U.S. Treasury Mulls Proposals To Supply Benefits Via Cards

  The Financial Management Service bureau of the U.S. Department of the Treasury has received 15 applications from financial institutions interested in providing nationwide debit card services to unbanked check recipients of Social Security and other federal payments, such as veteran or railroad retirement benefits.
  Bureau representatives declined to reveal the companies that applied. The deadline to submit proposals was Oct. 2.
  The Treasury Department's goal is to reduce the number of checks disbursed by promoting direct deposit and by increasing the number of electronic funds transfers to unbanked recipients with a prepaid debit card program.
  The Financial Management Service bureau, which maintains responsibility for disbursing federal benefits, received the applications and intended to notify finalists Oct. 19 and make a final decision Nov. 16. The program is slated to begin in January.
  "The Treasury has a goal of an all-electronic treasury," says Sally Phillips, director of the EFT strategy division at the Financial Management Service bureau. The prepaid debit cards will help the department increase electronic payments by reaching unbanked benefit recipients, she adds.
  About 80% of government payments are electronic. "The 20% that are left are costly to deliver," says Phillips, adding that checks cost 89 cents to issue versus 9 cents for an electronic funds transfer. "If we converted all checks to electronic funds transfers, we would save the government $125 million a year," she says. Of the 12 million consumers receiving benefit checks, fewer than one-third do not have bank accounts, Phillips adds.
  A survey of participants in an Illinois-based pilot returned positive results and contributed to the department's decision to move forward with a national program, says Phillips. The results also helped the department determine which aspects of the program are important, such as costs to the cardholder, says Ronda Kent, director of the agency enterprise solutions division at the Financial Management Service bureau.
  Once the chosen program is in place, marketing will play an important role in reaching the unbanked, says Phillips.
  The debit card pilot, known as Direct Express, is taking place in Illinois and includes Chicago as well as some rural ZIP codes. The Financial Management Service bureau sent 200,000 informational inserts accompanying checks and 35,000 direct-mail letters to check recipients in the pilot areas. The bureau sent the first mailing Dec. 27, 2006.
  New York-based JPMorgan Chase & Co. issued MasterCard-branded debit cards for the pilot, says Phillips. Chase officials would not comment on the company's involvement.
  A survey of pilot participants who use Direct Express cards found 85% were satisfied with them. One in five participants says having the card is easier than cashing a check, 13% say it is safer, 11% say it is faster, and 10% say it is cheaper.
  Phillips says she suspects the program chosen for nationwide rollout will be similar to the pilot. The cards will carry either the MasterCard or Visa brand and include Federal Deposit Insurance Corp. protection. Recipients can get money from an ATM and cash back at the point of sale, and they can make purchases, pay bills online and buy money orders, she says.
  The bureau is trying to avoid predicting how many consumers will enroll for the cards because the program is elective, says Kent. The bureau does, however, estimate check distribution, which should reach 150 million by 2013, according to the Financial Management Service.
  "The Treasury is being prudent by not forcing [the program] and being cautious about the rate of adoption," says Tim Sloane, director of debit advisory service at Waltham, Mass.-based Mercator Advisory Group. He believes possibilities exist for the chosen financial institution to create a compelling argument for prepaid use through marketing to government check recipients. The chosen institution's goal is to communicate the safety of the card while providing incentives for use to gain interchange revenue, Sloane says.
  Some of the unbanked will have to learn to use the cards effectively, says Katy Jacob, research specialist in the economic research department of the Federal Reserve Bank of Chicago. "If what you end up seeing is people using the cards as if they were checks and taking all the cash out in one swoop, they may be losing the benefits of the cards," she says.
  Jennifer Tescher, director of the Chicago-based Center for Financial Services Innovation, agrees. She anticipates two marketing challenges: getting check recipients to sign up for the debit card and then getting them to use the cards at ATMs and the point of sale.
  (c) 2007 Cards&Payments and SourceMedia, Inc. All Rights Reserved.
  http://www.cardforum.com http://www.sourcemedia.com