Taking the Check Out of Paycheck: The Role of Prepaid in Payroll

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10d ago 21:05

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The traditional model of biweekly or monthly physical check payouts is rapidly becoming a thing of the past. For businesses, moving away from checks results in lower processing costs and a reduced risk of check fraud.

While direct deposit offers clear benefits for employees, it’s not always their preferred method of receiving pay. In today’s competitive labor market, an organization’s compensation model can serve as a key differentiator.

In a recent PaymentsJournal podcast, Kristin Ridgway, Vice President of Treasury and Payment Solutions at U.S. Bank, and Jordan Hirschfield, Director of Prepaid at Javelin Strategy & Research, discussed the changing compensation landscape and the growing role prepaid solutions play in attracting and retaining talent.

“When we think of prepaid it becomes about gift cards—giving money away—and self-use,” Hirschfield said. “The payroll card opens up a window of opportunity that can expand almost exponentially in terms of all those things you can do for yourself.”

A Window of Opportunity

The need for more flexible payroll options is increasing. Businesses often have teams composed of various types of employees, not just long-term, full-time staff. In many cases, the traditional check and direct deposit model can complicate payments to a workforce with high turnover or those consisting of a mix of full-time employees, contractors, and seasonal workers.

“Prepaid payroll cards can reduce costs and administrative work by minimizing paper checks, and offer greater flexibility in delivering payments as needed,” Ridgway said. “Providing more payment options can improve the likelihood that workers will choose to continue working with that company.”

Building strong relationships is especially important with gig workers, who are often critical to an organization’s everyday operations.

The rise of digital payments has led consumers to increasingly expect flexibility—nowhere more so than in the growing gig economy. Most gig workers don’t work traditional hours or fixed schedules, so they don’t expect their payments to follow a traditional model either.

“If you think about a rideshare driver or an Instacart shopper, many want or need to have access to their pay as soon as they’ve finished their shift or the job,” Ridgway said. “With a traditional payroll system, they might not see those earnings for a week or more. With earned wage access and real-time payments to prepaid cards, they receive their money instantly by loading it to the card and could use it to buy gas or groceries or whatever that same day.”

Since many gig workers contract with multiple companies, prepaid accounts that support payouts from multiple sources are especially valuable. Similarly, a full-time worker who picks up gigs on the side can conveniently receive all their earnings on a single card.

Beyond the gig economy, full-time employees also have the option to direct a portion of their paycheck to a prepaid card. For example, a worker might allocate $100 from each pay period to save for the holidays, budget for dining out, or plan for a big-ticket purchase.

Even at companies with high direct deposit participation, a secondary prepaid account can offer added value and engagement. While an employee may initially use the prepaid card to save for a vacation or receive a gig payout, the card remains active and can support a range of future needs.

“There’s an interesting opportunity to have that worker who has multiple work opportunities—maybe one’s full-time and one’s a gig—to have funding onto a similar source,” Hirschfield said. “They want to be able to use that money exactly how the merchant, or wherever they’re going to spend it, is accepting it. Tying that in is really a critical need, not just a want in this environment.”

Retaining Well-Versed Employees

Paying employees in their preferred payment type is important as more consumers become well-versed in the digital economy.

A consumer who can split a check with friends in near real-time using a P2P service may be disheartened to find that the only way to receive their paycheck is through a scheduled direct deposit to a traditional bank account.

This highlights how alternative compensation models are becoming a critical factor in improving employee satisfaction and retention. As companies come to rely more on a shifting workforce—including seasonal, temporary, and contract workers—their goal should be to provide a consistent experience.

“You really want it to be a repeatable opportunity where you bring that employee back in season after season,” Hirschfield said. “There’s a lot of opportunity to use this type of environment down the line—both with your full-time employees and even with workers that come in occasionally—to make sure they have that positive experience, come back, and recommend your organization as a place to work.”

Outside of retention, reloadable card products are often more cost-effective, especially when compared to issuing paper checks.

Additionally, many prepaid solutions include a mobile app or website where cardholders can check balances and receive alerts. Users can also load funds onto the card themselves through cash or check deposits.

What’s more, prepaid often go beyond the card itself, offering features like interest-bearing savings accounts, cash-back rewards, and person-to-person transfers.

Prepaid cards can be instantly issued, allowing companies with frequent new hires or contractors to keep cards on hand. These can be used for immediate payouts, off-cycle payments, termination pay, or any situation where a payment to an individual is needed right away.

They can also help reduce certain regulatory burdens that businesses face.

“Something I’ve been hearing about more frequently in recent client conversations is escheatment,” Ridgway said. “This is a challenge for businesses that are issuing a lot of paper checks. U.S. Bank retains 100% responsibility for escheatment on our card programs, so this completely eliminates this burden from our clients for any abandoned funds. We follow escheatment rules according to the state where the individual lives.”

Redefining the Landscape

The benefits of prepaid in payroll suggest it’s poised to play a larger role in the compensation landscape—and may even help redefine it.

“I think we’re moving into a new generation of how terms are being used,” Hirschfield said. “I still refer to, ‘Oh, my paycheck was deposited.’ Well, I don’t actually get a check anymore, it’s direct deposited. I think you will see the same thing with prepaid cards. Prepaid cards are part of the function of a much bigger and more powerful set of tools where the card is just the centerpiece.”

These tools allow employees to access their earnings and make transactions in a modern way, which ultimately puts them in the driver’s seat.

“The bottom line is that when people have better access to their earnings, they’re more empowered, they’re more productive and they’re more loyal to those companies that offer those benefits and that faster pay,” Ridgway said. “That’s a win-win for employees and employers and it’s a really powerful differentiator in a competitive labor market.”

The post Taking the Check Out of Paycheck: The Role of Prepaid in Payroll appeared first on PaymentsJournal.

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