Visa is taking direct aim at physical paychecks in its latest partnership with human capital management software provider ADP.
While 94% of workers receive their pay electronically by direct deposit, checks capture off-cycle payments, such as real-time payouts, termination pay, and wage disbursements for contractors and 1099 workers. Though circulation is declining annually, the Federal Reserve collected 940 million paper checks worth $2.14 trillion in Q3’20.
Employee edge cases for off-cycle payments are becoming more complicated to process as the definition of “business hours” does not apply in a pandemic. ADP and Visa’s latest solution to enable faster disbursements therefore is well positioned to help employers navigate developing workforce dynamics.
Benefits To Employers
The initial use cases for Visa and ADP’s partnership will target off-cycle payments including one-off bonuses and reimbursements. Visa Direct will provide the rails to push real-time payments and leverage ADP’s Wisely Now Debit program to distribute and access the funds.
Notably out of scope are instant payouts and earned wage access (EWA) benefits which, have been among the most demanded off-cycle payment by employees. However, Visa Direct integrates with fintech providers such as Immediate, DailyPay, PayActiv, ZayZoon, FlexWage, and Instant, while ADP’s Marketplace has overlapping integrations. Employers can also offer EWA benefits through Wisely.
The broader opportunity for faster business disbursements represents a $9 trillion market, according to estimates by Visa. Further both have a track record for scaling.
Visa Direct enabled faster payouts to approximately 2.35 million US small businesses and sellers in fiscal year 2020. Globally, Visa Direct has facilitated 3.5 billion transactions across 65 domestic ACH schemes, 16 card-based networks, 7 real-time payment schemes, and 5 payment gateways as of Q4’20.
Whereas ADP’s payroll coverage includes 460,000 customers that employ 26 million workers, per its last 10-K. Benchmarked to the Bureau of Labor Statistics’s (BLS) February report, ADP covers approximately 15% – 17% of the workforce, depending on unemployment levels.
What’s In It For Visa?
Visa will benefit by routing payment volume to Visa Direct and expanding its “network of networks” to payroll, a multi-trillion dollar global market. It will also head off network competition from the automated clearing house (ACH) which, holds a near monopoly of direct deposit processing.
In 2020, direct deposit accounted for 12% of ACH volume, representing 8 billion payments for salaries, wages, benefits, and assistance from employers to individuals, according to NACHA. Direct deposits grew 12% year-over-year while ACH payments initiated by a paper check declined 21% YOY, suggesting more volume will shift to digital payments for either network to capture.
What’s In It For ADP?
ADP’s customers will benefit by saving on processing fees, streamlining disbursements in line with payroll regulations, and boosting adoption and usage of ADP’s Wisely product.
For employers, processing fees can cost $1 – $6 per check versus $0.15 – $1.50 to use ACH, depending on the payment type and size. Visa Direct charges a premium to ACH for real-time disbursements but the terms of the deal were not disclosed.
For employees, checks delay getting paid and can carry similar processing fees. The experience is also archaic compared to the instant gratification of peer-to-peer disbursements that consumers expect from fintech apps such as Square and Venmo.
The Demise Of The Paper Paycheck
In the short-term, checks remain essential for roughly 4% of workers that still receive their pay by paper, according to the 2020 “Getting Paid In America” survey. In 2021 they are a financial lifeline for the 40 million Americans that received their second stimulus check from the IRS by mail, albeit months after the relief package was approved by Congress.
Though the technology for real-time funds disbursement exists and is leveraged outside the US, breaking into payroll is complex. Barriers holding back full dematerialization include labor laws that vary by state, strict regulations such as the Electronic Fund Transfer Act (EFTA), and perceived switching costs.
By partnering directly, Visa and ADP are testing the market for faster payroll, capturing low-hanging demand for paperless business disbursements, and providing a better experience for workers.
I lead strategy and business development as Head of Markets at Atomic Financial, the payroll APIs connecting accounts to direct deposits, income verification, and employment data. I also advise founders and C-suite executives on the competitive landscape, go-to-market strategies, company growth, and product roadmap prioritization. Over the course of my career, I’ve built and scaled market research on emerging technology trends in the financial services and fintech ecosystem. I’ve worked with venture capital firms, financial institutions, regulators, and strategic investors on due diligence for investments, M&A, among other intelligence initiatives. In my spare time, I angel invest and run marathons.