Statement of Visa Inc.

Visa appreciates the opportunity to submit this written testimony to address the important issues raised by today’s hearing on the use of technology to improve public benefit programs.

The Visa Payment System, of which Visa U.S.A. is a part, is a leading consumer payment system, and plays a pivotal role in advancing new payment products and technologies, including the growing category of prepaid cards. Visa U.S.A. is an association of 14,000 U.S. financial institutions who issue credit, debit and prepaid cards and who work with merchants to ensure the acceptance of these cards for transactions.  Visa itself does not have relationships with cardholders or merchants.

This is important for understanding the use of prepaid cards for government benefit programs.  While Visa establishes the technical platform for the use of prepaid cards and the standards that enable the cards to be used at merchant locations and ATM machines, it is the financial institutions who work directly with state, local and federal agencies to issue cards to government beneficiaries.  The terms and conditions of the issuance of the cards, including terms and conditions to the cardholders, are set by contracts between these financial institutions and their government agency customers.  There are a variety of possible contractual relationships and a large degree of competition among financial institutions interested in serving this growing market.

The Prepaid Card Market

The growth of prepaid cards is one element in the electronicifcation of payments. In December 2004, the Federal Reserve System announced that electronic transactions had surpassed checks as the consumer’s preferred noncash method of payment. Fifty-five percent of these noncash transactions were completed using a debit or credit card, through an automated clearing house (ACH) transaction, or an electronic benefit transfer (EBT). The remaining forty-five percent of these transactions were made by check. The trend toward electronic payments is well underway.

Prepaid cards can bring the benefits of electronic transactions to consumers who are unserved or underserved by financial institutions, that is, to those without a credit card or a checking or a savings account that can be accessed through a debit card or the ACH.  Prepaid cards that access the same electronic payment networks as credit and debit cards can be used to meet the financial transactions needs of the unbanked in a highly efficient fashion. These prefunded financial services products are used to withdraw monies through ATMs, make point-of-sale debit transactions, pay bills, and transmit funds through account-to-account electronic transfers.

Prepaid payment cards are a broad series of products which represent the expansion of choice and convenience in how consumers, businesses and the public sector make and receive payments. While the category started with consumer-to-consumer gift cards, it has expanded to include:

• A payroll card, direct deposit alternative to both employers and employees,
• Disbursement of government benefits programs like child support, unemployment benefits and other social services

• Consumer management of benefits funds including flexible spending accounts (FSA) and healthcare reimbursement accounts (HRA)
• Corporate rewards, rebate, incentive or bonus programs

Prepaid cards are different from both credit cards and debit cards.  Credit cards offer consumers the ability to draw on a line of credit and pay their bills later – at the end of the month or over time.  Debit cards provide customers with convenient access to their depository account to pay for purchases or to obtain cash at ATM machines.  Prepaid cards provide customers with access to a pre-defined amount of money without drawing on a traditional banking account.

The funds associated with a prepaid card are stored in a central location by the financial institution that issues the card. There is no value on the card itself.  The card functions as an access device to the funds.

In a face-to-face point of sale transaction, the card is swiped at a regular point of sale terminal. The merchant does not need to install special point of sale equipment, and no PIN number is entered. The transaction is routed over the Visa network, and is approved if the cardholder has sufficient funds to cover the purchase. ATM access is accomplished through the use of the card in conjunction with a PIN number. Visa prepaid cards are accepted wherever Visa debit cards are accepted – worldwide, online or offline.

Some prepaid cards like gift cards are not reloadable.  They are designed to be used until their value is exhausted. Other cards such as payroll cards or government benefit cards are designed to be reloaded on a regular basis.

Visa estimates that the current market for all bank-issue prepaid cards (Visa, MasterCard and American Express) is less than $25 billion.  The bulk of that is government benefit cards.  The market is in its infancy now, but the potential growth over the next several years is likely to be substantial.

Government Prepaid Card Programs

Visa estimates that there are approximately 80 million underserved customers who receive about $1 trillion in wages and government benefits in the form of checks.  This delivery method imposes unnecessary costs on the recipients and it is costly and inefficient for the entity disbursing the funds.  The prepaid card is a way to improve the efficiency of this market.

The first government prepaid card program was implemented in 2002. The program used a reloadable prepaid Visa card to disburse Child Support payments. The program was with the state of Colorado and the issuer was US Bank. There are now 27 states that are using or are in the process of using a reloadable prepaid Visa card to disburse payments such as Child Support, Unemployment Insurance, Temporary Assistance to Needy Families and Payroll.  See the attached chart for a current list of programs. 

States are quickly adopting this method of disbursing payments to underserved recipients because of the significant cost savings and increased processing efficiencies compared to checks (cost savings from postage, check handling, processing lost/stolen checks and paying caseworkers to track down recipients). Recipients also like the benefits of receiving payments via direct deposit to a prepaid Visa card compared to receiving their benefit in the form of a check. They receive faster access to their funds and do not have to worry about paying check cashing fees. Additionally, unlike cash, if the card is lost or stolen, cardholders receive a replacement card and are protected from unauthorized transactions with Visa's Zero Liability program.

Visa estimates that there are about 2 million prepaid Visa cards in use by underserved customers through payroll cards, government benefit cards and general purpose prepaid cards. Visa issuing banks have issued about 1 million of these prepaid as part of government benefit programs, and about 600,000 of them are currently in active use by program beneficiaries.

Overall a prepaid card program saves money for the state agencies.  There are, of course, expenses associated with a prepaid card program.  For instance, there are costs, which vary by program, for producing and mailing prepaid cards and educating beneficiaries on their use.  The allocation of these costs is subject to the contractual agreement between the state agencies and the financial institutions issuing the cards.  In some cases, the state agency does not have a direct payment for these production and distribution costs. The results from the existing prepaid programs show cost savings for the state agencies from the switch away from paper check delivery of benefits, even taking into account these and other costs of administering the program.

Consumer protections can also be an expense of administering the program. The cards are protected by zero liability, and are subject to replacement if lost of stolen.  But these costs are minimal. Fraud losses from government prepaid Visa cards are low and stable, averaging less than $.03 cents for every $100 of transactions.  In Visa’s experience beneficiaries are protective of their card; they like the benefits and convenience of receiving payment through this method.  Visa has not seen a lot of instances of lost or stolen cards in these government prepaid programs.

• Visa prepaid cards are accepted at merchant locations and ATM machines worldwide.
• Visa prepaid cards are Visa cards, and are subject to Visa operating rules and regulations, including all the Visa Consumer Protections.
• Zero liability applies.  If a Visa prepaid card is used fraudulently, without the cardholder’s authorization, the cardholder is not liable for the fraudulent transactions.
• Visa prepaid cards can be replaced if lost or stolen.  The cardholder simply follows the normal procedure for notifying the issuing financial institution, and the old card will be canceled and a new one issued. 
• Funds are available immediately after the card is loaded.  There is no waiting period as there often is with check disbursements.
• Cardholder has the convenience, prestige and versatility of a Visa card.  This is especially important to those who do not have a relationship with a financial institution.
• Cardholders have safer, less expensive access to their money.  Those without a bank account do not need to go to risky, costly check cashing locations to cash their payroll or government benefit checks.

Check-cashing costs are especially troublesome for the unbanked and one of the major advantages of prepaid government benefit programs is to enable unbanked beneficiaries to avoid these fees. They can be relatively inexpensive in some states such as New York State, where fees are capped at 1.5 percent of the value of the check. In some states, however, fee limits are much higher and in eighteen states no fee limits are imposed.  In addition to check-cashing fees, unbanked customers will pay fees for bill payment services, money orders, and money transfer services.

Benefits to Government

• Prepaid cards reduce costs.  There are no paper checks to issue, or re-issue if they are lost or stolen.
• Funds disbursement is superior to paper check.  The funds reach employees or beneficiaries in a faster, safer and more secure electronic fashion.
• Prepaid cards enhance risk management.  Fraudulent use can be detected much earlier by sophisticated Visa fraud detection systems and those operated by the issuing financial institution.
• Prepaid cards provide better tracking and reporting of card use.  This enables cardholders and government to understand the pattern of spending with the cards, thereby improving budgeting and other expenditure control systems.