‘Banking’ the Unbanked with Direct Express (Sept. 22, 2014)

By Andrew Gillen, MasterCard

In 2011, an FDIC report estimated that 10 million American households (with 17 million adult residents) were unbanked. That is, they had no traditional banking relationship such as a checking or savings account. Without access to mainstream financial services and relying primarily on cash, the unbanked can be at a real disadvantage, vulnerable to financial loss from crime or mishap and dependent on high-cost check cashing. Not only is cash more costly and less secure, but it also leaves the unbanked essentially shut out of the modern digital economy—unable to transact online.

The U.S. Department of the Treasury designed the Direct Express Debit Master Card program to serve this unbanked population—specifically those unbanked Americans who receive a federal benefit payment. Until recently, however, I didn’t apreciate just how successful the program has been. Our annual cardholder survey revealed that 80 percent of Direct Express participants are unbanked. That means that of the 5 million Direct Express cards issued, roughly 4 million have gone to people without a traditional banking relationship. So, in effect, Direct Express “banks” up to 4 million of the 17 million unbanked Americans—nearly one-quarter of our entire unbanked population.

Treasury recently announced two important developments related to the Direct Express program: 

1. Treasury now makes 98 percent of federal benefits payments electronically, and
2. After a competitive bid process, Treasury has awarded a new agreement to Comerica Bank to continue to provide the Direct Express Debit MasterCard program through 2019.

Treasury’s efforts to move toward all-electronic benefit disbursement were driven by a 1996 Congressional mandate and the desire to realize the substantial savings electronic payments offer, compared to checks. Treasury’s achievement of a 98 percent electronic payment rate meets their mandate, and is expected to deliver savings for taxpayers of $1 billion over 10 years.

The Direct Express program is an important element in Treasury’s payment strategy, enabling them to make electronic payments even to benefits recipients without bank accounts. The Direct Express card offers greater safety than checks and cash. The program enables cardholders to transact online—something they can’t do with cash. In addition, recipients avoid the substantial fees often associated with check cashing.

The Direct Express card also can be far more affordable than the other alternatives available to unbanked Americans. Studies from Mercator Advisory Group and others have established that check cashing can cost a low-income worker more than a $1,000 each year. More recently, we have seen reports from Bretton Woods and The Pew Charitable Trusts that prepaid cards can be even more affordable than checking accounts.

Many benefit recipients have to spend their entire payment for basic necessities, driving their accounts toward a zero balance each month. That puts them at risk for overdraft and low-balance fees in a checking account. With Direct Express, however, you can’t overdraft, since each transaction is preauthorized based on the available balance on the card, and there are no low-balance fees. Direct Express also provides greater security, since cardholders are not liable for fraudulent purchases or loss—something cash doesn’t offer.

Enhancements Planned

Direct Express is designed so it can be used without any cost at all to cardholders. There are no applications fees and no monthly fees. The card is free to use at millions of merchant locations worldwide, and cardholders have access to tens of thousands of surcharge-free ATMs across America. It’s no wonder that consumer advocates have called this “probably the best prepaid card on the market.”[1]

Comerica and MasterCard take our responsibilities very seriously as stewards of this program, in partnership with Treasury. We have already launched a number of innovations in Direct Express over the past several years, such as the integration of the PayPerks financial capability platform, announced last year. We continue to build on the remarkable public infrastructure Direct Express has become, with a number of additional enhancements to the program planned for the coming months to deliver even greater value to the millions of Americans we serve.

Andrew Gillen is vice president for MasterCard’s public sector prepaid card business. He previously served in the U.S. Office of Management and Budget (OMB) and the State of New Jersey’s OMB, as well. In addition, Gillen led sales and relationship management teams for a major commercial card issuer, focusing on the GSA SmartPay program and other public sector business. He can be reached at [email protected].