions, termination payments, bonuses, and vacation pay. Don't stop after eliminating paper checks. Your company can easily eliminate pay stubs as well by giving employees secure access via Internet, phone, or kiosk to electronic pay statements.

A great head start to boosting 2010 profits

If you're looking for an easy way to save money that starts paying bottom-line dividends, it's time to re-examine direct deposit for employee paychecks. It's a hidden profit center that will flourish with reasonable management attention.