By Meghan BoyerATM&Debit News

The Treasury Department has received applications from 15 financial institutions interested in providing nationwide debit card services to unbanked recipients of Social Security and other federal benefits.

The Treasury’s goal is to reduce the number of checks disbursed by promoting direct deposit and by increasing the number of electronic funds transfers to unbanked recipients with a prepaid debit card program.

The agency’s Financial Management Service bureau, which is in charge of disbursing federal benefits, would not name the companies that submitted applications. The deadline was Oct. 2, and the bureau plans to notify finalists by Oct. 19 and make a final decision Nov. 16. The program is expected to go live in January.

“The Treasury has a goal of an all-electronic treasury,” said Sally Phillips, the director of the EFT strategy division at the Financial Management Service bureau. The prepaid debit cards will help the department increase electronic payments by reaching unbanked benefit recipients, she said.

About 80% of government payments are electronic, and “the 20% that are left are costly to deliver,” Ms. Phillips said. Checks cost 89 cents to issue, versus 9 cents for an electronic funds transfer.

“If we converted all checks to electronic funds transfers, we would save the government $125 million a year,” she said. About a third of the 12 million people receiving benefits checks have no bank accounts.

A survey of participants in an ongoing Illinois pilot program had positive results, which contributed to the department’s decision to move forward with a national program, Ms. Phillips said.

The survey findings also helped the department determine which aspects of the program are most important, such as costs to the cardholder, said Ronda Kent, the director of the agency enterprise solutions division at the Financial Management Service bureau.

Once the program is in place, marketing will play an important role in reaching the unbanked, Ms. Phillips said.

The Illinois pilot program, Direct Express, is taking place in Chicago and some rural ZIP codes. The Financial Management Service sought to reach the unbanked by sending 200,000 informational inserts accompanying checks and 35,000 direct-mail letters to check recipients in the pilot areas, beginning last December.

JPMorgan Chase & Co. issued the MasterCard Inc.-branded debit cards for the pilot effort, but bank executives would not discuss the program.

A survey of pilot program participants found that 85% of users were satisfied with the debit cards. One in five said that having the card is easier than cashing a check, 13% said it is safer, 11% said it is faster, and 10% said it is cheaper.

Ms. Phillips said she expects the nationwide program to be similar to the pilot program. The cards will use either the MasterCard or Visa U.S.A. networks, and will carry Federal Deposit Insurance Corp. protection.

Recipients will be able to get money from an automated teller machine or by requesting cash back at the point of sale. They will also be able to use the cards to make point of sale purchases, pay bills online, and buy money orders, she said.

The bureau would not predict how many people might use the cards, because the program will be optional, Ms. Kent said. But the bureau does estimate check volume, which it said should reach 150 million by 2013.

Tim Sloane, the director of debit advisory services at Mercator Advisory Group, a research company in Waltham, Mass., said, “The Treasury is being prudent and not forcing” the program “and being cautious about the rate of adoption.”

He said he believes that the financial company selected to manage the program will be able to create a compelling argument for using prepaid cards by marketing to government check recipients. The financial company’s goal should be to communicate the safety of the card while providing incentives for its use, which would boost its interchange revenue, Mr. Sloane said.

Some of the unbanked will have to learn to use the cards effectively, said Katy Jacob, a research specialist in the economic research department at the Federal Reserve Bank of Chicago. “If what you end up seeing is people using the cards as if they were checks and taking all the cash out in one swoop, they may be losing the benefits of the cards,” she said.

Jennifer Tescher, the director of the Center for Financial Services Innovation, in Chicago, agreed. She said she sees two marketing challenges: getting check recipients to sign up for the debit card and then getting them to use the cards at ATMs and the point of sale.

Ms. Boyer is the associate editor of ATM&Debit News, a SourceMedia publication, where this article first appeared.

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