What the Sept. 11 terrorist attacks did for payroll cards, Hurricane Katrina is doing for prepaid cards.
Payroll cards got a big boost after 9/11, when planes were grounded and paychecks could not be flown from headquarters to sites elsewhere. The logic of electronic payment became clear.
Likewise, prepaid debit cards received huge mainstream media attention after the Federal Emergency Management Agency began - and then abruptly stopped - providing hurricane relief funds through a JPMorgan Chase-issued card. The American Red Cross is continuing to distribute prepaid cards in shelters throughout the Gulf Coast region, as are several card marketing companies, including indiGOCARD of Fort Worth. It's estimated more than 500,000 such cards have been issued so far.
Structured properly, prepaid cards offer a number of obvious advantages in a disaster situation, the chief one being that funds - whether paychecks or government benefits - can be delivered to consumers electronically. They are particularly critical in light of this finding about Katrina from a Washington Post-Kaiser-Harvard poll of evacuees: seven in 10 had neither a checking or savings account nor a usable credit card.
Prepaid debit cards hold especially strong potential for linking unbanked and underbanked consumers as card processors add functions like bill payment, remittances, saving, and credit building. That piece of plastic might serve as a foothold for those who had little financial stability before Katrina and have even less now.
More analysis is needed to understand what went wrong with FEMA's effort to distribute relief payments via cards, an effort that was halted after a few days and reached only a small percentage of evacuees. But several early lessons are apparent.
First, risk management guidelines must be eased - and communicated clearly - to facilitate quick and easy card issuance. With no permanent address and little if any personal documentation, few evacuees could pass the typical "know your customer" test, especially in the early days after evacuation.
Federal and state bank regulators need to collaborate on a set of acceptable risk management practices for financial institutions to follow in disaster situations - not only for preparedness sake, but also so that there is a paper trail 18 months from now when banks are being examined and the memory of Katrina has faded.
Fraud is going to occur, but its cost must be weighed against the cost of failing to supply tens of thousands of evacuees with the tools they legitimately need to reestablish themselves.
Second, consumers must have the ability to reload the cards with multiple sources of funds. One of the primary shortcomings of the FEMA card was that it offered little beyond the $2,000 already loaded on it.
Given the customer identification challenges noted above, it may be necessary to create a two-step process where consumers initially receive a nonreloadable card loaded with immediate relief funds, perhaps with a 30-day expiration date, followed by a more fully functional card once a more thorough risk assessment has been done.
Some prepaid card companies use similar procedures - consumers are offered a PIN-only card at the cash register, and once they call in with additional information, a branded, personalized card is mailed to them.
Another advantage of a two-step process is that evacuees can transform themselves from victim status in need of aid to consumer status in need of a range of products and services.
Last, the federal government needs to rethink its role in ensuring that disaster victims have adequate access to financial services. FEMA put itself in an impossible situation by simultaneously attempting to provide immediate relief funds, ensure funds went only to those eligible, and distribute them through a private-sector product that had yet to be tested in a situation of similar magnitude. The political and financial risk was simply untenable.
Ultimately, the better model may turn out to be state electronic benefits transfer programs. States have had years to perfect relationships with third-party card providers and card enrollment and distribution mechanisms. Louisiana is using its EBT infrastructure to get emergency food stamps to hurricane victims, and it recently began providing unemployment compensation via prepaid cards.
New issues will undoubtedly surface as relief and rebuilding efforts progress in the wake of Katrina. But prepaid cards are here to stay. \
