With the deadline here for the phase-out of paper checks from the Treasury Department, there is a renewed push to make recipients aware of the final switch to direct deposit.

Through public relations methods and the mail, the federal government is urging Social Security and other federal benefit recipients to switch to direct deposit or to sign up for the Direct Express Debit MasterCard card by March 1, 2013.

Mainly, direct deposit or debit are the most efficient and secure ways to deliver funds electronically. “Our mission is to deliver benefits in the safest and most convenient way,” said Walt Henderson, director of the EFT Strategy Division of the US Department of the Treasury’s Financial Management Service.

Factoring in cost savings, electronic is the best way to go. Paper checks cost the Treasury about $1 per check, including mailing and processing. If funds are electronically paid to recipients, the savings is estimated at $1 billion over a 10-year period.

At the time of this writing, an estimated 5 million recipients are still getting paper checks. “Until these people switch, the Treasury will continue to send out paper checks, but the Go Direct campaign is making every effort to explain how recipients can easily switch to direct deposit or debit card,” said Henderson.

“We expect everyone to comply, but there are unique situations that we have to be sensitive to,” said Henderson. “We will be reaching out to everyone with information on how to switch, but will continue to send benefits.”



Treasury Validates Debit Card as Mainstream Payment Method

By implementing Direct Express, the Treasury is sending a message that they see checks as expensive and dated, according to Craig Fuller, CEO, Transcard. “It means that consumers that are dependent on receiving government payments by check will be forced to direct-deposit.”

The phase-out of paper checks by the Treasury and the institution of a reloadable debit card program for benefit recipients is a way to smooth out the payment process. 

“It is a watershed moment that finally takes a step forward to validate that debit is viable as a mainstream payment method,” said T. Jack Williams, president, Paymentcard Services. “Prepaid providers like Green Dot and others have been trying to take us there, but this kind of step by the Treasury will get us there.”

“The ultimate endorsement of debit cards or reloadable debit cards is the federal government,” said Mark Putman, senior vice president of Prepaid Solutions at First Data.

The federal announcement of the Direct Express card is the single biggest mover of reloadable debit cards. Putman talks to payroll and human resources decision makers at both large and smaller companies about instituting payroll cards and they frequently ask why they should start a payroll card program. “I explain that if the federal government has done it, so can you,” Putman says. 

Roughly 25 percent of companies offer prepaid on their payment cards. Williams thinks it will be good for the industry as long as prepaid providers act responsibly on behalf of our cardholders. “As we reach mainstream status, we have to function at a mainstream level of accountability. We have to be on par with ACH deposit,” said Williams. “We as an industry have to make sure that no one exploits the market by using predatory programs. This is our chance to shine in the US payment market.”



Reloadable Card Opportunities

With the federal government putting its stamp on reloadable debit cards, there is increased opportunity for general spend cards to make it into the mainstream. Many companies and organizations already offer payroll cards, including the Red Cross, Walmart, and state governments. Pay cards are used to deliver compensation, benefits, and wages to those who do not have a direct deposit bank option.

Pay cards are a viable option to paper paychecks cutting the costs of printing and helping the unbanked population save on the cost of check-cashing. An estimated 60 million Americans are considered unbanked or underbanked and are forced to rely on cash, money orders and payday loans, with fees eating up an average of 2.5 percent of their payroll.

How do pay or payroll cards work? Employers deposit wages to the pay card account via direct deposit, and the employee uses the card just like a debit card. The primary difference between a traditional bank debit card and a pay card is the employer creates the “banking relationship” with a financial institution or a third party program manager – rather than the employee.

Each payday, the card is electronically reloaded with the employee’s wages. Pay cards work within an open loop system. In an open loop system, cards are accepted beyond the issuer’s locations through a more universal network for PIN-based (e.g., STAR) or signature-based (e.g., Visa, MasterCard) transactions.

Pay cards can offer a multiplicity of functions in addition to ATM cash withdrawals, point-of-sale purchases, and online purchases. Exact applications vary slightly by employer and pay card vendor.

Although pay cards have lagged behind other forms of prepaid cards in public acceptance, such programs are being implemented by giant corporations that have hundreds of thousands of employees on their payroll, such as Sears and Walmart.

Williams said that some CEOs have been reluctant to launch payroll card programs because they were not yet fully understood and not quite in the mainstream. “But now the regulatory landscape is evening out. Technology leapfrogged the law, but now we have sorted through rules and regulations and things have settled down for mainstream use. Industry players believe that the time has come,” said Williams.

The landscape provides two choices of payroll cards: (1) ACH direct deposit; and (2) direct deposit to a prepaid debit card. The Treasury’s program is called Direct Express.



Expanding the Reloadable Card Market

As the reloadable card environment expands, it will be a positive step for the prepaid market.

Deposits at the payroll level are higher than deposits on general purpose reloadable cards. “For employers, capturing the money by direct deposit into a prepaid card at this point keeps the money flowing electronically. So it’s a win-win situation because when pay is captured at this level, employees can use ACH, bill pay, funds transfer, person to person payments, and other money management tools,” said Putman.

Konrad Christensen, retail payments product manager, The Members Group (TMG) said that prepaid reloadable is growing as we see government using it as well as small business and larger chains using this payment method for payroll. “Some employers are requiring sign-up right off the gate,” said Christensen. “Prepaid reloadable has all the features of the true debit card and the cost is much less than checks.”

The average cost for a paper check is between $1 and $2. There is an initial cost for setting up cards but after that it is easy to reload funds.

“Users get the power of plastic and can avoid cashing at check cashing stores,” Christensen said. “It leads them away from cash, which could result in overspending and the possibility of theft. Cards can also be used to make purchases online.”

The Members Group is a behind the scenes platform provider for credit unions that are offering reloadable debit cards to their customers. TMG has 55 partners with the Aitrareload and Coopera branded cards. The credit union’s logo is shown on the card. The Coopera card is designed for the Hispanic demographic. Atirareload is a general purpose reloadable card with some new features that include text message alert, geared to Gen Y. It acts like a normal checking account and kids can check their balance, while parents can monitor where the kids have spent money. It also builds internal credit that can be checked by merchants. •



For more information about the federal government’s program Direct Express Debit Master Card, visit godirect.org, or contact the Call Center: 800-333-1795