States Flock to Prepaid Debit Cards

  The personal identification number-based electronic benefits transfer card program has become the standard for delivering state and federal cash and food-stamp benefits. Indeed, the government last year stopped printing paper food coupons.
  But it appears that the state-administered EBT program is just the beginning in using existing debit systems to deliver government payments.
  Now, states' use of nationally branded prepaid debit cards as payment vehicles appears on the verge of sweeping the nation as EBT programs did a few years ago. States are looking to use debit cards as a means to reduce the costs and overhead associated with distributing checks.
  Visa USA claims that 13 states are distributing prepaid cards carrying its brand mark for child-support programs. In its recently released annual financial report, the card association predicts that all 50 states similarly will embrace nationally branded, signature-based prepaid cards within 18 months.
  "We believe that is a high-growth area," says Stacey Pinkerd, Visa executive vice president.
  All states currently issue PIN-based debit cards for EBT programs used to deliver food and cash benefits. Now, most states are striking deals with issuers of nationally branded prepaid cards to support court-ordered child-support payments, in which states distribute the funds. But the distribution of state-run unemployment benefits and state employee paychecks is not that far behind.
  Last year, an analysis by CCM's sister publication, ATM&Debit News, found only four states distributing signature-based debit cards-all Visa cards-for child-support payments. Now, at least 17 states have signed deals to replace paper checks with debit cards for child-support payments, according to ADN. Several of those states are using the cards to distribute other types of payments as well.
  MasterCard International also has gained some share of the state-sponsored card payment market. Four states are distributing cards with the MasterCard brand.
  Minneapolis-based U.S. Bancorp, which has branded its state-sponsored debit cards the Visa ReliaCard, appears to be the early market leader. Other debit issuers, though, are beginning to strike their own state deals.
  Detroit-based Comerica Bank, for example, recently secured a contract to issue MasterCard-branded cards with Pennsylvania, which oversees about 280,000 child-support cases. Utah and Georgia also are distributing Comerica's EPPICard. Georgia also uses the cards to pay state employees.
  Houston-based Affiliated Computer Services Inc. processes EPPICard transactions for Comerica. Such alliances between processors and issuers likely will become more common as the popularity of branded debit cards spreads among states, says Robert Bucceri, president of EBT Council of the Electronic Funds Transfer Association. Some processors already provide services to states, such as designing their payment systems, he says.
  Having a large automated-teller-machine footprint in a state seems to give relatively large financial institutions an advantage. "One of the main decisions in our selection process was access for clients to their cash," says Sandra Vanneman, director of South Dakota's Department of Social Services. South Dakota is part of a consortium with North Dakota, Colorado and Nebraska that is using the Visa-branded ReliaCard to distribute child-support payments.
  The consortium contract, like other state contracts, does not allow issuers to charge states fees, and it requires them to allow cardholders two free ATM transactions. U.S. Bank agreed to provide cardholders two free monthly transactions via ATMs connected to Visa's Plus network, says Vanneman. Subsequent ATM transactions cost $1.50, she says.
  South Dakota estimates paper checks cost about $10 each to cut and distribute, while electronic funds transfers to the cards cost about 10 cents, Vanneman says. Issuers hope that recipients increasingly use their cards for purchases because of the interchange they receive from the merchants' banks, she says.