The heart of their argument is that prepaid card-based systems deliver more information to all of the stakeholders than cash does. Both the cardholder and the organisation managing the cards are able to view balance information on past transactions online. Spending can be monitored in real-time online which is important safeguarding benefits. The data coming back from cards on what and where people spend could be shooting valuable in a range of fields, and was certainly help researchers to better understand the “poverty premium” and the limited access to retail financial services mugs low income families.
But most importantly, Amex finally finally finally frames prepaid for what it should be, a checking account replacement, instead of a glorified gift-card.[From Bluebird vs Greendot. Prepaid wins. – Forbes]
I couldn’t agree more. Prepaid cards have moved on a lot in recent years. Technology means that they can be given standing order and direct debit-like layers forming a sort of “bank account lite”. But we need still more functionality. There are a particular set of problems to do with subsidiary, companion and delegated cards which need to be addressed to overcome real problems in services for excluded groups. Quite often temporary fixes are found by adding companion cards (for carers, or dependents for example) but I think more generalised solutions, which would have to be connected in some way with some form of identity infrastructure, are what is really needed.
But back to the report. There’s no need for me to repeat all of the findings, as sure you want to read them for yourself, but I do want to highlight one or two things from the report, which makes some very sensible and reasoned recommendations that I suspect more than one of our clients will be able to respond to with new prepaid products and associated services.
The starting point for the report is that, excluding savings accounts which are not transactional in the sense that you cannot link them to a debit or credit card or pay benefits into them, the number of people without a current or basic account stands at more than 2.5 million in the UK today. (This excludes people who have bank account but for whom prepaid might be a better alternative). Therefore, the report recommends that the government address the problem of the unbanked by adopting fully functional chip and PIN prepaid cards. These cards can then be used for welfare and benefit payments of all kinds, and not only for the unbanked. The report says that the public sector should avoid the temptation to use simpler and less functional alternatives. They note that less functional cards keep the unbanked in a cash-based economy and that maintaining cash-based withdrawal systems using “one-dimensional” cards, the unbanked will not be to make the savings associated with shopping online, or pay bills direct debits, and so have a limited impact encouraging claimants into mainstream financial habits.
The authors say that people who were already using a prepaid card for social care direct payments spoke very positively about them when interviewed and they give a number of detailed case studies of existing schemes that I found very useful. I particularly liked the case of the Utah State card, delivered by JP Morgan Chase, which holds up to five separate pots of money on one card. This “jam jarring” of funds is a critical kind of functionality needed for the systems and not found in current implementations. When I interviewed Claudia for the podcast in our Tomorrow’s Transaction series I didn’t want to be a bore her with nerd interjections about this, but from reading the report I wasn’t sure if the authors were aware that it’s part of the EMV specification to allow multiple payment applications on the same card. The terminals have to implement this functionality there is no reason why a single card couldn’t be issued with say three or four payment applications on board each one storing a different pot of money. Thus, when the benefit recipient presents the card at a point-of-sale (POS) terminal they would be asked to select between different pots. As is discussed later in the report this will make it possible to have some pots restricted by merchant category code (MCC), or by time, or by terminal ID, or by velocity, or by maximum amount or whatever, and have other parts that are unrestricted. As an aside, one of the other learnings from the systems already in place was that councils experienced a high frequency of lost cards and/or lost PINs.
A particularly important thread in the report is the once concerning this issue of monitoring and control of card spending. The authors note that there might be benefits to using prepaid cards to deliver financial services to vulnerable groups and that we should begin a debate on balancing the complexities and ethics of safeguarding spending balanced against “nanny state” interference. (It was interesting to note the focus group participants tended to support the idea of other people having their benefits monitored, but not themselves.) Restrictions in the USA, like in the UK, are currently implemented by some blocking specific MCCs which identify types of shops. Since the card companies have no access to the level III POS data, nor would the retailers want them to, I don’t really see MCC blocking as a viable way forward, and as I’ve written before I’m sure it would have negative consequences as “legitimate goods” were traded away a discount for “illegitimate goods”.
I found some of their ideas about managing and restricting spending pots for rent purposes quite interesting — I would prefer a more radical solution, making it illegal to pay rents in cash at all — but there you go. Incidentally, and I don’t want to touch on politics of UK welfare payments, which are not the subject of this post, but the authors note in passing that when they interviewed people about the new universal credit shift to paying housing benefit to recipients rather than landlords, not a single person interviewed could see the benefit of doing so. Yet one of the reasons why the report is so timely is that the UK is about to undergo this transformation in the way that welfare benefits are paid.
The welfare system in the UK is switching to a new “universal credit” system where all benefits will be unified and paid monthly in arrears.
claimants will receive just one monthly payment, paid into a bank account in the same way as a monthly salary
[From Universal Credit – DWP]
If you’re wondering why our clients care about this, it’s because it represents a money flow of around £2 billion per month that is up for grabs.[From Who wants low-cost bank accounts?]
They authors also recommend that the government create a targeted savings encouragement scheme. Our experiences down in Kenya would seem to support this conclusion. Simple savings products offered to the unbanked have tremendous social benefits, but that’s a subject for another post sometime.
Finally, I want to highlight that when the authors were talking about their areas for concern, the areas where the existing prepaid card infrastructure would ideally need to be improved to provide better solutions to the specific problems, I couldn’t help thinking that they were describing a kind of “Holvi for social care”: that is, a white-label payment institution that provides very specific and targeted functionality. Just as Holvi provides group accounts and the functionality that goes with them, you could imagine a similar system providing care accounts and the functionality that goes with them. I would have thought this might be a very fruitful area of investigation for the government and other stakeholder groups.
I thought the report’s conclusions and recommendations were excellent and make complete sense and I would only add additional recommendations around the use of communication channels — specifically mobile phones and digital television — to deliver budgeting and value-added management services around the prepaid cards. I think this is where we really could use new technology to make a difference. A prepaid account managed by mobile phone has greater utility and is far more powerful than a prepaid account managed just through a card.
Demos recommends that the government reviews its financial inclusion and digital inclusion activities and creates greater synergies between the two. I was very happy to read this, because we have been of a similar mind for some time. One or two of the projects that Consult Hyperion has been working on, including the current Technology Strategy Board project on using mobile and digital television to deliver financial services to socially excluded groups, have indicated precisely the same.
All in all, an excellent report and props to MasterCard for sponsoring it. In fact I was so interested in all of this that I have invited Claudia along to our Tomorrow’s Transactions Forum in March where she will present alongside the Department of Work and Pensions (DWP) in a session designed to explore some of these issues in more detail. This is precisely the kind of area where some innovative use of new technology a little bit of out-of-the-box thinking about new services can intersect to bring about radical improvement, forming a genuine win-win for the government, the payments industry, taxpayers and benefit recipients.
These are personal opinions and should not be misunderstood as representing the opinions of
Consult Hyperion or any of its clients or suppliers