Public sector prepaid debit cards are a phenomenon that’s set to swell the numbers of prepaid users across the U.S. -- as long as issuers can quell consumers concerns regarding hidden fees, as well as issuer concerns about fraud and a lack of profitability. Prepaid providers also have some qualms about fraud, but these are being addressed.
The Treasury Department has mandated that by 2013 all federal benefits programs – ranging from Social Security and SSI to veteran affairs and railroad retirement – go electronic. For some recipients, that will mean receiving funds through direct deposit into bank accounts, but many will sign up for debit cards that are jointly sponsored by the government and a partnering bank.
Federal benefits – other than public assistance – will be offered on the Direct Express Debit MasterCard, which is issued by Comerica Bank. Already more than 1.5 million beneficiaries have signed up for the card – and that number is expected to grow swiftly.
“We had legislation in the mid ‘90s that gave us the authority to require electronic payment. We started out by designing a product called Electronic Transfer Account (ETA),” said Walt Henderson, director of the EFT Strategy Division at the Department of Treasury. “In the mid 2000s, when the prepaid market came into its own, we did a successful pilot of prepaid cards in the state of Illinois with SSI recipients and that helped us define the prepaid product that would be appropriate for federal benefit recipients. That lead us to Comerica Bank as financial [issuer] and the Direct Express prepaid card.”
In the past decade, the federal government also took public assistance programs electronic – with the Supplemental Nutritional Assistance Program (SNAP, also known as Food Stamps) and Medicaid, – going electronic. These cards were not associated with the major payment networks like Visa and MasterCard, but they worked the same way and helped solidify the role of public sector recipient and payment cards in general.
This year, the U.S. Treasury Department also announced a pilot program in partnership with prepaid provider Green Dot Corp. that enables low and moderate-income Americans to receive their tax refunds via prepaid debit card. The Treasury Department sent letters to 600,000 potential recipients inviting them to join the program for their 2010 tax refunds.
The partnership could swell Green Dot’s user numbers by a half million in one quarter with cardholders placing much larger amounts of money on their card than are typically done in prepaid programs. Most prepaid debit cards hold a couple of hundred dollars in load at any given time.
In the meantime, dozens of state programs are trialing state tax refunds on debit cards – and others are going further with retirement benefits and even child support payments. In fact, the state of Nebraska Child Support Payment Center issued payments on prepaid debit cards, with 97% of all payments going either direct deposit into banks or onto prepaid cards, taking the cost of processing payments from $385,000 to $26,700 in 2010, according to the state.
Beyond savings for government agencies, the rise of these prepaid programs will mean lots of opportunities for smaller prepaid providers – even those that are regionally focused like small banks. After all, while the government is seeking issuer partners that won’t hit consumers with overwhelming fees, there is still plenty of opportunity to profit. With the tax refund cards, users can reload their cards at 50,000 participating Green Dot retailers and at a fee of up to $4.95.
A 2010 study sponsored by MasterCard and conducted by Boston Consulting Group, predicts that government open-loop prepaid card programs will grow to $163 billion in 2017. The same study predicts payroll cards – which are also mainstream consumer prepaid acceptance – to grow to $99.6 billion by 2017. Largely as a result of these government and payroll programs, the study says that the U.S. prepaid load volume will quadruple to $440 billion by 2017.
Not Every Financial Institution and Prepaid Provider Wants In, But Why?
Even with all the potential Green Dot will see from participating in the tax refund program, for example, not every prepaid provider is thrilled about getting into government sector prepaid. For one thing, there is some concern among banks about getting in bed with the underbanked – which is still the largely targeted market here. With Direct Express, for example, users become members of Comerica Banks. With other cards, users don’t become members, but they do have a continued relationship with the issuer since the cards tend to be reloadable.
“There are some concerns among banks that if they go beyond government programs [making cards reloadable by other means] there is potential of fraud risk; that people will be using them nefariously for loading other monies and opens them up to greater fraud risk,” said Melissa Koide, vice president of policy at the Center for Financial Services Innovation (CFSI).
One example would be consumers loading money onto these cards from employers or friends with bad checks that banks would be on the hook for if the funds are spent, explained Koide. There is also the problem of stolen cards that exists with any prepaid card – but the risk can be greater with government sector cards since the loaded value is often higher than on privately bought cards.
Not all government affiliated prepaid cards are open for reloading from users unless the funds are coming from government payment. MasterCard, for example, promotes its government sector cards with both reloadable and one-time use cards. But a one-time use card model doesn’t lend itself to widening profits overtime for issuers. The goal for prepaid reloadables is generally to extend the relationship so that issuers see income from reloads and ATM fees over time.
Banking associations, such as the Credit Union National Association (CUNA) have asked that funds being loaded from government be specifically marked so that banks can see this income is secure. This also enables them to label and treat other income sources differently.
But fraud among public sector cards shouldn’t be any more of a concern than it would be with regular bank debit cards or other reloadable prepaid cards. After all, these cards are associated with payment networks that are required to fulfill all sorts of fraud prevention government regulation compliance.
“These cards are covered by Zero Liability so consumers have the same level of protection for any fraudulent transactions against prepaid cards as they would on credit cards,” explained Kate Mullhearn, a Visa spokesperson. The Zero Liability program includes real-time monitoring using behavioral profiles in spending patterns for immediate response time, among other consumer protections. Every payment network has a similar program.
What’s more, these cards must meet Regulation E compliance – the rules that require institutions to provide users with banking statements and other protections so that consumers can be aware when fraud occurs. Also, retailers using these cards are required to fulfill PCI requirements, which means providing protection such as encryption for data traveling the networks from merchant to payment processing platform and beyond to data centers.
Even government sector cards that aren’t associated with payment networks have reached new levels of fraud prevention, explains Brian Kibble-Smith, who was involved with government programs and card issuance for two decades. While these cards are not subject to Regulation E compliance from the Federal Government, they do make tracking retailer and user fraud much easier than before the programs were electronic since every transaction leaves a documented trail, says Kibble-Smith.
Consumer Education Campaigns are the Answer
Often overcoming resistance to both using and issuing prepaid cards from the government sector is about public education. After all, in many cases prepaid cards have received a bad rap for being associated with hidden charges for consumers – or loss for banking institutions and issuers.
The Department of Treasury has launched a full education program to address the consumer part of this problem.
“We were fortunate to have the Go Direct public education campaign that started in 2005, and that encouraged users to sign up for direct deposit, so we folded Direct Express into that campaign,” said Henderson. The campaign includes a website with explanatory video and articles about related benefits. There’s even a Twitter campaign associated with the card that explains benefits and incentives.
A big part of education is addressing the consumer concerns about hidden charges that they wouldn’t otherwise face if they weren’t receiving funds by prepaid card.
The Direct Express cards actually have lower charges than most prepaid cards, and that is well promoted by the Treasury. The cards have no monthly fee and ATM withdrawal fees of under $1.
“People’s initial reaction is ‘I don’t want to switch because of fees,’ but once they see how fee-friendly it is, it’s very compelling,” said Henderson.
When it comes to state level programs, the flip side of that problem will have to be explained to issuers. They will have to hear from government agencies that there are still decent margins to be earned despite charging lower fees for government related cards.
The way to make that case is to explain “that kind of sizable inflow [from government loads] can offset the cost of doing these programs,” said CFSI’s Koide.
It may take time and effort to explain that fraud-related problems or hidden fees are not a real burden, but as that happens, government sector prepaid cards will be the biggest boon to overall prepaid growth of any other phenomenon in the market. •