The Fed has given high marks to the prepaid cards issued after Hurricane Katrina, despite some well-publicized misuse.
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The Katrina program's problems are well known. It was hard to verify eligibility for people who had lost their identification documents. Some tried to get multiple cards to which they were not entitled. Some spent their aid money inappropriately.
But Julia S. Cheney, a co-author of the report, said the advantages of prepaid cards more than offset the problems.
"I think prepaid cards provided a way to quickly and efficiently get relief to the people who needed it," said Ms. Cheney, of the Philadelphia Fed's payment cards center, on Tuesday.
Her co-author, Sherrie L.W. Rhine, said that people with bank accounts suffered less financial disruption than those without them, but that "electronic payments are a way to help all consumers, not just the banked."
Ms. Rhine, a senior economist with the Federal Reserve Bank of New York's office of regional and community affairs, and Ms. Cheney refused to discuss criticisms of the Katrina programs, such as the lack of oversight over recipients' use of the money. Their report focused on the advantages of using cards for relief programs.
Ms. Rhine said that though aid agencies have been using prepaid cards to distribute relief funds for several years, the scope of Katrina's impact made this effort a standout.
The report says the Aug. 29 hurricane, which devastated parts of Louisiana, Mississippi, and Alabama and flooded about 80% of New Orleans, left people "without access to their financial accounts and the payment services provided by financial institutions."
In the next days and weeks the American Red Cross distributed more than 300,000 cards ranging in value from $360 to $1,565. The Federal Emergency Management Agency gave out about 10,000 cards, each worth $2,000. All of these were MasterCard International cards issued by JPMorgan Chase & Co.
In addition, the three states used existing electronic benefits transfer programs, such as food stamps programs, to distribute relief.
The report says that payment cards are safer than cash to carry around and cheaper and faster than checks to produce and get to recipients. "When you are talking about people that have been hit by this kind of disaster, timeliness is important," Ms. Rhine said.
Robert A. Bucceri of Chadds Ford Planning Associates LLC of West Chester, Pa., a senior consultant with the Electronic Funds Transfer Association, said prepaid cards "are a big step forward" in disaster relief because they are much easier than checks to distribute and use.
A check in the mail is useless to people who have lost their homes and are shuttling between shelters, hotels, and friends' or family members' homes, Mr. Bucceri said. And to people in relief centers far from a bank or check-cashing store, a check can be of little use, he added.
Prepaid cards, in contrast, can be used immediately at automated teller machines or merchants. JPMorgan Chase set up about a dozen ATMs at the Houston Astrodome, which was used as an emergency relief center after Katrina.
The report acknowledges that emergency prepaid card programs can be vulnerable to fraud. After Katrina, though aid agencies imposed various types of screening mechanisms, they also wanted to provide help fast, it noted.
The agencies issued single-use instead of reloadable cards. Though the latter are more convenient, they "require stronger customer identification protocols in order to limit the potential for illicit use," the report says.
For credit transactions, it recommends "restricting card use to preapproved types of purchases, such as food, clothing, or shelter, and rejecting attempts to purchase nonapproved items." Inappropriate use of the cards - at strip clubs, for example, or to buy luxury luggage - was widely reported.
Ms. Cheney said that though aid programs such as food stamps and Women, Infants, and Children limit what recipients can buy, such controls are harder to implement on prepaid cards that bear a major card company's brands and are designed for general spending.
Harder but not impossible, she said. A principal advantage of using electronic payment cards is that aid agencies "can limit some types of spending" on them, Ms. Cheney said.
"You need to quickly get funds to the people who need it," she said, while maintaining "the ability to control fraudulent use and misuse."
Aid agencies and the financial services industry must coordinate better in such emergencies, Ms. Cheney said. Aid agencies should describe suitable transactions or categories of merchants, and financial firms should advise on the types of controls that are possible, she said.
Ariana-Michelle Moore, an analyst at the Boston market research company Celent Communications LLC, said that card processors can screen transactions now.
Credit transactions carry several levels of data, she said. The first level has store names and categories and transaction amounts. The second carries tax information. The third can describe specific items people purchase.
Ms. Moore said processors can screen purchases using level 1 data but not level 3. They can therefore make it impossible to use the cards at a bar but cannot prevent people from purchasing beer at a grocery store, she said.
Still, aid agencies should take advantage of this function to restrict prepaid relief cards, Ms. Moore said.
"If the [Katrina] cards were abused, I don't know why they weren't being filtered with level 1 data," she said. "The capability is there."
