September 29, 2005

Hurricane Relief Debit (and Other) Cards Update

Filed under: Business Moves,Economy,Taxes & Government — Tom @ 3:09 pm

Previous Posts:
This Weekend’s Unanswered Questions (091705):
Special Katrina Debit-Card Abuse Edition
Katrina Debit-Card Abuse Update: Some Merchants Refuse Cards
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Those offended by how relief debit cards were abused in the aftermath of Katrina will not be pleased by what I found after the first two paragraphs at the subscription-only Cardforum.com web site today (excerpts are for fair use and discussion purposes):

The Federal Emergency Management Agency’s entry into prepaid debit to assist victims of hurricane Katrina is widely viewed by industry observers as a failure.

FEMA discontinued issuing MasterCard-branded prepaid debit cards after only a day of distribution on Sept. 9. About 10,000 of the cards, issued by J.P. Morgan Chase & Co., were distributed.

However, a closer look at the aftermath of the Katrina disaster reveals that use of prepaid debit cards is taking center stage in the post-disaster relief and recovery effort. Some industry observers predict that Katrina is a watershed event that will boost the use of prepaid debit cards by government for many years.

So far, at least 580,000 prepaid debit cards have been distributed in connection with the hurricane relief effort, and that number could soon reach a million cards.

The American Red Cross has distributed at least 300,000 MasterCard-branded cards, which carry from $360 to $1,565 in value, according to sources familiar with the cards, which have both PIN-based and signature-based capabilities. The sources tell ATM&Debit News that the Red Cross is ordering 100,000 prepaid debit cards to be produced daily.

Moreover, Louisiana, Mississippi and Alabama all are taking advantage of a new disaster-connected program that uses existing electronic benefits transfer systems to deliver food and cash assistance via EBT (Electronic Benefits Transfer) cards. So far, about 280,000 EBT cards have been issued by Louisiana since the U.S. Department of Agriculture on Sept. 9 began disbursing federal food-stamp benefits for people displaced by Katrina. Those are in addition to the 300,000 EBT cards, which also can be used for disaster assistance, already in circulation among existing food-stamp recipients in Louisiana. The USDA is allowing a 30-day allotment of food assistance using existing EBT programs. The agency estimates that about 977,000 households will be certified to receive EBT cards for disaster assistance.

Chase is Louisiana’s main EBT contractor and EBT card issuer. Tom Mclaughlin, EBT administrator for Chase, says the EBT cards, which all states now use to deliver food stamps, is ideal for delivering food assistance to displaced people. “It did not matter whether that person is in Texas or Florida. They have been able to access their benefits,” says Mclaughlin. He notes that EBT cards are now accepted at most supermarkets in the nation via point-of-sale terminals. Chase provides network gateway connections under EBT interoperability rules.

The rules to qualify for disaster benefits on EBT cards are less stringent than those required to qualify for food stamps. Unlike traditional EBT cards, disaster recipients need not provide income statements to qualify. They only need proof of residence in disaster areas.

Although abuse of the special cards would seem to be in play with less-stringent qualification rules, the disaster-related EBT cards expire after 30 days but can be renewed.

Clarence Carter, deputy administrator for the USDA’s Food and Nutrition Service, says a higher fraud potential is the reason why the 30-day use limit was imposed.

One source tells ADN that the Red Cross also is trying to prevent widespread fraud on its prepaid debit cards by setting time limits and daily withdrawal caps.

Chase appears to be the main commercial beneficiary of the Katrina-connected prepaid products. Chase gets an undisclosed monthly fee for every household issued an EBT card. Typical EBT contracts provide contractors up to $5 a month per EBT household. Chase as an issuer gets interchange revenue when the Red Cross cards are used for purchases.

….. States are increasingly using their existing EBT infrastructure for disaster planning, says Ellen Bollinger, legal counsel for the Washington, D.C.-based Food Research and Action Center. Bollinger’s group has lobbied for federal and state authorities to use the nation’s EBT card infrastructure to deliver emergency food aid.

The group in July produced a white paper, titled “An Advocate’s Guide to the Disaster Food Stamp Program” that urges states to relax food-stamp qualification rules in emergencies.

John Carrier, state EBT administrator, says Louisiana is considering delivering disaster cash assistance via existing cards. Cash value on the cards could be used for ATM withdrawals.

In addition to EBT cards, which cannot be used for non-food retail purchases, Louisiana also has begun issuing Visa-branded, prepaid debit cards to deliver unemployment compensation instead of sending evacuees paper checks. Hundreds of thousands of Louisiana residents are expected to apply for unemployment compensation in the coming weeks.

Tim Sloane, director of Mercator Advisory Group’s debit advisory service, says he thinks the use of prepaid debit cards in Katrina’s aftermath will spark other public uses for the cards. Sloane, for example, says he sees no reason why Social Security benefits cannot be loaded onto the disaster-related EBT cards to replace paper checks and offer benefit access for those who cannot use direct deposits into bank accounts.

Carter says federal and state officials are discussing the use of EBT cards to deliver a host of badly needed benefits to hurricane victims. “There is no reason why those (EBT) cards cannot provide multiple benefits,” Carter says.

So, it appears that although the FEMA debit card program ended, cards were still passed out freely after the public was told the practice had stopped.

I have no problem with some of the ideas for employing cards, and some may have the potential for reducing administrative costs. But I see a pervasive disregard for making sure that controls are in place to ensure that money placed on debit cards or EBTs will be spent in the manner intended, or whether more money than is really necessary is being distributed (and no, I am not impressed with the 30-day card expirations as a control mechanism). Doesn’t anyone see that the ability to use some of the cards discussed to get money at ATM machines totally compromises whatever accountability potential may have existed?

It seems there are plenty of incentives to be careless, and few if any to be careful. The more spending, the higher the banks’ interchange fees, the higher the contributions the Red Cross requests from a pliant public, and the more voters get potentially bought with the free goodies. Who is representing the donors or the taxpayers here?

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2 Comments

  1. Only just saw my quote. I take some small issue with your tone. Prepaid instrunments provide remarkable visibility into spending without limiting where it can be spent. This new capability offers greater visibility than any other payment option.

    I would be cautious about how we use that information and visibility.

    A $250 air conditioner may appear to be inappropriate post-Katrina, but if it enables a dis-placed family to live in a friends garage than it is money well spent.

    Who do you think should be the arbitar and how much will we spend to monitor the influx of data across all of this spending? I don’t think we want to go back to giving cash or checks, since they offer no visibility at all – but visibility will encourage monitoring and action and these activities add cost to administrative overhead.

    Comment by Tim Sloane — February 14, 2006 @ 11:53 am

  2. Thanks for your reply.

    I agree with the fact that visibility is improved and that it is a good thing. My point was that the ATM capability circumvents visibility.

    It’s been a few months, but I had two issues. One was making sure only eligible people got the debit cards in the first place, and that eligibles weren’t able to double up, and second that the money would be spent on recovering from the disaster (and not on, say, designer clothes, as was noted in the previous posts).

    The GAO just ripped the entire operation in a report released yesterday, and the debit card handling and screening was involved:
    http://www.usatoday.com/money/2006-02-12-katrina-fraud_x.htm
    http://www.usatoday.com/news/world/gao.pdf

    Effective compassion monitors what is done with the charitably given money. It’s what differentiates the effective charity of a century ago from the throw-money-around charity of today:
    Walter Williams on Why Health Care Is Not a Right; Olasky on Effective Compassion
    http://www.bizzyblog.com/?p=1419

    Comment by Tom Blumer — February 14, 2006 @ 12:10 pm

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