Small Business Adoption of Payroll Direct Deposit

Driving Revenue & Profits
in Electronic Payments…

Small Business Adoption of
Payroll Direct Deposit

Ian Macoy, NACHA
Paul McAdam, FIS

April 4, 2011

PROPRIETARY / CONFIDENTIAL: This document is NACHA’s proprietary
confidential information and may not be circulated without prior approval.

© 2011 NACHA. All rights reserved.

Background

As support for NACHA’s promotion of Direct Deposit use among small
businesses, NACHA and FIS collaborated on this study to identify:

 Key attributes of small businesses that adopt Direct Deposit

 Barriers to adoption of Direct Deposit

 How knowledge about adopters’ characteristics can be leveraged in
targeting non-adopters to improve Direct Deposit penetration

 Understand how Direct Deposit fits within the context of other financial
products/services used by small businesses

Slide 2
© 2011 NACHA and FIS. All rights reserved.

Research Methodology

 51-question, online survey completed by 2,249 small businesses in
November 2010
 Respondents’ positions within companies:
– Owners, CEOs or presidents
– CFOs, controllers or treasurers
– Office managers, accountants, bookkeepers or payroll managers
 Company criteria for qualifying for this study:
– More than one employee
– Use a business checking account most often for the company business
– Less than $20 million in 2009 revenue
 The survey was fielded by FIS to members of a small business panel
maintained by Research Now

Slide 3

Respondents by annual revenue and number of
employees

Company Revenue (2009)
Under $500,000 24%*
$500,000 to $999,999 19%
$1 million to $1.99 million 19%
$10 million to $20 million 7%

Number of Employees
2 to 5 employees 21%
101 or more employees 6%

* Read as: 24% of the companies surveyed have annual revenues less than $500,000
Please select the box below that corresponds to your firm’s total revenue in 2009. n = 2,247
How many individuals (in full-time equivalents) does your company employ? n = 2,246
Slide 4

Key small business lines of trade were well
represented

Small Businesses Lines of Trade

Professional, Scientific or Technical Services 13% *
Retail Trade 13%
Construction 10%
Healthcare or Social Assistance 8%
Accommodation or Food Services 7%
Financial or Insurance Services 7%
Wholesale Trade 6% Over 100 completed
Real Estate Sales, Rental or Leasing 5% surveys within
these lines of trade
Non-Profit, Charity, Civic, Social or Religious Organization 5%
Manufacturing 4%
Transportation or Warehousing 4%
Arts, Entertainment or Recreation 3%
Information (e.g., publishing, broadcasting, data processing,… 3%
Administrative & Support Services 3%
Repair and Maintenance Services 2%
Educational Services 2%
Personal Care Services 2%
Agriculture, Forestry, Fishing, Mining 1%
Other 2%
* Read as: 13% of respondents work in the Professional, Scientific, or Technical Services industry
What is your company’s primary business? n = 2,248

Slide 5

Summary of findings

• Awareness of Direct Deposit is high, although FI recommendations are not typically part
of the path to adoption.

• Time savings, cost effectiveness and employee demand are primary motivators.

• Only 30% of small business users of the service obtain 100% employee participation.
Within companies that offer Direct Deposit, on average it is used by 83% of employees.

• 100% participation cannot be achieved in some small businesses because a significant
percentage of their employees do not have bank accounts.

• Obstacles to Direct Deposit penetration include: 1) too few employees to justify it; 2)
employee preference for checks; and 3) cost.

• Additionally, one-half of non-users have not been approached by an FI, accounting firm or
payroll processor about Direct Deposit.

• Opportunity exists to further penetrate some part of the small business market by FIs but
the message will need to allay their concerns about the expense associated with the
service, and the perception that the firm has too few employees to justify it.

Slide 6

Nearly half of the small businesses surveyed use payroll
Direct Deposit, another 20% are potential adopters

Awareness Usage Consideration

94%
of small 10%
businesses are 52% 48%
aware it is 20% 18%
possible to offer Use Don’t Use
payroll Direct
Deposit

Would consider in the future

Would not consider in the future

Unsure

Slide 7

We estimate that 34% of U.S. small businesses with
2 – 100 employees use Direct Deposit

17% of employees do not use Direct Deposit.
4.0 million employees in total

Use of Direct Deposit among
Businesses with 2 – 100 83% of employees use Direct Deposit.
employees 18.8 million employees in total

Direct Deposit Usage Among All Employees of Small Businesses
34%
Use
Direct 46% 10% 44%
66%
Don’t Deposit
Use Direct Deposit
Use Work at a firm that offers Direct Deposit, but don't use it
Direct
Work at a firm that does not offer Direct Deposit
Deposit

# Employees at
# Firms
these Firms

2 to 5 employees 2,014,230 4,028,461
• 4.7 million of these firms in the U.S. 6 to 10 employees 615,084 4,052,024
11 to 20 employees 283,247 3,801,464
• They employ 41 million people 21 to 50 employees 139,746 4,198,355
51 to 100 employees 31,625 2,162,024
Total 3,083,932 18,242,329
Source: Statistics of U.S. Business from U.S. Census Bureau, FIS analysis

Slide 8

Most Direct Deposit users encourage their employees
to adopt it and offer the option to split their deposits

Direct Deposit Usage

Company encourages employees to use
91% *
payroll Direct Deposit

Company currently offers its employees
the ability to split their payroll Direct 71%
Deposit into multiple financial accounts

* Read as: 91% of Direct Deposit users encourage employees to use payroll Direct Deposit. n = 1,041

Slide 9

As company revenue increases, the likelihood of
Direct Deposit usage increases

2009 Revenue

18% Non-Users
21%
35%
45%
59%

79%

79% 82% Users
65%
55%
41%

21%

Under $500,000 $500,000 to $1 million to $2 million to $5 million to $10 million to
$999,999 $1.99 million $4.99 million $9.99 million $20 million

* Read as: 21% of those who have less than $500k in 2009 revenue are users
Please select the box below that corresponds to your firm’s total revenue in 2009. n = 2,021

Slide 10

Similarly, as the number of employees increases, so
does the likelihood of Direct Deposit usage

Number of Employees

21% Non-Users
25%
35%
45%
59%

82%

75% 79% Users
65%
55%
41%

18%
*

2 to 5 6 to 10 11 to 20 21 to 50 51 to 100 101 or more
employees employees employees employees employees employees

* Read as: 18% of those who have 2 to 5 employees are users
How many individuals (in full-time equivalents) does your company employ? n = 2,021

Slide 11

Higher percentages of Direct Deposit users tend to be
services industries or manufacturing related

Small Business Lines of Trade
Financial or Insurance Services 70%* 30%
Information (e.g., publishing, data processing, libraries) 67% 33%
Educational Services 65% 35%
Non-Profit, Charity, Civic, Social or Religious 63% 37%
Manufacturing 63% 37%
Professional, Scientific or Technical Services 62% 38%
Healthcare or Social Assistance 58% 42%
Administrative & Support Services 54% 46%
Transportation or Warehousing 52% 48%
Agriculture, Forestry, Fishing, Mining 45% 55%
Real Estate Sales, Rental or Leasing 45% 55%
Arts, Entertainment or Recreation 44% 56%
Wholesale Trade 43% 57%
Construction 40% 60%
Retail Trade 37% 63%
Personal Care Services 34% 66%
Accommodation or Food Services 33% 67%
Repair and Maintenance Services 28% 72%

Users Non-Users
* Read as: 70% of financial services or insurance services small businesses are users
What is your company’s primary business? n = 2,021 Average
Slide 12

The vast majority of companies that outsource
payroll to a payroll processor offer Direct Deposit

Who Manages Payroll

17% Non-Users

46% 44%
59%

83% Users

54% 56%
41% *

Myself or our internal Divided between myself Outsourced to our Outsourced to a third-
accounting/payroll staff or internal staff and our accounting firm party payroll processing
accounting firm firm

* Read as: 41% of those who manage their payroll internally are users
Who is primarily responsible for managing your company’s employee payroll? n = 2,021

Slide 13

Time savings, cost effectiveness and employee demand
are the key adoption motivators

Primary Factors Leading to Adoption of Direct Deposit
(among Direct Deposit Users)

Saves time 57% *

More cost effective 48%

Employees requested it 44%

Reduces number of errors 24%

Better for the environment 24%

Reduces need to monitor payroll and tax law changes 22%

Bank or credit union recommended it 15%

Received incentive from payroll provider 11%

Other 5%

* Read as: 57% of Direct Deposit users cite ―saves time‖ as a primary factor that led their company to offer payroll Direct Deposit
What are the primary factors that led your company to offer payroll Direct Deposit? n = 1,041

Slide 14

Less than one-third of companies have 100%
employee participation

Percent of Employees Using Direct Deposit
(Among Direct Deposit Users)

100% 30%*

90% to 99% 25%

75% to 90% 24%

50% to 74% 11%

25% to 49% 7%
• 79% of companies reported that
more than 3/4 of employees use it
1% to 24% 3% • 83% of employees use it on average

* Read as: 30% of small businesses with Direct Deposit have 100% of their employees participating
Approximately what percentage of the company’s employees currently receive payroll Direct Deposit? n = 1,041

Slide 15

Preference for receiving checks is a key reason cited
for employees not using Direct Deposit

Why Some Employees Do Not Use Direct Deposit
(among Direct Deposit Users)

Prefer receiving checks 51% *

Don’t have bank accounts 30%

Privacy issues 18%

Distrust electronic banking 18%

Distrust banks 7% • 97% of them are paid with checks

• Only 3% with payroll cards
Other 4%

Don't know 13%

* Read as: 51% of Direct Deposit users cite ―prefer receiving checks‖ as a primary reason why some of their employees do no use Direct Deposit
What is the primary reason that not all employees use payroll Direct Deposit? n = 733

Slide 16

“Too few employees to justify it” is the leading
reason small businesses don’t offer Direct Deposit

Reasons Why Company Does Not Offer Direct Deposit

We have too few employees to justify it 46% *

Our employees prefer receiving checks and/or cash 28%
No one has ever approached the company about using Direct
26%
Deposit
Direct Deposit is too expensive 21%

Many of our employees are temporary, seasonal or part time 19%

Many of our employees do not have a checking account 17%

Most of the company's transactions are in cash or check 17%
Want to take advantage of “check float” obtained by paying
14%
employees using paper checks
Setup process is too time consuming 10%

Setup process is too difficult 9%
We’ve tried using Direct Deposit before, but were disappointed in
2%
its performance
Other 7%

* Read as: 46% of non-users cite ―we have too few employees to justify it‖ as a reason for not using Direct Deposit
For what reasons does the company not offer payroll Direct Deposit to its employees? n = 980

Slide 17

“Too few employees” has more 1st ranks but “too
expensive” has highest ratio of 1st ranks to total mentions

Ranking of Top Obstacles to Direct Deposit Adoption

24% *
We have too few employees to justify it
52%

Ranked First
14%
Our employees prefer receiving checks and/or
cash First/Total
50%

14%
Direct Deposit is too expensive
64%

11%
No one has approached the company about
using Direct Deposit 42%

* Read as: 24% of non-users rank ―we have too few employees to justify it‖ as the most important reason for not using Direct Deposit
Please rank the order of importance of the reasons why your company does not offer Direct Deposit to its employees (rank the top 3). n = 980

Slide 18

Users hold higher opinions of the benefits of Direct
Deposit than non-users

Strongly Agree/Agree
(top two box)

85% *
(Would) save(s) our employees time
55%

78%
(Would be) is a valued employee benefit
45%

(Would be) is easier than paying employees using paper 76%
checks 41%

70%
(Would be) is better for the environment
51%

(Would) save(s) my company time compared to paying 69%
employees using paper checks 39%

(Would be) is less expensive than paying employees 57%
using paper checks 31%
Users
(Would) reduce(s) errors relative to paying employees 49%
using paper checks 27% Non-users
(Would) cause(s) my company to lose valuable “check 30%
float” compared to issuing paper checks for employee
29%
payroll

* Read as: 85% of users agree that Direct Deposit saves their employees time
Please indicate how strongly you agree or disagree with each statement below about using Direct Deposit for employee payroll . n = 2,021
Note: Direct Deposit users were asked a different question (how do) than non-users (i.e., how would)
Slide 19

Messaging around employee benefits, environment
and easier/saves time will resonate with prospects

Strongly Agree/Agree
(Among Companies not Using Direct Deposit)

77% *
Would save our employees time
29%

68%
Would be better for the environment
32%

68%
Would be a valued employee benefit
19%

Would be easier than paying employees using paper 60%
checks 20%

Would save my company time compared to paying 59%
employees using paper checks 18%

Would be less expensive than paying employees using 43%
paper checks 20%

Would reduce errors relative to paying employees using 38% Prospects
paper checks 18%
Non Prospects
Would cause my company to lose valuable “check float” 35%
compared to issuing paper checks for employee payroll 23%

* Read as: 77% of small businesses that would consider offering payroll Direct Deposit in the future strongly agree/agree that Direct Deposit saves their employees time
Please indicate how strongly you agree or disagree with each statement below about using Direct Deposit for employee payroll . n = 980
Note: Direct Deposit users were asked a different question (how do) than non-users (i.e., how would)
Slide 20

Profile of payroll Direct Deposit adopters vs. non
adopters

Adopters Non Adopters
Annual Revenue  > $2 million  < $750,000

# of Employees  > 20  <5
 Financial services
 Repair & Maintenance Services
 Information services
 Accommodation & Food Services
 Education
Industries  Personal Care Services
 Professional services
 Retail Trade
 Manufacturing
 Construction
 Non-Profit or Religious

 Saves employees time
 A valued employee benefit
 Easier than paying with checks  Saves employees time
Attitudes
 Better for environment  Better for environment
 Saves company time
 Less expensive than checks

Employee Base  Skewed toward salaried  Skewed toward hourly

Slide 21

Profile of payroll Direct Deposit adopters vs. non
adopters

Adopters Non Adopters
Payroll Processing  Outsource to a third party  Do it internally
 Savings or MMDA
 Merchant Card Processing
 Debit Card
Deposit & Cash  Receive check images online
 Overdraft Protection
Management  Overdraft protection
 Savings or MMDA
Services  Wire transfer
 Merchant Card Processing
 Debit Card
 ACH
 Business credit card
 Personal credit card of owner  Business credit card
Credit Services
 Secured line of credit  Personal credit card of owner
 Equipment lease

 Company-sponsored retirement plan
Other Financial
 Health savings account
Services
 Electronic invoiced presentment
 More likely to use online banking
Channel Behavior
 Use branches less often

Slide 22

Keys to driving Direct Deposit utilization within the
non-adopter segment

 While two-thirds of small businesses do not use Direct Deposit for employee payroll,
approximately 40% of them would consider using the service.

 Approximately 1.3 million small businesses and 6.3 million employees would consider
using Direct Deposit

 The ―best prospect‖ companies for Direct Deposit adoption are:

– Between $1 - $10 million in annual revenue

– B2B companies, primarily in the professional services, healthcare and financial services lines
of trade

– Expressed more pain points regarding the payroll process, making them more open to new
and external solutions

– Believe the biggest benefits of Direct Deposit are employee- and environment-related ones

– More likely to use a broader range of deposit, credit and online channel services than non-
prospects

– Most cited reason for why not using Direct Deposit – ―no one has approached us about it‖

Slide 23

Recommendations – Communication

 Though awareness of Direct Deposit is high among small businesses, a major
reason why Direct Deposit falls short of potential penetration is lack of
communication:

– 51% of non-users have not been contacted by anyone about payroll Direct
Deposit

– Only 30% have ever been approached by their bank or credit union.

– 34% of non-users considering Direct Deposit say one of the reasons they don’t
use it is because no one has approached them.

 Small businesses need to be persuaded that employer benefits outweigh the cost of
Direct Deposit.

– Small businesses view Direct Deposit as benefiting their employees more than
them. They also acknowledge the environmental benefits of Direct Deposit.

– Saving employees’ time is apparent; saving small businesses’ owners time and
making the payroll process easier for employers is not.

Slide 24

Recommendations – Cross Selling

 The best prospects for Direct Deposit (non-users who indicate they would consider
using it in the future) are more likely to be using other banking services thereby
affording the opportunity to cross-sell Direct Deposit with other services such as:

– Cash management and deposit services

– Banking and financial services, especially company sponsored benefits plans

– Credit products, especially lines of credit

 The best prospects for Direct Deposit also tend to be more active in online banking
than non-prospects—affording another opportunity for FIs to communicate the
benefits of Direct Deposit.

– 86% of the best prospects use business online banking

– Half of them access online banking daily or multiple times per day

– 80% of them use online bill pay, and they are more likely to be ―bank-site‖
versus ―biller-site‖ bill pay users

Slide 25

Contact Information

FIS delivers banking and payments technologies to
more than 14,000 financial institutions and businesses The FIS research team for this project includes:
in over 100 countries worldwide. FIS provides financial
institution core processing, and card issuer and Paul McAdam
transaction processing services, including the NYCE ®
Network. FIS maintains processing and technology Senior Vice President
relationships with 40 of the top 50 global banks, 708.449.7742
including 9 of the top 10. FIS is a member of Standard paul.mcadam@fisglobal.com
and Poor's (S&P) 500® Index and consistently holds a
leading ranking in the annual FinTech 100 rankings.
Headquartered in Jacksonville, Florida, FIS employs Mandy Putnam
more than 30,000 on a global basis. FIS is listed on Director
the New York Stock Exchange under the ―FIS‖ ticker 614.414.4207
symbol. For more information about FIS see mandy.putnam@fisglobal.com
www.fisglobal.com.
James Gamble
Director
This research was conducted by FIS Research and
614.414.4213
Thought Leadership, a key function of FIS’ Enterprise
james.gamble@fisglobal.com
Strategy department. The FIS Research & Thought
Leadership team proactively manages market and
Chris Nay
client perceptions of FIS as a thought-leader and
Senior Strategic Researcher
thought-partner by conducting high-quality primary
614.414.4218
research on critical industry issues and delivering
christopher.nay@fisglobal.com
interpretation and recommendations to client
organizations.

Slide 26

Small Business Adoption of Payroll Direct Deposit

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