Treasury to Phase Out Paper Checks
Debit is the Rising Star
Moving to electronic payments will save Social Security $1 billion over the next 10 years. No wonder the US Department of the Treasury is phasing out paper checks for recipients of federal benefits and non-tax payments. Anyone that applies for federal benefits on or after May 1, 2011 must choose an electronic payment option.
If direct deposit into a bank or credit union account is not a viable option for some recipients, an alternative is having their funds deposited electronically into a Direct Express Debit MasterCard card account. Treasury called the prepaid card, provided by Comerica Bank, Treasury’s financial agent, “a safe and convenient” alternative to paper checks for benefit payments.
In a more recent move by the federal government, Treasury has launched a pilot program of prepaid debit and payroll cards for tax refunds, which will be offered by mail to 600,000 low- and moderate-income individuals nationwide. Letters will invite these taxpayers to consider activating a MyAccountCard Visa Prepaid Debit Card in time to have their 2010 federal tax refund direct deposited to the card.
More than 1.5 million beneficiaries already signed up for the Direct Express card since its introduction in 2008. Of these cardholders, 94 percent say they are satisfied with the card, according to a 2010 Go Direct campaign survey.
Cardholders can make purchases, pay bills, and have access to free cash withdrawals with each deposit to the Direct Express card account, immediately available on payment day. No bank account or credit check is required and the card accounts are FDIC-insured up to the maximum amount allowed by law. There are no sign-up fees, monthly fees, or overdraft charges.
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Debit Rising on the Payment Spectrum
While these moves by the federal government do not constitute an official endorsement of a particular debit product, it seems fair to say that Treasury is strongly encouraging a debit option. What will the impact be on the migration from cash and checks to debit? Who will be most impacted and who will lead the way to further growth?
“The biggest challenge for debit cards has been getting consumers to embrace them,” said Fedor Smith, ATLANTIC-ACM. “This shift by the federal government could mean considerable growth for debit cards.”
Dan O’Malley, CEO of PerkStreet Financial, thinks that people have become more comfortable with using debit. “Government adoption usually comes toward the end of a wave, so the phase-out of paper checks is a sign that the switch is almost completed,” said O’Malley. “Debit is just as secure and consumers can avoid the true cost of credit cards.”
Since the economy has been in reverse, with debt mounting, a substantial number of Americans have put their credit cards aside. An analysis by Transunion estimates that more than eight million consumers stopped using bank-issued general purpose credit cards over the past year.
“There is undoubtedly a seismic shift in transaction preference for the US consumer from credit cards to debit cards over the last several years, which seems to be accelerating,” said Bill Hazelton, founder and managing director of Credit Card Assist.
One of the issues with prepaid debit cards has been how to insure that funds are loaded on the card in an easy, recurring, cost effective manner. “The Treasury program addresses that issue for a segment of the target population. It is a positive step for the industry,” noted Richard Bialek, Bialek Group.
Impact on Check Cashers
The elimination of paper checks from the federal government may impact check cashers the most.
“The Treasury’s decision to eliminate paper checks may change the entire process of personal financial management for the unbanked cash-based sector,” said Greg Waltz, vice president and general manager of payment products at Money Gram. “It will really be fascinating to see how far the traditional cash-based consumer will go with it.”
New cardholders may be reluctant to give up going to the check cashing store, which has been their neighborhood financial center.
“The unbanked and some of the older demographic are being forced into an electronic world but it remains to be seen whether or not they will use the full array of electronic options that the banked demographic is used to,” Waltz said. “They may use the ATM to obtain their funds from the debit card and then go right back to the check casher on the corner to buy money orders to pay utility bills. Or they may become accustomed to the electronic channel through which they can pay their bills.”
“We think check cashing stores may bear the brunt of the revenue loss. Payment networks – including the STAR Network – will be positively impacted, because the holders of benefit cards will be able to use them at the point of sale,” said Jeff Johnson, senior vice president and division manager of prepaid solutions, First Data.
Government Move May Push Corporate
What about the corporate world? Will more Fortune 500 companies start to mimic the Treasury and institute payroll card programs?
T. Jack Williams, Paymentcard Services, thinks that with fraud involving payroll checks on the rise, the natural alternative is the payroll card. “Not only is a payroll card less costly to the employer, it offers more utility to the employee,” said Williams. “As bill pay, international remittances and mobile commerce tied to the payroll card, prepaid debit will become a more mainstream payment methodology.”
Providers of payroll card programs may be forced to develop a full array of banking type services to win business in the future. “The days of a debit card being just a prepaid debit card with ATM and point of sale access are pretty much over,” noted Williams.
“Distributing funds in this way helps organizations reduce the costs – as well as administration, reconciliation and escheatment issues – associated with funds disbursement,” said Johnson at First Data. “Employers will be more likely to adopt a payroll card when they see the US government do the same thing.”
Adding Innovation to Grow Debit
Third-party research suggests that consumers with lower FICO scores use debit more often, but debit use among consumers with higher scores is growing more rapidly, according to a report from MasterCard in Payments.com.
Debit’s appeal is growing across the spectrum, according to the report. MasterCard analysis indicates that most growth in debit is coming at the expense of cash and checks.
As the government encourages prepaid cards for federal benefits and tax refunds, experts foresee growth in the sector for its utility, safety, and convenience. One area of growth is likely to be corporate expense reimbursement.
Williams says that rather than cut a paper check for per-diem or expenses, more and more companies will pay employees with a payroll card, which allows for movement of funds from a prepaid account to a DDA bank account.
“In order to maintain momentum in the marketplace, debit card issuers will need to continue to innovate in such areas as security and mobile payment system technology to keep pace in a category that will see increasingly intense completion for consumers,” commented Hazelton. “Credit card issuers will be ramping up the marketing pressure on debit card completion to counteract this shift in sentiment.”
Bruce McCleary at ClearPoint Credit Counseling Solutions said, “As more people are on the outside of the traditional mainstream banking system, it will likely be more commonplace to have payroll checks and benefits processed to debit cards.”
Most of the innovation, right now, seems to be coming from traditional card providers. For example, Chase rolled out its own debit card rewards program last year.
“Such programs for debit were conspicuously absent from debit card offerings in the past, so this type of offering from a major card issuer was seen as a big step forward for the debit card business,” remarked Hazelton. “Card issuers are leading the charge with card functionality innovations, but debit card providers should be able to quickly follow and replicate any of this new functionality.”
As for small business finance, PerkStreet is excited about the use of debit, calling it a powerful tool for helping small business stay on top of spending and cash flow. “We see it happening already in the market,” said O’Malley. “Consumers have benefited and it can also be a big benefit to small business. The sector is ripe with opportunities for debit payment.”
“Debit cards are the shiny new toy in the industry for consumers and credit card issuers are scrambling to avoid getting run over by the change in consumer transaction sentiment,” added Hazelton. •