As millions turn to prepaid cards to help them manage their finances the American government has all but moved to remove cash for certain payouts. March 1, 2013, marked “the end of cash” for the U.S. government. Starting on that date federal payments such as Social Security, Supplemental Security Income, also known as SSI, veterans’ benefits, and retirement benefits for federal employees were, for the most part, no longer available in cheque form, and instead were only made available electronically.
In practical terms, this means that recipients of federal payments have two options: They can elect to receive their payments by direct deposit to a bank account of their choice, or they can use a government-issued prepaid card called the Direct Express Card. This is an easy decision for the vast majority of Americans, given the fact that they have had bank accounts their entire lives and just need to set up direct deposit. But for the millions of adults in America who do not have bank accounts, including seniors and the poor, this is a much tougher choice. These individuals can open an account at a bank or credit union, or they can go with the Direct Express Card. Consumers also have the option of switching to another prepaid card if it meets certain requirements. Without bank accounts, the unbanked have traditionally relied on cash-based financial services such as check cashers, money orders, and in-person bill payment to handle their transaction needs; expensive options that often carry a premium.
The usage of prepaid cards has grown significantly among the unbanked. In 2009 only 12 percent of unbanked consumers used prepaid cards; by 2011 18 percent did. And among the previously banked—those who once had a traditional bank account but no longer do—usage increased from 19 percent in 2009 to 27 percent in 2011. This suggests that prepaid debit cards are being used as substitutes for traditional bank accounts.
There are four types of prepaid cards worth focussing on:
Government-issued prepaid cards
Government-issued prepaid cards have been available for more than a decade both to access in-kind benefits. In the United States forty-one states currently use these cards to distribute unemployment benefits. In 2012, six states used prepaid cards to distribute tax refunds. These cards offer more protection from theft and loss making them more appealing.
Prepaid payroll cards
A growing number of employers issue prepaid cards—known as payroll cards—to workers who choose not to enroll in direct-deposit programs. One such employer is WalMart, which in 2009 began issuing payroll cards to its employees. Similar to government prepaid cards, payroll cards have regulations that are more comparable to bank accounts.
General-purpose reloadable prepaid cards
Our favourite type of prepaid cards, these cards are issued both by traditional brick-and-mortar banks and by other prepaid-card distributors. These types of cards have been marketed as a way to properly manage spending and, in some cases, as a bank account substitute.
Another favourite, these cards that can only be used in one store or a set of related stores are considered gift cards, not general-purpose reloadable cards. These cards can also often be used at a specific mall in any of the stores in the center. According to the Consumer Protection Act these cards need to have their balances stored for three years meaning you’ve got a high level of protection.
As we can see, prepaid cards are very much the future of payments for companies. With the move by the American government to no longer use cash or cheque’s it’s only a matter of time until governments around the world start following this lead. It’s an exciting time for prepaid!