In this month’s guest article, Matthew Lanford, head of prepaid at
MasterCard Europe, examines how the current economic environment
and the need for cost control are combining to elevate prepaid as
an ideal tool for corporates and institutions in areas such as
payroll and expenses.
My previous contribution to CI saw me examine the dynamics shaping
the prepaid industry’s engagement with consumers and assess the
passing of prepaid into the payments mainstream, amid the emergence
of a new generation of European consumers willing to embrace
prepaid as ‘everyday money’.
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This month I am turning my attention to another key prepaid
industry stakeholder group to consider the opportunities prepaid
offers to corporates of various sizes across the full range of
industry sectors.
Prepaid beyond gifting
As some CI readers will already be aware, throughout the summer I
have been out and about addressing delegates at payments and
financial services industry events in the UK and across Europe. My
travels have seen me talk to key players in the prepaid and wider
payments community, as well as issuing banks, about how MasterCard
perceives the continued evolution of prepaid this side of the
Atlantic.
Prominent among the messages I have been sharing is that the
current economic climate should be regarded as the catalyst for
growth that those operating in the prepaid industry have been
waiting for. The recessionary desire of consumers, corporates and
government agencies to take greater control of their finances,
combined with a growing acceptance of card-based payments in
emerging European economies, is fuelling the evolution of prepaid
beyond its traditional gift card purpose.
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By GlobalDataGift cards have been, and will remain, an important application of
prepaid. However, as consumers, businesses and governments seek the
aforementioned increase in financial control, what I term the
inherent ‘controlled flexibility’ of prepaid will come to the fore
as a growth driver.
The term itself is simply explained. The ‘control’ element derives
from what prepaid offers in terms of expenditure discipline,
allowing those using it to tighten their grip on the overall volume
and underlying patterns of their expenditure. The ‘flexibility’,
meanwhile, is born of the wide range of environments in which
prepaid solutions can be applied, ranging from public transport to
welfare payments, which in truth, is limited only by our collective
imagination.
Controlled flexibility and corporates
We can readily apply these principles to businesses in order to
enable them to benefit from the versatility of prepaid, with
standard business overheads such as staff remuneration and
compensation, business expenses and travel and entertainment being
just some of the operational areas where prepaid can help managers
seize more control of costs and drive the efficiency of business
processes.
The growth of prepaid card payments in the business sector, in
terms of both the overall volume of transactions and number of
companies adopting prepaid schemes, is accelerating. Independent
research figures produced in 2008 by PSE Consulting make for
interesting reading here, predicting that by 2015, corporate
benefits and prepaid payroll programmes will account for 21 percent
(€28 billion) of the total spending in Europe on prepaid
cards.
This growth is becoming apparent as the needs of European
businesses evolve. Maintaining a tight grip on costs, having access
to up-to-the-minute financial information and ensuring strict
budgeting on all fronts is now more important than ever as cashflow
issues raise their head and credit supplies, particularly in this
iteration of the economic cycle, continue to wither.
For companies wanting to repair and enhance their balance sheets,
prepaid can, therefore, be a tool offering a combination of greater
cost controls and more efficient payment processes thanks to its
ability to reduce reliance on cash-based systems, with their
accompanying security risks and cumbersome administration.
Multiple commercial benefits
This need for streamlining is important for both small businesses
and large corporations. Either way, cost control is integral to
bottom-line success. Prepaid is now proving itself as a valuable
companion for managers seeking to remove inefficient,
non-electronic payment methods like cash and cheques, while
improving overall operational efficiency.
The role of prepaid in managing employee expenses provides us with
a case in point. For employees, reclaiming out-of-pocket expenses
from an employer is invariably a laborious and tedious task. The
filing of multiple receipts, filling-in of countless forms and all
too frequent long waits for claims to be processed are all factors
likely to breed dissatisfaction among out-of-pocket
employees.
Employee expenses made easy
The expenses process is also an administrative nightmare for
employers. Traditionally, companies had little alternative but to
operate an in-house petty cash system or provide workers with
access to a corporate credit card. This is particularly the case
for small businesses that lack a finance department to orchestrate
their expense handling.
But the use of a prepaid-based expenses system can provide
companies, large and small, with alternatives. For one thing,
prepaid applications take away any reliance upon paper-based
administration, thus reducing costs and offering the additional
benefit of freeing up staff to work on tasks likely to positively
impact the bottom line. For small businesses, which do not want to
give their employees access to the company accounts, prepaid is the
ideal solution. In many cases, providing employees with a corporate
credit card is simply not appropriate, which is the case for
companies with a high number of temporary workers.
Moreover, the use of a prepaid application for staff travel,
entertainment, per diem and operational expenses does not need to
be a burden, but essentially enables managers to control the flow
of money directed for these purposes. Corporations can now load a
prepaid card with the required funds in real time, thereby imposing
greater discipline, not only on the amounts of money spent by
employees, but also, if required, the locations in which company
money can be spent.
This is typified by the use of MasterCard’s own inControl
technology. This programme gives corporations the ability to place
spending restrictions on the type of merchant category code at
which a prepaid expense card can be used. Time limitations can also
be imposed so as to ensure expenses cards are used only during
nominated business hours. It is even possible to arrange for alerts
so as to check when an employee prepaid card balance is nearing
zero – and needs to be topped up.
When it comes to the area of per diem expenses – an expense type
particularly commonplace in the travel and hospitality industry
sectors – prepaid again offers tangible and worthwhile benefits to
companies. In this sphere, the CorporatePay Prepaid MasterCard
Expense Card, launched in November 2008, helps to eliminate
unauthorised spend, manage expense claims, prevent budget
overspends, reduce fraudulent claims as well as providing easy
access to data for organisations to review expenditure and focus on
expense procurement activity.
Prepaid staff motivation
We are also currently witnessing growth in the use of prepaid cards
by corporates as part of measures to incentivise and motivate
staff. Retaining key personnel is a major issue for companies
seeking to be best-placed to capitalise on the eventual economic
upturn.
In the absence of large salary increases and bonus payments,
prepaid incentive programmes (which allow employers to load value
onto a prepaid card, then distribute that card to an employee as
recognition for a job well done) provide an efficient means of
recognising top performers.
These reward applications can even be used to rejuvenate
relationships between businesses and their customer base, at the
same time as winning market share from their rivals. This is often
seen in the form of closed-loop gift cards distributed to select
customers as a means of rewarding loyalty, administering discounts
and influencing customer behaviour.
Prepaid and payroll
One of the most eyebrow-raising drivers in the corporate payments
marketplace is the development of prepaid cards to support payroll
operations. Prepaid and payroll share a long historical
association, particularly in the US, where prepaid payroll
programmes have been in existence since the late 1990s.
Payroll cards typically fall into one of two sub-categories:
dedicated programmes or general-purpose prepaid cards, which are
then used for payroll by consumers. Dedicated payroll cards are
typically ‘sold in’ to employers or employment agencies by
programme managers or issuing banks. Employers then issue the cards
to employees and pay their salaries to them via the payroll
card.
General-purpose programmes involve the encouragement of staff by
employers to apply for general-purpose prepaid cards, to which the
employer then transfers funds each payday via standard payroll
direct deposit. Employees then can use the card as they would any
other card product that is linked to a personal account, with the
ability to add their own funds to the card as well.
Prepaid and payroll: quantifying potential
Many more industries have the potential to benefit from prepaid
payroll programmes, from health care and construction to food
service and hospitality, to name but a few. The growth potential
for payroll applications in the prepaid industry across Europe is
vast. According to an independent study from ase research in June
2009, commissioned by MasterCard Worldwide, at least 10 percent of
the UK workforce is not currently paid by electronic transfer to a
bank account. This figure alone suggests a sizeable market
opportunity for prepaid card usage.
Even for some of those workers who are paid by electronic transfer,
the process can be inconvenient for both the payer and the payee.
This is certainly the case for those earning in one currency and
incurring living or operating expenses in another. As the continued
expansion of the European Union and flows of
internationally-sourced labour continue apace, the opportunity for
prepaid in payroll is again underscored.
According to the ase study, Italy currently has the most
significant prepaid payroll market in Europe. This owes primarily
to the above-average number of financially excluded citizens
(around 18 percent of the population) that have adopted this
solution. Prepaid products in Italy are predominantly consumer
products that are marketed by banks. However, a growing number of
corporate programmes are emerging as companies seek to eliminate
cash from their payroll.
But it is not just in Western Europe that prepaid payroll cards are
gaining traction. They are also becoming increasingly popular in
those emerging markets where there is a lack of traditional banking
relationships, such as those in the Central and Eastern Europe
(CEE) region, Russia and Turkey. Employers in these economies are
attracted to prepaid payroll cards because of the reduced costs
resulting from moving employees from paper-based systems to
electronic systems.
Poland is further cited by ase as a market with particularly strong
growth potential. According to ase’s report, an estimated 41
percent of its population are categorised as being ‘financially
excluded’. When we take into account Polish labour force
statistics, which quantify the adult working population as over 16
million, the pool of opportunity is clearly deep.
The ase study asserts that the use of prepaid for payroll
applications in Poland may provide the key to transitioning this
burgeoning economy from a reliance on a cash-based payroll system
to a plastic-based one. It is hard to disagree with this
viewpoint.
Maximising the opportunity
Payroll thus represents a significant growth opportunity for
prepaid in Europe, however, a number of outstanding issues need to
be resolved before progress can accelerate fully.
Firstly, in some of the markets studied by ase’s report, there
still appears to be a lack of knowledge regarding local legislation
governing the payment of wages and salaries to workers.
Furthermore, legislation in this area varies between jurisdictions,
forming a somewhat unnerving patchwork landscape.
France exemplifies this point. The European Commission reports that
over 90 percent of French adults in full-time employment are paid
directly into a bank account. Anecdotal evidence from ase’s
research of payroll providers suggests, however, that this figure
may be in need of some revision.
Following interviews conducted with French payroll providers, ase
reported that a significant number of staff in companies with less
than 20 employees are paid by cheque. When this information is
combined with statistics from La Croix in 2008, which reveals that
there are over 2.6 million SMEs in France, 25 percent of which
employ less than 10 workers, it would appear that payment methods
in the region are not so clear cut.
Nevertheless, France has found its own unique prepaid solution;
Districash, a Crédit Mutuel programme which involves participating
companies setting up a sub-account onto which they transfer money
from which employees can withdraw their salary. This programme
indicates clearly that French companies are continuing to seek
alternatives to cash and cheques.
Districash is, however, viewed in the domestic market as a
restricted solution since under French law, employees have to
withdraw lump sums of cash and are not able to receive more than
€1,500 per month this way (a figure, incidentally, considerably
lower than the average monthly wage in France).
Conversely, in Turkey, Labour Code 27058 requires that 100 percent
of salaries must be paid directly into employees’ bank accounts.
The ase report suggests Turkish legislators may be receptive to a
modification of this rule if an appropriate case for alternative
prepaid channels could be made. At present however, this rule
creates a significant barrier to prepaid payroll development in
this region.
Tapping the underbanked
Any payroll provider looking to use prepaid to make their mark in
the European market would be wise to focus due diligence efforts on
markets where consumer access to fully transactional bank accounts
remains limited. While by no means being the only route in tapping
into the lucrative underbanked population, it is likely to be a
good starting point for issuers looking to crack the payroll market
in Europe.
Generally speaking, the greater the percentage of underbanked or
financially excluded in a country, the more that economy will rely
on cash as a means of exchange. Examples include the Czech
Republic, Ireland, Italy, Poland and Romania, where cash still
remains a major part of their payments system. For these
cash-friendly nations, their populations’ existing lack of
dependence on debit or credit should make them more open to the
ease, safety and security that prepaid payroll cards can
offer.
These opportunities will be driven by the ability of payroll
providers to create compelling propositions for their products,
which must be bespoke and engineered to negotiate any onerous
legislative obstacles.
Finally it is also the case that payroll service procurement
decisions are made largely by accountancy firms in many of the
European markets. This dictates that prepaid-based payroll
programme providers must build awareness and understanding among
accountancy firms of the benefits prepaid can offer.
Building contact networks with these organisations and the large
outsourcing firms should, in my view, be a fundamental priority for
any prepaid provider looking to crack the payroll market in
Europe.
The banking community and corporates
I want to end this piece by explaining specifically how I see the
opportunity that banks serving commercial customers can also
benefit from this projected growth market. With prepaid having
passed into the payments mainstream, banks should no longer regard
the product as something exclusively for their retail
customers.
The opportunity outlined above confirms, in my view, that prepaid
products can and should be woven into corporate customer product
portfolios.
In a market where banks need to demonstrate more than ever that
they are acting in their customers’ best interests, the offer of a
payment product satisfying the basic need of corporate customers to
control funds should be a compelling one.
Certainly, the major UK high street banks have only recently
started to dip their toes into the prepaid pool. It is my hope that
the inherent strengths of the prepaid product will catalyse the
mainstream banking players to develop new prepaid propositions for
their customers, both retail and commercial.
Meanwhile, with people using prepaid cards more commonly in their
day-to-day consumer lives, it is feasible to suggest that an
‘overspill’ of prepaid usage into their commercial activities will
further propel the growth of the corporate segment of the prepaid
market.
Whatever the outcome, prepaid has now become far more than simply a
gifting product for consumers. Businesses are starting to
appreciate the benefits on offer and it is now incumbent upon our
industry to help them reap the rewards.
