This month, the federal government will largely stop issuing paper checks for Social Security and other recurring payments. The shift to electronic payments has been a long time coming, with a campaign that started in the late 1990s and a U.S. Treasury Department that was ahead of its time. Today, all 50 states are disbursing most, if not all, benefits electronically.
While we have reached the end of the line for government checks, policymakers are just beginning to consider how to leverage government payments as an onramp to broader financial engagement.
Government opinion on addressing the needs of unbanked consumers is mixed. In a recent survey of state and local government decision-makers by Governing Magazine, 46% believe government has no obligation to provide financial services to the unbanked beyond the delivery of benefits.
Now that both federal and state governments have achieved the initial goals of cost savings and increased efficiency, it is time to place greater emphasis on how electronic payment tools can provide broader benefit for recipients.
Federal and state governments reach tens of millions of households each month, providing a range of benefits including unemployment insurance, child support, food stamps, cash assistance, disability benefits and retirement and pension payments. In January alone, 62 million people received $70 billion in Social Security and disability benefits. States pay out nearly $13 billion of food stamps benefits annually to 23 million households.
While the specifics vary by state and by benefit, recipients generally are given the option of either having funds directly deposited into an account of their choosing or using a government-selected payment card. Those who choose the government card are far more likely to be unbanked.
The quality of those debit cards varies widely, and there are few clear standards. A recent report by the National Consumer Law Center, for instance, evaluated 42 different state unemployment cards. Eighteen received a "thumbs up," 3 received a "thumbs down," and the rest were deemed neutral.
Government payment cards can be viewed as potential bank accounts waiting to be opened by people with the fewest quality opportunities to connect to the financial mainstream. For government payment cards to be part of the solution, policymakers should design them with three critical elements in mind: choice, reloadability and capability.
Choice: Unbanked benefit recipients have little choice about the payment card they are provided because governments generally enter into contracts with a single card provider. Moreover, some states make it difficult for consumers to have their benefits directly deposited into a bank account, effectively steering them to the state-provided payment card.
Policymakers should consider other ways to guide the development of high-quality products that increase marketplace innovation and competition and increase consumer choice. For instance, they could focus on setting criteria for product providers and enabling consumers to choose from the range of products that meet the criteria.
Reloadability: Today, government payment cards serve a single purpose – to deliver benefits. Cardholders cannot deposit money from other sources into their card accounts, making them of minimal use. Governments should be leveraging payment card platforms to provide recipients with a more robust financial vehicle.
Making cards reloadable raises a number of legal and regulatory issues, and increases the risks to providers. One possible intermediate step would be to enable a single government payment card to serve as a gateway to two accounts, one for government benefits and another for other funds. This would minimize the risk of improper garnishment of government benefits that arises when funds from multiple sources are commingled.
Capability: Most government payment cards provide minimal functionality beyond making purchases at the point of sale and withdrawing cash at the ATM. Yet we live in an era where technological innovations are spurring a new generation of money management tools and techniques that can deepen the customer experience and help improve financial well-being.
One of the most exciting developments on this front is the Treasury Department's decision to add a web- and mobile-based financial education hub to Direct Express, the default payment card for federal benefit recipients. Cardholders will have the chance to win cash prizes by engaging in financial education modules.
The effort, a partnership between the government, card issuer Comerica Bank, MasterCard, and technology start-up PayPerks, represents the kind of public-private collaboration that will be required to turn government payments into a teachable moment.
The first step, though, belongs to the government. Government benefits alone don't create financially healthy citizens and communities. Leveraging disbursement platforms to provide broader financial access and a more meaningful financial experience can turn government payments into a powerful strategy for community development and consumer empowerment.
Jennifer Tescher is the president and chief executive of the Center for Financial Services Innovation.