A First Data White Paper
March 2010
Using Payment Cards to
Achieve Lower Cost and More
Secure Government Funds
Disbursement
Issuing checks for government payments is an
expensive way to disburse funds. Not only are
checks costly to print and mail, but their use also
has negative environmental impacts, they are
frequently stolen or fraudulently modified, and
they can impose unnecessary expenses on some
recipients. But there is a better way, and it is
already in use in many programs.
By
First Data Government and Education Task Force
© 2010 First Data Corporation. All trademarks, service marks and trade names referenced in this material are the property of their respective owners.
Using Payment Cards for Lower Cost, More Secure
Government Funds Disbursement
A First Data White Paper
Introduction: The Value of Moving to Paperless
Funds Disbursements
Federal, state and local government agencies across the United States print and
distribute an enormous number of paper checks each week. While businesses
and financial services companies are rapidly embracing a paperless payment
environment with electronic funds transfers and paycards, government entities
continue to issue billions of paper checks every year for employee payroll,
entitlement programs, Social Security, tax refunds, grant disbursements and
many other purposes.
There are significant costs associated with producing and distributing paper checks, including:
JJ Physical Printing and Handling: Printing and handling checks is expensive—especially compared to alternative
disbursement methods. According to research firm Mercator Advisory Group, it costs the United States
Treasury 98 cents to issue a paper check (including materials, labor and postage), but only 10 cents to
distribute those same funds electronically.1 State and local government agencies, which don’t enjoy the
economies of scale possessed by the federal government, often spend even more to print and mail paper checks.
JJ Fraud, theft and other problems:
Check fraud is pervasive, and
government checks are often the target
of theft. According to the United States
Department of the Treasury, at least
480,000 Social Security checks were
reported lost or stolen in 2008, and $64
million in Treasury-issued checks were
fraudulently endorsed.2 Furthermore,
although paper checks comprise only
20 percent of the total number of
Social Security disbursements, they
account for 90 percent of reported
problems3. Each year, the Treasury
incurs tremendous unnecessary costs
processing the 1.4 million inquiries
it receives pertaining to misplaced,
damaged, stolen, misdirected and
missing Social Security checks.4
What Are Open Loop and Closed Loop Prepaid Cards?
There are two basic types of prepaid cards: open loop and
closed loop.
Open loop prepaid cards work like standard debit cards.
They can be utilized at any retailer that accepts credit/
debit cards, and they can be used for receiving direct
deposits or making withdrawals at ATM machines—all
without the need for the cardholder to even have a bank
account.
Closed loop prepaid cards are restricted for use with
specific merchants or purchases. Merchant gift cards,
prepaid telephone cards and transit fare cards are all
examples of closed loop cards.
JJ Environmental Impacts: Paper checks have a considerable environmental impact that goes beyond even
the substantial natural resources consumed in producing the paper and printing the checks. Nearly all
paper checks are distributed through the U.S. Postal Service or other carriers that rely on trucks and
airplanes for transportation. According to the Electronic Payments Association, producing and delivering
paper checks uses over 674 million gallons of fuel each year, and burning that fuel produces more than
3.6 million tons of greenhouse gases annually.5 Issuing physical checks also creates a sizable amount of
paper waste comprising not only the check itself, but also the mailing envelope, accompanying inserts and
related deposit slips and receipts.
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Using Payment Cards for Lower Cost, More Secure
Government Funds Disbursement
A First Data White Paper
It is not surprising that there is a serious movement among government agencies to move away from paper
checks to various methods of electronic funds transfer.
One of the fastest growing forms of electronic funds disbursement is through “open loop” prepaid payment
cards—also known as network-branded prepaid cards or general purpose prepaid cards—which work much
like conventional debit cards (see callout box on previous page). The total dollar amount of funds disbursed by
federal, state and local governments through open loop prepaid cards more than doubled in 2008, increasing
from $4.9 billion to $10.5 billion.6
This type of disbursement instrument enables recipients of government funds to access their money wherever
credit and debit cards are accepted, without the need for a bank account—an important advantage over
electronic direct deposits, which require recipients to have a banking relationship. For government funds
recipients, using prepaid cards is more convenient than cashing paper checks, less costly than visiting a
check-cashing facility and safer than carrying cash. Recipients can also generally count on receiving their
electronic funds sooner than paper checks. Additionally, prepaid cards can potentially provide insight into
how disbursed funds are used.
The advantages of electronic disbursements are clear:
JJ Eliminate the costs associated with printing and distributing checks
JJ Impose fewer costs on recipients
JJ Provide improved safety and security
This paper explains how open loop prepaid payment cards work and examines the benefits of payment cards
for both government entities and funds recipients. It also considers the various ways in which governments at
all levels are already using them to disburse funds more cost-effectively.
How Reloadable Open Loop
Payment Cards Work
Although some types of payment cards are issued to
recipients with a fixed amount of funds loaded onto them
(thus intended for one-time disbursements), reloadable
payment cards hold the most promise for cost-effectively
disbursing government funds because they function much
like conventional deposit accounts—allowing for funds to
be disbursed to them over and over again.
Government Agency
Government
Agency
Qualifies
Recipients of
Funds
Government
Agency Deposits
Program Funds
Bank Issues
Payment Cards
and Manages
Accounts
Recipients of Funds
The funding process behind a reloadable payment card is
simple. A government agency sets up a single Master Account with a bank that agrees to service the program
responsible for disbursing funds. When the agency qualifies a new recipient for funds disbursement, the bank
is notified and subsequently:
1. Sets up a “Stored Value Sub-Account” (associated with the Master Account) on behalf of the new
recipient.
2. Issues a payment card to the new recipient based on personal information provided by the agency.
This payment card is connected to the Stored Value Sub-Account established in the individual’s
name (the individual does not need his or her own bank account).
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Using Payment Cards for Lower Cost, More Secure
Government Funds Disbursement
A First Data White Paper
When the agency authorizes the payment of funds to a recipient, it deposits money into that individual’s
Stored-Value Sub-Account by transferring it from the Master Account. Typically, once funds have been
deposited to the Stored-Value Sub-Account, the government agency no longer has access to the money; it
has effectively been transferred to the recipient. Subsequent use of the payment card at merchants, ATMs,
Web sites and other locations debits the recipient’s Stored-Value Sub-Account.
With this model, the government agency can set up electronic disbursement for any qualified recipient of
program funds, even if the individual does not have a bank account or does not agree to direct deposit.
Clear Benefits for Both Program Administrators and
Recipients of Government Funds
Both government programs and their funds recipients appreciate the advantages of funds disbursed through
payment cards instead of paper checks.
For program administrators, payment card solutions offer significant cost saving, better security and improved
money management. For funds recipients, payment cards have proven to be a cheaper, safer and more
convenient way to receive money.
Payment Card Advantages for Government Agencies
The principal advantages for government to use payment cards for funds disbursement include:
JJ Lower Cost Funds Transfer – As previously discussed, electronic funds disbursement through payment
cards is less expensive than printing and mailing checks. Although there is an initial cost associated with
manufacturing and distributing payment cards, subsequent disbursements are in the form of electronic
funds transfers to the card accounts. This method helps reduce costs in other ways as well, including the
elimination of lost and misdirected checks, which are very expensive to void and reissue (approximately $9
per check).7
Payment card funds disbursement also eliminates the handling of undeliverable checks, and it enables
much simpler, more efficient processes for account reconciliation. Cost saving can be especially dramatic
for programs that make recurring payments, such as Social Security, unemployment, payroll and other
regular payment programs.
JJ Improved Money Management – When a state government agency mails a check, the funds covering
that check must be on hand before the check is mailed—even if the check is mailed in advance of the
disbursement due date. When a check is sent out, it may be in the mail for several days before the recipient
receives it, and it might be another several days or even weeks before it is cashed. During all that time,
funds needed to cover the check must be in the government account. When the check is cashed, all those
funds move out of the government account at once.
With payment card funds disbursement, actual funds transfer does not occur until the day the
disbursement is due, so there is no need to tie up funds for the period of time a check would be in the
mail. Also, payment card balances tend to deplete gradually as individuals spend them down, rather
than all at once. Depending on terms of the government’s banking relationship, these funding and cash
flow characteristics may give government financial managers more flexibility and control in the way they
manage program account balances.
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Using Payment Cards for Lower Cost, More Secure
Government Funds Disbursement
A First Data White Paper
JJ Acceptance by Funds Recipients – Prepaid cards of all types are popular among American consumers: in
2008, nearly $248 billion was loaded onto open and closed loop cards. The usage of open loop prepaid
cards—for everything from payroll to gifts and savings—is growing rapidly, with total funds loaded
increasing by 49 percent in 2008, to over $60 billion.8
According to research conducted by the Federal Deposit Insurance Corporation (FDIC), open loop prepaid
cards are increasingly being used as alternatives to traditional deposit accounts by the 26 percent of
American households who are either unbanked (with no formal banking relationship) or underbanked (with
limited banking relationships).9
JJ Better Security – Electronically distributing funds to payment cards is safer than mailing paper checks.
Payment cards are less likely to be stolen or lost, and if they are, it is more difficult for someone to
use them, especially if a personal identification number (PIN) is required to complete the transaction.
Furthermore, a lost or stolen payment card can be deactivated as soon as it is reported missing. Programs
using payment cards for funds disbursement are able to allocate fewer resources to reconciling and
reissuing missing and stolen checks, and the incidence of fraud is greatly reduced.
JJ Enhanced Tracking of Disbursed Funds – With payment card-based disbursements, program administrators
have access to reporting and controls that are not available when funds are sent out as paper checks.
For instance, by tracking aggregate payment card purchases and using data analytics to investigate
buying patterns, it becomes possible to observe spending patterns by product categories and recipient
demographics. In this way, program administrators can learn more about where their disbursements
go, helping them improve the effectiveness of various initiatives. It can also enhance the government’s
ability to analyze spending in order to determine if disaster relief payments or a federal stimulus program
produced the desired economic effects.
Furthermore, for some kinds of programs, administrators may want to restrict what recipients purchase
with disbursement funds. For instance, some general aid or food assistance programs do not allow the
purchase of alcohol and tobacco. Payment cards can be set up with restricted product codes (e.g., SKUs),
preventing funds recipients from using the cards to buy
prohibited items.
Payment Card Advantages for Recipients of
Government Funds
How Many People Have Limited
or No Bank Accounts?
There are several reasons why a growing number of people who
receive government funds prefer payment cards over paper
checks. These include:
JJ Improved Convenience – When a funds recipient receives a
check, he or she must go to a bank or check-cashing facility
to cash or deposit it. For regular recipients of government
payroll or benefits checks, this can be a time-consuming
activity: the Electronic Payments Association estimates
that paper-check recipients spend an average of 24 hours
annually depositing or cashing checks.10 With a reloadable
payment card, the money simply accrues to the card account
and is immediately available to the recipient for making
purchases, transfers or ATM withdrawals.
54.5M – 25%
111M – 51%
51.1M – 24%
Banked
Unbanked
Underbanked
JJ Lower Costs – For funds recipients who have no bank
account (nearly 8 percent of all U.S. households, comprising
17 million adults)cashing a government check is not only
inconvenient, but expensive.11 A recent economic study
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Using Payment Cards for Lower Cost, More Secure
Government Funds Disbursement
A First Data White Paper
conducted by financial consultancy Bretton Woods Inc. found that consumers relying on check-cashing
facilities incur fees of up to 3 percent per transaction, totaling an average of $312.60 per household annually.12
This figure represents a significant expense to low-income families, which make up approximately 71 percent
of unbanked households.13 In comparison, there is little or no cost to recipients receiving government
disbursements through an open loop prepaid card, depending on the terms of the program.
JJ Faster Funds Availability – Because payment card funds recipients don’t have to wait for a check to arrive
in the mail (and then find time to cash or deposit it), they often have access to their money more quickly.
And unlike paper-check recipients, payment card users enjoy uninterrupted access to their recurring fund
disbursements, even if they are traveling or displaced from their mailing addresses.
JJ Access to Services Enjoyed by People With Credit and Debit Cards – Consumers without deposit accounts
or with limited formal banking relationships are often unable to rent cars, reserve hotel rooms or even
make online purchases. Prepaid payment cards, which work just like debit cards, enable unbanked and
underbanked funds recipients to conduct these activities like everyone else.
Additionally, with prepaid payment cards, consumers can check card balances and access transaction
records through online and phone-based tools, much like they can with conventional bank accounts. If
desired, funds on the disbursement card can be kept separate from other accounts and earmarked for
special purchases or savings.
JJ Improved Safety and Security – Many funds recipients—especially those without deposit accounts—cash
their checks and carry the currency with them, making them attractive targets for criminals. With a
payment card, the need to carry large amounts of cash (or to store it at home) is reduced or eliminated.
If the card does happen to be stolen or lost, the funds can be frozen and a new card issued.
Where Are Prepaid Payment Cards Currently Being Used
in Public Sector Programs?
A sizable number of federal, state and local government agencies have already begun successfully using
payment cards to distribute funds. Examples of current payment card usage include:
JJ
JJ
JJ
JJ
JJ
JJ
JJ
JJ
JJ
Social Security
Food stamps/electronic benefits transfer (EBT)
Employee payroll
Temporary Assistance for Needy Families (TANF)
Correctional facilities
Court-ordered payments
Transit authorities
State unemployment
Military personnel
Some of these programs use closed loop cards (which can be used only in certain establishments) while others
use open loop cards (with funds recipients can use anywhere, like a debit or credit card). Some programs
use reloadable cards that allow agencies to make periodic payments to recipients by simply electronically
transferring funds to individuals’ card accounts. Other programs use non-reloadable cards that function
more like prepaid gift cards. Given the great variety of programs that successfully employ payment cards for
government funds disbursement, it is illustrative to discuss a few examples:
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Using Payment Cards for Lower Cost, More Secure
Government Funds Disbursement
A First Data White Paper
Social Security
In early 2007, the United States Social Security Agency, which sent out millions of checks every month, decided
to launch a pilot program using reloadable open loop payment cards.14 As part of the pilot, it sent information
about the program to a limited selection of Social Security recipients along with their regular benefit checks.
More than 3,300 recipients who either had no bank account or had refused direct deposit signed up for the
new Social Security Direct Express card program, and 2,400—nearly 73 percent—of these recipients eventually
activated their cards and began using the payment card service during the pilot.
Because of the success of the pilot program, the Social Security Agency implemented a full-scale rollout in
2008. In that year, approximately 450,000 Social Security recipients registered for the program, and $1.2
billion was electronically disbursed to their payment cards.15 By mid-2009, more than half a million people
had signed up for the program, and nearly $1.5 billion had been loaded onto Direct Express payment cards.16
In the fall of 2009, the Social Security Agency made it mandatory for recipients to select either a direct
electronic deposit to their accounts or the payment card option.
Social Security’s Direct Express reloadable payment cards represent the Treasury’s largest ongoing payment
card program. The switch from paper to plastic sought to cut costs and improve efficiency, and it appears to
be doing just that. It costs the Treasury almost 90 percent less to disburse an automatic deposit or electronic
funds transfer to a card than it does to cut a paper check—and that doesn’t include expenses for check
reconciliation or replacement of lost, stolen or damaged checks.17
While Social Security is clearly one of the largest government programs in the country using this type of
disbursement method, it is not unique in its endeavors or success.
Temporary Assistance to Needy Families
State governments have begun using open loop reloadable prepaid cards to disburse Temporary Assistance
for Needy Families (TANF) funds directly to recipients. TANF disbursements through payment cards are
growing steadily, with the amount distributed increasing by nearly 4 percent in 2008, to $15.6 million—despite
a reduction in overall direct aid.18
Many states view the TANF payment cards as a valuable opportunity to help families become financially selfsufficient, teach them how banking systems work and provide many of the benefits of a conventional banking
relationship. Additionally, the program has been a much more cost-effective way to distribute funds directly
to recipients.
Recipients also appreciate the payment card program because they have quicker access to their funds, and
carrying payment cards is safer than carrying cash. TANF cards typically work like this:
JJ An applicant’s personal information (name, Social Security number, address and telephone number) is sent
to the bank that services the card program. A prepaid card is printed and mailed promptly, so that the
applicant receives the card within five days from the application date. The applicant family also receives
information about how to use the card and any fees associated with its use.
JJ When a household receives authorization for a benefit, those funds are electronically transferred to the
card, a process that takes only about 24 hours from the time of authorization to the funds clearing at the
host bank. Funds are typically transferred at the same time each month.
JJ When a family leaves the TANF program, their card remains active until they spend the disbursed funds
down to zero. No new funds can be added to the card after they leave the program.
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Using Payment Cards for Lower Cost, More Secure
Government Funds Disbursement
A First Data White Paper
Unemployment Benefits
In recent years, more and more states have adopted an open loop reloadable payment card solution for
distributing unemployment benefits. According to Mercator, 21 states currently disburse unemployment this
way, including all the largest states except California.19
In the traditional paper-check model of distributing unemployment benefits, applicants generally submit a
form every two weeks (sometimes this can be done online or through an automated-response telephone
hotline). The form asks if they have received compensation for work and if they are actively looking for a job.
It usually takes 3 to 5 days to process a claim, after which a check is printed and mailed. Funds are typically
disbursed twice each month.
The unemployment benefits application process is similar in a payment card system, except that first-time
applicants receive a payment card and PIN. Funds are transferred to the card almost immediately upon claim
approval, and the recipients can then use their cards to withdraw cash or make purchases, just like with a
credit or debit card. Most states have relationships with one or more ATM networks that allow unemployment
recipients several free monthly transactions at participating ATMs.
Cost saving have been significant for state governments, especially during the current period of high
unemployment. The Pennsylvania Department of Labor & Industry implemented an open loop prepaid card
program for disbursing unemployment benefits in late 2007, subsequently saving the state over $2 million a
year in check processing and mailing costs.20 This program was implemented following the impressive success
of the Department of Public Welfare’s child support benefits payment card, which saved the state $5 million
in postage expenses alone in its first three years.21
Navy Cash Card Program
Several years ago, the U.S. Navy began rolling out the
Navy Cash Card Program, a dual-function payment card
system for disbursing payroll to personnel serving aboard
ships around the world. Each payment card is equipped
with both a magnetic strip and a smart chip. The magnetic
strip allows sailors to perform traditional open loop
payment card functions like withdrawing cash and making
purchases at civilian merchant locations onshore, while the
chip provides access to a closed loop “electronic purse”
for buying items from stores and vending machines aboard
naval vessels. Navy personnel can also use the cards and
affiliated Web site to send money home and even to make
“chip-to-chip” transfers to other sailors.
The flexibility and advanced functionality of these hybrid
cards allow the Navy to operate a virtually cashless
environment on its ships. Before the implementation of the
cash card program aboard the USS Harry S. Truman, supply
officers had to collect, count and redeploy $250,000 in
coins from the ship’s vending machines each month. Now
the vending machines are completely coinless, and the ship
has eliminated its overall currency management expenses
almost entirely—like much of the rest of the Navy’s fleet.22
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How a Government Benefits Card Works
Government
Agencies
Transfer
Program Funds
Federal Reserve
Government Agencies
Government
Agencies
Qualify
Benefits
Recipients
Card Program
Provider
Federal Reserve
Sets Up
Individual
Accounts and
Disburses Funds
Card Program Provider
Issues Government
Benefits Cards
and Processes
Transactions
Benefits Recipients
page 8
Using Payment Cards for Lower Cost, More Secure
Government Funds Disbursement
A First Data White Paper
The Future of Reloadable Payment Cards in Large-Scale
Disbursement Programs
Government entities that have adopted a reloadable payment card strategy for programs such as Social
Security, TANF, unemployment benefits and employee payroll are just beginning to realize the full potential of
this payment mechanism. Prepaid payment cards can lower costs, improve funds distribution and enhance
recipient services for a wide variety of programs and services such as:
JJ
JJ
JJ
JJ
JJ
JJ
JJ
JJ
JJ
Federal and state tax refunds
Stimulus payments
Medicare and flexible spending accounts for health and fitness
Child support
Child care
Food stamps/electronic benefits transfer (EBT)
Education and financial aid grants
Payroll distribution
Transit vouchers
It is important to note, however, that card usages may be subject to various regulatory requirements based
on the type of card and the regulatory framework in which it is to be used.
Summary
The cost of printing, handling and distributing paper checks is far greater than just the materials and labor
required. There are substantial environmental costs and impacts that must be considered. Additionally,
government checks are a frequent target of theft and fraud. Paper checks are also potentially inconvenient
and costly for benefits recipients to convert to cash.
Current payment card programs have proven to be cost-effective and efficient ways to disburse funds. They
are also more secure, and recipients find them safer and more convenient than paper checks. In addition,
disbursements through payment cards impose significantly lower annual expenses on unbanked recipients
by reducing their reliance on check-cashing facilities and other costly alternative financial services. This is
particularly advantageous to need-based government benefits programs, which seek to put as much money
as possible in beneficiaries’ pockets.
Payment cards not only offer a more cost-effective way to distribute funds, but they also open up opportunities
for improved money management, greater flexibility and control of funds usage, and enhanced tracking for
accurate measurement of the effectiveness disbursement programs.
Furthermore, by increasing the scale and breadth of prepaid payment card disbursement programs, there is a
tremendous opportunity to further reduce administrative and other costs of many government programs.
Visit firstdata.com/en_us/products/government/egovernment-benefits-disbursement to learn more about
how electronic disbursement can make it easier and less costly for government agencies to deliver needed
benefits to their constituents.
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Innovations in Payments and Decoupled Debit Reshape
the Power of Merchant Loyalty Programs
A First Data White Paper
Sources:
Mercator Advisory Group, “6th Annual Network Branded Prepaid Market Assessment,”
August 2009.
1
Financial Management Service – U.S. Treasury, press release, June 22, 2009.
2
Ibid.
3
Ibid.
4
5
NACHA and PayItGreen Alliance, “When Getting Paid and Paying Bills – Think Green,” 2008.
Mercator Advisory Group, “6th Annual Network Branded Prepaid Market Assessment,”
August 2009.
6
Boston Globe, “It’s all in the card,” February 4, 2004.
7
Ibid.
8
FDIC, “National Survey of Unbanked and Underbanked Households,” December 2009.
9
Electronic Payments Association via BusinessWeek Marketing Services, “Direct Deposit,”
2009.
10
FDIC, “National Survey of Unbanked and Underbanked Households,” December 2009.
11
Bretton Woods, Inc., “Payment Systems Evolution and Branded Prepaid Card Analysis,”
October 2009.
12
FDIC, “National Survey of Unbanked and Underbanked Households,” December 2009.
13
Mercator Advisory Group, “6th Annual Network Branded Prepaid Market Assessment,”
August 2009.
14
Ibid.
15
Ibid.
16
Ibid.
17
Ibid.
18
Ibid.
19
Philadelphia Business Journal, “PA using unemployment debit cards,” October 16, 2007.
20
Ibid.
21
U.S. Office of the Comptroller of the Currency, “Plastic Goes to Sea,” Fall 2004.
22
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The Global Leader in Electronic Commerce
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