Although prepaid debit cards are a heavily used tool to distribute funds for unemployment benefits and child support, the need for speed and flexibility that emerged during COVID-19 highlighted their value and versatility for delivering other kinds of funds to citizens, especially the unbanked.
“The pandemic brought about a renewed sense of urgency around payments and how it’s important to have ways to get payments in the hands of your constituents quickly,” says James Homer, vice president of national sales & relationship management at U.S. Bank. “When CARES Act money was disbursed to different cities and counties, they needed a mechanism to get it out to the people that needed it, and prepaid cards are more attractive than paper checks.”
Government banking leaders face a variety of challenges when distributing funds to citizens, including:
Direct deposit solves those concerns when the citizen’s bank information is available, but what about unbanked constituents? Prepaid cards fill that gap, allowing fast, efficient distribution along with easier, less costly access to the money. When distributing funds to the unbanked, that’s no small consideration. Funds loaded on a prepaid card can be spent virtually anywhere with no cost to the consumer.
“There's a whole population of people that don't have access to traditional banking services. They're heavily dependent on cash and they're heavily dependent on check cashing agencies,” Homer explains. “For the under and unbanked, it’s quite common to have to pay check cashing fees. You may have to take public transportation just to get there, so when there’s a stay-at-home order and you can't get on the bus or the check cashing is now closed, now what do you do?”
Most states have leveraged prepaid cards for distributing unemployment benefits and child support for years. The benefits of these electronic disbursements are obvious compared to the old days, when states needed to process paper checks.
“They had to pay to have the check printed. They had to pay to have the check mailed. It took three to five days for it to get there. And what if the check was lost or stolen? Lots of things can happen. And if they go uncashed, that’s a nightmare for reconciliation,” Homer says.
When direct deposit became available in the 1970s and ‘80s, that eliminated the need to physically produce a paper check and mail it, which created large cost savings. But when somebody doesn’t have a bank account, direct deposit wasn’t an option, until prepaid cards became available.
“We have U.S. Bank mail them this card and then we just direct deposit onto that card,” Homer explains. “In fact, in some states the only way to get paid unemployment benefits and child support payments is through direct deposit or a card. They don’t do any checks, which saves the state and the taxpayers a lot of money and a lot of efficiency gains, as well.”
From the citizen’s standpoint, they receive a card in the mail that can be loaded (and sometimes reloaded) electronically. The prepaid cards operate on the Visa or MasterCard systems, they are accepted for payment at most retailers, and the consumer can access cash for free at in-network ATMs (incurring out-of-network fees at non-network machines). From a functional standpoint, that means no check cashing fees for the unbanked, and no overdraft fees, either.
The reloadable cards have an account and routing number, so loading them is similar to making an ACH direct deposits. There are many different features available on prepaid cards, allowing state and local governments to match the right features to the right situation.
For example, some can be reloaded and used for recurring payments like payroll, unemployment, child support, pensions, foster care, workers compensation and more. Some cards are ideal for programs that target a specific need such as food stipends or lodging payment assistance. And single-load “reward” cards are best for one-time payout of awards/recognition, incentives, and relief payments
Many cards also come with phone support, websites and apps to check balances and even get text notifications for deposit alerts. In fact, the card user can add additional deposits to some of the cards, allowing them to use the card like a de facto checking account.
Even before the COVID crisis, some state and local governments expanded their use of prepaid cards beyond unemployment and child support, but the unique challenges of shutdown and pandemic highlighted some of the benefits of prepaid cards.
A large city in the Pacific Northwest used prepaid cards to distribute CARES Act relief to citizens. They mailed reloadable cards to identified eligible constituents and enrolled them with U.S. Bank to distribute funds. Because the payments included housing assistance, they chose a card that includes a bill pay feature.
“A lot of landlords don’t accept credit cards, so this card allowed those individuals to use them to pay rent,” Homer says. “They can also use those cards to access cash without fees at our bank tellers and in-network ATMs.”
Other cities used single-load rewards cards for one-time relief payments. They don’t have cash access, but the cards can be distributed quickly and used to purchase clothes, groceries, prescriptions and other essential items.
That’s actually the fastest way to distribute one-time payments via a prepaid card, according to Homer. “There’s really no implementation time. They just order and fund the cards,” he explains. “There is a small per card fee to the agency, so there is some expense for the convenience.”
The District of Columbia increased its use of prepaid cards during the COVID crisis. Many District employees already received payroll via prepaid card, but when the shutdown began, they used cards to replace their remaining paper paychecks.
“People couldn't come in and pick up their checks as they normally would,” Homer says. “So, they quickly went to a mandate and leaned on us heavily to expedite these cards to the employees that needed their pay but weren't permitted to physically come in to any of the District offices to pick up checks.”
A large teacher retirement system on the west coast also leveraged prepaid cards at the start of the pandemic because of difficulties mailing pension payments to foreign recipients.
“The international mail was blocked, but we partnered with the client to get the cards in the hands of their foreign recipients so they could receive direct deposit of their pension pay,” Homer explains. “Retirees often prefer paper checks, but if you can’t mail payments to foreign countries, they quickly realized this is an excellent solution for receiving their payments.”
Even before the pandemic, prepaid cards were becoming an option for the replacement checks for workers compensation payments. “Once the state reviews the claim and makes the decision and determination, they had been sending checks,” Homer says. “Prepaid cards are actually more efficient for administration, and we’ve already discussed how they’re much better for unbanked recipients."
Housing authorities are making a growing use of the flexibility of reloadable cards for distributing subsidies – especially assistance with subsidized housing expenses. For instance, rather than paying utility bills directly or issuing reimbursement checks that could potentially be lost or stolen, they use reloadable cards to issue the reimbursements.
“Every time they get a utility reimbursement, it's put onto their reloadable card,” Homer says. “They can pay bills with it. They can go get cash off it. They can go buy groceries with it, whenever they want. It’s really a great program.”
With the increased interest in contactless payments in a post-COVID society, the demand for prepaid cards will almost certainly expand. Some of the prepaid cards are already accessible for mobile wallets and tap payments, with more enhancements and innovations on the horizon.
“Digital payment is more and more common,” Homer notes. “We’re entering a real-time-payment world, but not everybody has a bank account and/or a smartphone. It’s important to make sure we have ways to disburse funds that benefit those individuals.”