Pre-paid cards are an increasingly popular alternative to vouchers, but employers should be clear about how to use them, says Victoria Furness
Cash is no longer king in today’s society. Cards overtook cash payments for the first time back in 2005 and Peter Ayliffe, chief executive of Visa Europe, has gone so far as to predict that notes and coins will be history by 2012. According to Datamonitor’s Prepaid 08 report, the fastest-growing area in payment products is pre-paid cards, which are expected to expand at a rate of 22.6% a year between 2007 and 2012.
This trend is evident in the workplace, too, with an increasing number of pre-paid cards made available to employees, either to replace paper vouchers in reward and recognition schemes, to manage expenses, or to pay staff who do not have a bank account.
For example, employee benefits provider P&MM runs 35 different card programmes. John Sylvester, the firm’s executive director, says: “It is a new type of reward we are just starting to discover and there are all sorts of uses for it.”
Other providers include Grassroots, with its Pure Reward Visa card, and Corporate Innovations, which launched its Freedom card this summer
Types of pre-paid card
There are several types of pre-paid card. A closed-loop card is restricted in the number of outlets it can be redeemed at. This is the electronic equivalent of discounted retail vouchers, which are the mainstay of most voluntary and some flexible benefits packages.
Meanwhile, an open-loop card uses a card network (such as Visa, Mastercard or Maestro) and can therefore be used at far more places than closed-loop cards. An employer can also choose whether it wants its pre-paid cards to be reloadable or used as a one-off gift.
Whether closed or open loop, the cards are all pre-paid debit cards, so employees cannot exceed the amount loaded onto them. They are also subject to the same tax and national insurance (NI) rules as vouchers. This means if a pre-paid card can be used to withdraw cash from an ATM, it is treated as earnings so income tax and NI contributions are deducted. But if it can only be used to buy non-cash goods and services, income tax is not payable.
Different levels of discount
Historically, open-loop pre-paid cards have not offered the same level of discounts at retailers - say 6% rather than 10% if goods are paid for using a voucher or closed-loop giftcard - and the discounts do not apply at every location the card can be used. Steve Tickle, senior HR manager at Allianz, says: “Generally, the rates are slightly better if you use vouchers but, of course, the disadvantage of vouchers is that sometimes you need to buy them in £50 or £100 chunks, so for sheer convenience, the card is really handy.”
It is the convenience aspect that many in the industry believe will make pre-paid cards a big growth area, particularly in the current economic climate. David Watt, managing director of Corporate Innovations, says: “People need to supplement their income rather than buy luxury goods at the moment, so a John Lewis or Thomas Cook voucher might not be the best incentive.”
A growing body of research indicates pre-paid cards can have a tangible impact on employee motivation. In its report Prepaid Card Market Overview, edition nine, published in March 2009, the Pepper Corporation consultancy found monetary incentives worked better than gifts or travel, delivering a 27% increase in overall performance, compared with 13% for the latter.
Impact on employee performance
P&MM ran a similar study, Plastic Yields Fantastic Results, published in September 2007, which investigated pre-paid cards’ impact on employee performance. This also showed the effectiveness of pre-paid cards, with holders improving their performance by 73% more than non-cardholders.
Although there is no research to back it up yet, most providers believe company-branded cards create a better sense of ownership and engagement among staff. “From a motivation perspective, the key aspect of changing behaviour is getting positive reinforcement when the pleasure is being delivered,” says Sylvester. “That happens every time a pre-paid card is used.”
Although the administration for setting up a pre-paid card scheme is similar to that for retail vouchers, there are some extra benefits employers do not get with vouchers, such as the cost of distribution or replacement. The other advantage is the security associated with cards. “If you lose a voucher, you have lost it,” says Watt. “But with a pre-paid card, you can control the balance on it.”
Business case for cards
But not everyone is convinced of the business case for pre-paid cards. Glenn Elliott, managing director of Asperity Employee Benefits, says: “We did a good six months of work looking at card products, but at the moment, it works out that you get a better financial deal using retail-specific cards.”
Elliott says there is some confusion in the market about how to use pre-paid debit cards. “The business case is stronger for using it for incentives than it is as an employee benefit. But I think one of the niches where people will find pre-paid Visa cards can be used is in a flexible benefits scheme to mop up any surplus left over from employee contributions.”
So although the pre-paid market is potentially a huge growth area, it is too early to predict the demise of discounted paper high-street retail vouchers. Andrew Johnson, director general of the UK Gift Card and Voucher Association, says paper still makes up a huge part of the corporate market. “There is a migration towards plastic, but I would not say it is a flood,” he adds.
And who knows what other forms of electronic payment might be around the corner - from ‘wave and pay’ cards to electronic codes sent to mobile phones - that could eventually succeed pre-paid cards.
Case Study: B&Q
B&Q tools up to reward achievement
In March, DIY retailer B&Q updated its ‘thank-you’ scheme to incorporate its new corporate giftcard product. The scheme is a way for B&Q’s 34,000 staff to recognise colleagues’ achievements at work.
The new scheme includes a website, which employees visit to send electronic thank-you messages. Then, at the end of every month, one or more recipients are chosen to receive the B&Q giftcard. Under the previous scheme, the gift would have been a high-street voucher.
Leon Foster-Hill, employee engagement manager at B&Q, explains: “We wanted to get away from vouchers as they could be used in different types of retailers, including our competitor, Homebase, but not in our own stores.” Employees that redeem the giftcard have the added advantage of receiving a 20% staff discount on any purchases. B&Q receives an added benefit of increased security because cards are not loaded with funds until they are presented to its top monthly achievers.
So far, 10,000 cards have been sent out to stores ready to distribute, but it is too early for B&Q to report on the scheme’s success.
Case Study: Allianz
Allianz offers a flexible premium
Insurance giant Allianz has offered employees its Spree Flex card - a pre-paid Mastercard giving discounts at selected high-street stores - through its flexible benefits scheme since November 2007.
The card does not replace high-street discount vouchers, which staff can still obtain through Allianz’s voluntary benefits scheme, but the firm wanted the pre-paid debit card to give employees extra flexibility in buying goods and services.
Steve Tickle, senior HR manager at Allianz, says: “If [staff] are going to buy any large items - for example, if their washing machine breaks - sometimes sending off for vouchers can be a bit of an inconvenience.” The card is branded with Allianz’s corporate colours and company logo. “We wanted it to be seen as a benefit provided by the company for individuals,” says Tickle. “At the time of doing it, we were one of the first to use Spree Flex.” He says it is hard to judge the card’s impact on staff morale and engagement, although take-up has increased. This year, 52% more cards were issued than last year.
A Mori poll that Allianz conducts every year to gauge staff feedback has also shown a consistent improvement in employee engagement with benefits over the past five years.
