Anyone who has left their home at all in the last several years has undoubtedly noticed just how many cheque cashing and payday loan operations exist; they tend to stand out with their brightly coloured stores and vivid signage. No doubt they do a brisk business and their services are not exactly inexpensive. On average, cashing a $500.00 cheque at such a place could cost the customer approximately $15 - $18, and the cost increases as the amount of the cheque increases.
So why do people use this service and how does prepaid fit into the equation?
Many people using cheque cashing facilities are under-banked or completely un-banked. That is, they do not have a bank account, and as a result, have limited options for drawing funds against a cheque. Once they do cash their cheque, the only option is to receive the entire amount in cash which brings up safety and security concerns. For some people, the funds they receive are part of a social assistance program typically administered by local or federal government. Payments are generally issued monthly to cover costs such as housing, family support and the basic necessities required to live. Often programs offer recipients the option of having the issued funds deposited directly into their bank account if they have one. The issue is that many of the people within such programs do not have a bank account due to the cost, the recipient's geographic location, or a lack of knowledge or experience with the conventional financial system.
Prepaid cards are a potential solution to address many challenges associated with government disbursement issued on paper cheques. Individuals within a program are issued a branded prepaid Visa card which is reloadable and accepted at all Visa merchants. In addition, the card may be used within a wide network of ATM's for cash withdrawals, online and telephone purchases, and bill pay. In essence, the prepaid Visa cards offer the functionality of a traditional bank account with a few subtle differences. The results of implementing such a program are positive and include the elimination of paper cheques, significant program cost savings, and a move towards the financial mainstream for the cardholder. Funds become available faster as they are electronically deposited onto cards and are immediately available for use. Gone is the time consuming task of cashing a cheque (which in many communities means waiting in line or having a payment delayed due to delivery delays caused by bad weather, etc.).
An example of such a program is the U.S. Department of the Treasury's Financial Management Service (FMS) and their recent move to offer Social Security payments on a prepaid card. The Treasury estimates that four million Social Security cheque recipients do not have bank accounts, placing them at greater risk of delivery delays or lost or stolen cheques, which take time to reissue. 9 times out of 10 problems with Social Security payments are linked to cheques, not direct deposit.
If every unbanked federal cheque recipient signed up to use a prepaid card, it would save taxpayers about $44 million per year.
A move toward Visa prepaid brings marginalized individuals closer to integration into the financial system mainstream while providing a significant cost savings for the taxpayer. While popular in the US, the conversion has only just begun in Canada. Given the nature of Canada's geography, among other things, government disbursement on prepaid Visa cards is an excellent solution and the concept deserves serious consideration.