Prepaid and Stored Value Debit Cards

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Prepaid and Stored Value Debit Cards
DECEM B E R 5, 2 0 0 6
National Association of State Treasurers
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The Growth of Debit Cards for Mainstream
Financial Access

• Growing consumer market acceptance
• Overcomes barriers to direct deposit - lack of
  bank accounts

Data source ATM Debit News, September 21, 2006
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Prepaid Debit Card Technology Alternatives

• Prepaid vs. Proprietary (Electronic Benefits
  Transfer)
• Instant issue cash cards single issue, small
  value payments
• Integrated chip (smart) cards
• MasterCard or Visa Branded Cards
• - Signature
• - PIN

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Prepaid Debit Card Applications

• Unemployment Insurance benefits
• Child Support
• Workers Compensation
• Retirement annuities
• Child care subsidies
• Payroll

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Prepaid Debit Cards - Program Overview

• Prepaid debit card programs are designed to
  replace costly paper check payments
• Funds are deposited to the cards in the same
  manner as direct deposit - via the ACH network.
• Card provides recipients the convenience and
  security of a branded card product (Visa or
  MasterCard), but no credit is extended.
  Recipients have access to only the funds that
  have been distributed by the state agency.
• Cardholders have multiple ways to access their
  funds
• Signature-based purchases (Visa/MasterCard)
• PIN-based purchases (Interlink/Maestro)
• ATMs (Plus/Cirrus, etc)
• Bank tellers (Visa/MasterCard)
• Customer service is provided 24 / 7 / 365 by live
  and multilingual representatives

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Benefits to Government Agencies

• Reduced check expenses
• NACHA studies estimate government entities spend
  0.50 - 1.50 to issue physical checks
• No check production, delivery, reconciliation, or
  storage fees
• No check fraud or lost/stolen checks
• Universal eligibility
• More secure distribution of funds
• Card issuer assumes liability for card-based
  fraud
• Follows the same process and timing as direct
  deposit via the ACH network
• Enhanced recipient satisfaction
• Perception as governmental market leader
• Card issuer (bank) assumes escheatment liability
  of funds

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Benefits to Recipients / Cardholders

• The prestige of a branded card
• A lower cost alternative to check cashing
  facilities
• No stigma attached to cashing assistance checks
• 100 fraud protection for both the State and
  cardholders
• Monthly statements to track spending (both paper
  on-line)
• Pay bills online or over the phone
• Make Internet and catalog purchases
• Budgeting and/or savings mechanism

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Marketing and Communications

• Two distinct marketing strategies
• Optional direct deposit (into checking/savings
  account or prepaid debit card)
• Response rates better if solicitation pieces
  speak to direct deposit into either a traditional
  account or a card as opposed to only a card
• Check inserts, direct mail, etc.
• On-going communications with recipients of paper
  checks (semi-annually)
• Mandatory direct deposit (into checking/savings
  account or prepaid debit card)
• Recommend at least three mailings prior to card
  issuance
• Mailing 1 - Program introduction, direct
  deposit/card enrollment form
• Mailing 2 - Last Chance, must select either
  traditional direct deposit or card
• Mailing 3 - Your card is on the way / do not
  discard message

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Program Pricing

• Agency costs
• Typically limited to ACH-origination fees
• Cardholder fees - Can be a completely cost free
  program to cardholders
• No card issuance or monthly account fees
• Behavior that may result in cardholders being
  charged fees
• Excessive use of ATMs or bank tellers
• Excessive use of live customer service
  representatives
• Expedited card replacement
• Overdrafts

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Recommendations / Findings

• Card Issuance / Implementation
• Issue cards in smaller batches (especially for
  mandatory direct deposit programs)
• Customer service implications for both state
  agency and card issuer
• State agency must update database prior to card
  issuance to insure names and addresses are
  correct
• Voluntary direct deposit program
• Moderate customer service liability for both
  agency and card issuer -- the recipient applied
  for the card
• Recipients rely on cash withdrawals early in the
  program, then migrate to POS as comfort level
  increases
• Mandatory direct deposit program
• More substantial customer service liability for
  both agency and card issuer -- some recipients
  may have limited experience with banks or bank
  card products
• Notifying cardholders with a notice in the form
  of a check significantly reduces the need to
  reissue cards to people who were not expecting
  them (and may have simply thrown them away)

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Recommendations/Findings

• Need to remain vigilant to prevent data loss
  leading to identity theft
• Prepaid Debit Cards Can be an Integral Part of
  Disaster Preparedness Programs
• Trend in states toward mandating all electronic
  payment
• Programs should not shift cost from agencies to
  payment recipients

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Lessons Learned
State agencies will realize cost reductions
Cardholders prefer the safety and convenience of
payment cards
Cardholders are successful at using and
maintaining their accounts
Branded card approach provides wide acceptance
Government agencies realize multiple advantages