CoreFirst Bank and Trust is under pressure on two fronts when it comes to payroll cards. It faces strong competition from large banks and other rivals, as well as a heavy state and national regulatory burden.
"There are so many things that the regulators are looking at with payroll cards," such as embezzlement and fraud issues, says Kim Rees, senior vice president and director of treasury management for the Topeka, Kan. bank.
To keep its deployment and compliance costs under control, CoreFirst uses externally hosted technology to manage its new payroll card program. Such programs are required to comply with security, fraud, anti-money laundering and other "know your customer" requirements that fall under the Patriot Act, the Dodd-Frank law and state regulation. The Consumer Financial Protection Bureau also has prepaid cards on its radar for enhanced fee disclosure rules.
"We would not be able to offer the program if we didn't have [access to the hosted solution]," Rees says, adding the bank would have to deploy full-time staff for compliance. In this case, the outsourcer tracks changes in national and state law, and updates the processing system on CoreFirst's behalf.
CoreFirst is an initial client of a prepaid card partnership between Jack Henry—a core banking company that includes a number of smaller banks among its client base—and TransCard, a company that sells prepaid products to financial institutions.
Under the partnership, the two companies sell payroll cards, reloadable prepaid cards and gift cards. The client financial institutions hold the deposits, share in the interchange income and set their own pricing, which generates cardholder fee income.
To extract tech deployment and management costs—a burden for smaller card issuers—TransCard uses what it calls an internally managed cloud, or a private cloud, which differs from a public cloud in that a private cloud is stored behind a firewall and serves a specific client roster.
At TransCard, the private cloud performs all of the processing for the prepaid cards. A consumer accesses the prepaid card via his or her issuer's website or mobile banking site, but is actually accessing TransCard, which is managing the program on a private label basis.
CoreFirst, which has about $1 billion in assets, serves small businesses and other organizations in the Topeka area. Its clients are a mix of companies that pay employees on a recurring basis and those who pay on a contract basis.
"What we're finding is that many organizations are trying to eliminate checks, and one of the ways they are doing so is in payroll," Rees says.
Employees can use the payroll card at any ATM or bank branch, or can use it to make purchases — an expanding use case among consumers hoping to improve their financial health, CoreFirst says. The bank plans to expand its customer outreach to these consumers in the near future though the development of money management and financial goal-setting tools.
"People are using the payroll card like a debit card, which is a good thing to see," Rees says.
The payroll cards will carry fees, a controversial subject for not just payroll cards but prepaid cards in general. Kansas law does not allow monthly charges to employees for the payroll cards, but there are transaction fees. There's also a free withdrawal per pay period as per Kansas law.
The overall prepaid card market is expanding—Aite predicts the number of prepaid cards in the U.S. will expand from about 10 million in 2010 to nearly 30 million by 2016.
Among Jack Henry's core banking competitors, Fiserv offers a variety of prepaid products as hosted technology—including general purpose reloadable cards, gift cards and incentive cards that can be offered as processing only or as a combined processing/program management offering.
"I think the service could be a good differentiator for small financial institutions vis a vis larger ones," says Bernard Golden, a cloud computing consultant. "This seems targeted at unbanked individuals, who could be a good market for small institutions, as large institutions in particular serve this segment poorly."