The debit card market is about to get a quantum leap in users, courtesy of the U.S. government. The U.S. Department of the Treasury's Financial Management Service (FMS) has announced that millions of unbanked Americans receiving Social Security will soon be offered a prepaid debit card for benefit payments. Treasury has selected Comerica Bank, based in Dallas, to provide the "Direct Express" card, which will start rolling out in early 2008.The program first targets the 4 million unbanked recipients of Social Security payments, but the program will be offered across the board as well. Up to $44 million in administration costs could be eliminated by the debit card program for the unbanked alone. The Direct Express card is part of an ongoing federal effort, called Go Direct, to get recipients to go paperless.

Details of Program

Treasury estimated that there are four million Social Security and Supplemental Security Income (SSI) check recipients who are unbanked. Because they have to wait for paper checks to arrive, there is a risk of delay due to weather, national or local emergencies. Checks can also be lost or stolen. The news release said that nine times out of 10, problems with Social Security payments are associated with paper checks, not direct deposit. The accounts are FDIC-insured, and subject to federal consumer protection regulations (Regulation E). Direct Express offers one free ATM withdrawal per month, but if you don't use it, it carries over to the next month. Cash withdrawals from any teller in a bank are free. Subsequent cash withdrawals within a calendar month are 90 cents each. If the withdrawals are not at a surcharge free bank, there could be an ATM charge. Direct Express is a PIN based account, so it cannot go negative, and merchant fees for accepting the card are less than credit card signature accounts.

Other details:

• No monthly account maintenance fee.
• $3 ATM fee for withdrawal outside the U.S.
• Bill payments, including utilities and telephone bills are free.
• ATM balance inquiry free.
• No inactivity fee.
• No overdraft fees.

Program Acceptance

Treasury said it did not have an estimate of the take rate among the 4 million unbanked Social Security payees. New Social Security recipients will also be given the opportunity to receive the debit card at sign up. There are almost 51 million Social Security recipients in the U.S. Eight million receive checks. Currently, 84.3%, or 43 million, Social Security recipients get Social Security money via EFT. Treasury officials don't have an estimate of how many would opt for the debit card, but even a small take rate would represent millions of debit cards. Alvina McHale, a spokesperson for Financial Management Service of the U.S. Department of the Treasury said that recipients learned fast. For example, the Illinois pilot program had a charge of $2.50 for a second cash withdrawal in a calendar month, but there were no complaints about the charge."They get so smart so fast at the best way to use and manage the card," said McHale, "and keep the costs really low or, hopefully, no cost at all." She said Comerica has pulled together a network of 56,000 surcharge free ATMs out of the approximately 400,000 total ATMs in the country. The number of surcharge free ATMs is already growing rapidly, according to McHale. The cards and a public education program will allow users to determine which ATMs are free. You get one replacement card a year free. It can only be charged with Social Security payments. There is no commingling of funds. Free networks:

1. Comerica Bank
2. 7-11 Corporate Store ATMs
3. Alliance One
4. Charter One Bank
5. Citizens Bank
6. MasterCard ATM Alliance
7. MoneyPass Network
8. PNC Bank
9. Shazam Networks

Comerica was in negotiation with other networks to expand the network at press time.

Comerica Was a Surprise

The program announcement was no surprise, since the Treasury has been receiving proposals after it issued an RFP last year, but the selection of Comerica as the card provider caught some offguard.Tim Sloane, Director, Debit Advisory Service at Mercator Advisory Group, was surprised by the choice of Comerica, because JPMorgan Chase had the first pilot debit card program for federal government payments. In 2006, JPMorgan Chase rolled out a multi-city test for distributing Earned Income Tax Credit (EITC) payments via a prepaid debit card. JPMorgan seemed the natural choice. "U.S. Bank and JPMorgan Chase tend to be the two leaders in going after government bids for debit cards," said Sloane. "So, there was a presumption that those would be the two that would have the best opportunity, with JPMorgan Chase having the edge, because of the pilot." The announcement said that Comerica Bank was selected, in part, because of its experience as a prepaid card issuer for millions of benefit recipients, particularly for state government programs.

Prepaid Industry Will Also Benefit

The program contributes to the growing mainstream use and acceptance of prepaid cards by enabling a new, large segment of older consumers to become comfortable with their regular use and convenience for ongoing purchases.Industry consultant Lori Breitzke, of E&S Consulting in Atlanta, said, "This prepaid card program will have a positive impact on the industry, as the benefit it affords large government entities is proven with the Comerica implementation. This should be further proof to other employers to move to prepaid cards as a way to pay their employees. Prepaid cards provide a safe, secure and immediate way to pay unbanked employees."Sloane said that the initiation of debit cards in Social Security payments caused him to raise his 2008 debit card forecast by a small amount in 2008, but a major bump up in 2009 and 2010. The Treasury Department announcement said that the Direct Express card would be introduced in spring 2008, and phased into national distribution by the end of the summer. But Sloane was skeptical about the rollout. "A program of this scale and complexity cannot be expected to ramp up in just a few months," he said. "Just the communications to that audience is going to take some time." He said that consumers do not usually jump on an offer like this at the first opportunity. Sloane feels that is because this is a totally new concept and many of the unbanked recipients may not even know what a prepaid debit card is. "It's not the sweet spot of the existing market for prepaid products," he added. He sees several steps in the education process, to sell the benefits to payees, and it will take more than just a few months to ramp up.