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CLASS Technical Assistance Brief Series Spring 2011 • No. 9 Fundamentals and Their Use in Government Programs By Cathy Corby Parker, James Wironen, Mollie G. Murphy, and Kevin J. Mahoney

The Community Living Assistance Services and Supports (CLASS) Plan – a groundbreaking component of the Affordable Care Act – creates a voluntary federally-administered insurance program to help individuals pay for needed assistance in a place they call home if they become functionally limited. Implementation will require knowledge translation from various sectors, including research and existing public and private programs. This Technical Assistance Brief Series seeks to answer questions pertinent to developing and implementing the program.

Debit cards were introduced in the 1980’s This brief describes the Introduction and a in the form of Automated Teller history and operation History of Debit Cards (ATM) cards that provided consumers of debit cards and with 24-hour to in their provides examples A little over 50 years ago, , checking, and savings accounts. A of their use in introduced credit cards. The utility of “debit card” is a plastic that government programs these early credit cards was limited as resembles a but it is linked to inform the use of a payment card and would only work to the card owner’s at a debit cards to access if both the merchant and consumer bank. When the card is used, it accesses CLASS Plan benefits. used the same bank. To address this funds the card owner has in his or her issue, major banks formed franchises . A Personal Identification so that one bank’s card could be Number (PIN) is associated with each accepted at another bank’s merchant. debit card to protect against unauthorized These franchises became known as use. To increase convenience for “associations.” Today, Visa® and consumers, banks formed networks and MasterCard® are the largest card allowed their customers to use ATMs associations and their product offers owned by any bank in the network. A have expanded beyond credit cards. network logo was added to the card for consumers to easily identify the ATMs Card associations play an important that were in the network. To extend role in establishing the rules that govern the value of their ATM cards, networks use of payment cards by consumers and encouraged merchants to install PIN-pads businesses. To protect the safety and at their cash registers so consumers could integrity of the card-based payment make purchases with ATM cards. Over system, all payment cards must be time, ATM cards came to be known as issued or guaranteed by a financial “debit cards.” institution, and each merchant must be sponsored into the association by a In the 1990’s, Visa and MasterCard . launched their own version of debit

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cards that did not require use of a PIN How Debit Cards Work for purchases. Instead, the consumer signed the back of the debit card and this signature could be matched with When a consumer uses a debit card to get the consumer’s signature on the receipt cash from an ATM or make a purchase, “A ‘debit card’ to validate the cardholder. Today, most the ATM or merchant (POS) is a plastic debit cards operate in both modes, system sends an electronic request to the payment card carrying one or more network brands and association or network linked to the card. that resembles a an association brand, allowing purchases The association passes the authorization credit card but it is to be authorized either with a PIN or the request to the bank that provided the linked to the card cardholder’s signature. debit card to the consumer. The bank validates that the card has not expired or owner’s deposit been reported lost or stolen and that there account at a bank. Originally, debit cards were linked to are sufficient funds available to cover one or more bank accounts owned by When the card is the amount of the transaction. If a PIN the cardholder. Around the year 2000, a used, it accesses is entered for identification, the PIN is new form of debit card called a “prepaid funds the card also validated. The bank then sends the debit card” was launched. The funds on owner has in his or approval or denial transaction back to the prepaid cards were still kept at a bank, her bank account.” association or network, who delivers it but in a pooled account where the balance to the ATM or POS where the cardholder was held in trust for cardholders. Behind presented the card. (See Figure below.) the scenes, balances on each card were tracked in real time so that any one cardholder only had access to the funds in the trust account associated with his or her prepaid debit card.

FIGURE Authorization Processing Transaction Flow

Authorization Request

ATM or Card Card Store POS Association Issuing System or Network Bank

Authorization Response

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All of this happens nearly instantaneously store gift cards. Some debit cards are – sometimes in less than one second of hybrids of open loop and closed loop, in time. And, throughout the authorization that they have a network or association process transactions are monitored to look brand, but they do not work at all for patterns of . merchants where that brand is accepted. • Reloadable vs. Non-Reloadable The newer debit card processing — Reloadable prepaid cards operate “The newer debit platforms associated with prepaid debit very much like a bank account and the card processing cards were designed to handle more card issuer must validate the identity platforms complex authorization procedures. This of the cardholder in essentially the associated with could include limiting use of the card same process as if the consumer was prepaid debit to certain categories of merchants or opening a bank account. can cards were particular merchant locations. It could be loaded onto a reloadable card via designed to handle also include restricting use of the card direct deposit of pay or government more complex to purchase of particular products or benefits (the same as if the employer authorization services if the merchant is able to send or government agency was depositing procedures. This information about the items being funds to a bank account). Consumers can also load money onto their cards could include purchased. Prepaid debit cards can also have multiple “purses” associated with a at retail locations that participate in a limiting use single card. For example, a prepaid debit reload network (such as GreenDot® or of the card to card could have a general spending purse MoneyGram®) by giving cash to the certain categories and a savings purse. retail store clerk to load onto the card. of merchants Non-reloadable prepaid cards are not or particular associated with an individual. Because merchant Debit Card of their anonymous nature, there are locations. It Characteristics strict limits on the dollar amount of could also include funds that can be loaded onto a non- reloadable card. restricting use There are a wide variety of debit card of the card to products in the market. Underlying this • PIN and/or Signature — Debit cards purchase of variation are five debit card characteristics can be issued with PIN and signature particular products that define the capabilities and uses for a cardholder authentication, just PIN, or or services if the debit card. These are: just signature. When a PIN is used, merchant is able to the card is processed over a network send information • Open Loop vs. Closed Loop — and the transaction is considered about the items “Open loop” means that the debit final at the time the authorization is being purchased.” card is connected to an association approved. When a signature is used, or network and the card can be used the authorization is routed through an at any merchant in the association or association, but the merchant must network. “Closed loop” is the term send an end-of-day electronic file to used for debit cards that are issued by a the association with all of the day’s particular retailer and can only be used authorized transactions before the for purchases at that particular retailer. movement of money will occur. Cards The most common closed loop cards are that allow ATM access must have a

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PIN. Many retailers allow customers to • Bank-Account Based Debit Cards obtain cash back with purchases when a — Today, virtually every checking PIN is used. Cards that only use PINs account comes with a debit card. Most are not able to be used for e-commerce bank-based debit cards have both a purchases or bill payments at merchant signature and PIN. The number on “Debit cards can web sites. the bank debit card is linked to one or be issued with • Registered or Anonymous — All more bank accounts. A purchase or PIN and signature reloadable cards must be registered withdrawal using a bank account-based cardholder to a particular individual. Consumers debit card may be approved if there are authentication, with non-reloadable cards can register not sufficient funds in the account, based just PIN, or just the card or use it anonymously. The upon the bank’s overdraft policies. Funds signature. When advantage of registering a non- in the account associated with the bank a PIN is used, the reloadable card is that it can then be debit card are insured by the Federal card is processed used to make e-commerce or Deposit Insurance Corporation (FDIC). over a network and purchases. Many online merchants will • Government Benefit Cards — State the transaction is not accept unregistered cards because of and local government agencies spend considered final the high risk of fraud. millions of dollars annually printing at the time the • Primary or Companion Card — Both and mailing checks to benefit recipients authorization is bank account-based and prepaid debit for programs such as Social Security, approved. When a cards can have more than one card linked unemployment, and court ordered signature is used, to a specific account. Two cards can both payments. To reduce costs and increase the authorization access the same funds or each card can convenience for recipients, government is routed through have its own balance. Bank account- agencies have encouraged direct deposit of benefits to recipients’ bank accounts. an association, but based debit cards have one balance But, the FDIC estimates that in the U.S. the merchant must shared by the primary and companion cards. Prepaid debit cards can operate 17 million people reside in households send an end-of- similarly, but they can also be set-up to without bank accounts and another 21 day electronic file allow the primary cardholder to transfer million people have a bank account but to the association funds to the companion card. In that conduct most of their financial business with all of the case, each consumer has access only with cash and money orders.1 This day’s authorized to the funds on his or her card, not the segment of the population uses check transactions before combined balance. cashing services, where they can receive the movement of their funds in cash immediately without money will occur.” Common Debit Card any hold period, as may be the case with a bank. To drive costs out of delivery of Products government payments to unbanked and consumers, many agencies By varying the combinations of these five have distributed reloadable prepaid debit card characteristics, debit card providers cards to recipients who do not specify a have created dozens of different debit card bank account for direct deposit. These products to meet specialized market needs. debit cards allow benefit recipients However, the most widely used debit cards to withdraw their funds at an ATM or fall into seven categories, each of which is , and to make purchases in highlighted below. www.TheSCANFoundation.org 4 Spring 2011 • No. 9 CLASS Technical Assistance Brief Series

stores and online. Government agencies payroll deposit. Employers have no work with the debit card providers to ability to see card balance or transaction ensure that costs for the recipient are information on payroll debit cards. low. Recipients are usually allowed one • General Purpose Reloadable (GPR) free withdrawal after each deposit of Cards — As their name suggests, GPR benefits, and government benefit cards cards are reloadable prepaid debit cards participate in at least one “surcharge- that can be purchased by consumers free” ATM network. “Surcharge-free” for a variety of uses. Consumers who ATM networks allow cardholders to don’t have a credit card or bank debit withdraw funds at an ATM without any card often use GPR cards to make from the owner of the ATM. While purchases in stores and pay bills more fraud does occur with government debit conveniently than using cash or money cards, as discussed later in this paper, orders, as well as for making purchases the incidence and customer impact of and paying bills online. Some debit card fraud is substantially lower consumers have their pay deposited to than with check-based distribution of the GPR card – in essence, the GPR card benefits. While comparable statistics becomes their bank account. for are not available, paper checks are GPR cards vary widely and can include subject to being lost, stolen, or altered; a fee to purchase the card, a monthly there is no real-time authorization maintenance fee and reload, ATM, and for paper checks, as with debit cards; purchase transaction fees. and there are no consumer protections • Flexible Spending Account (FSA) associated with use of checks. Cards — Open loop prepaid cards • Employee Payroll Debit Cards — linked to flexible spending accounts Employers for decades have promoted allow in-store and online purchases direct deposit of pay to bank accounts in directly from the funds in the FSA – order to save the expense of producing consumers do not have to file claims and distributing . Many for reimbursement. FSA cards use employers now provide reloadable signatures for authentication and do prepaid debit cards to employees who not have PINs or ATM access. Use of do not specify a bank account for direct FSA funds is restricted to purchases deposit of their pay. These payroll debit of approved medical and healthcare cards have evolved into “checkless products and services. Funds in the FSA checking” accounts. Employees can cards are legally the property of the plan deposit pay from multiple employers administrator and can only be loaded to these cards or even keep their cards to the card by the plan administrator. when they change jobs. In many FSA’s operate on a “plan year” and states, employers can mandate use at the end of the plan year, FSA of a payroll debit card for employees administrators zero-out any remaining who do not specify a bank account for balances on the FSA card. direct deposit, but they must provide • Health (HSA) the cards free, with no monthly fees and Cards — HSA’s are savings accounts at least one free withdrawal after each associated with high deductible

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insurance plans. An employee Debit Card Providers participating in a high-deductible insurance plan can open an HSA account at a bank and either the employee or There is an “issuing bank” or “issuer” for employer deposits funds to the HSA. every open loop bank or prepaid debit card. These funds earn interest tax-free and The bank has a fiduciary responsibility the funds can be used for out-of-pocket to the associations and networks in the medical costs. At this time, there is no case of fraud or misuse of the card, and is requirement that HSA account providers responsible for complying with association substantiate that the funds are used for and network rules and government medical purposes, and employees can regulations. There is not a bank issuer withdraw their health savings funds in associated with closed loop cards. cash through an ATM or bank teller. • Gift Cards — Gift cards are non- “Processors” are companies that reloadable prepaid cards that can be process debit card transactions, acting either open loop or closed loop. The on behalf of issuing banks to manage only way funds on a can be debit cards and authorize and settle accessed is to make purchases. Open transactions. Open loop card processors loop gift cards can be used anywhere the accept authorization requests from the association brand is accepted. Closed associations or networks and approve or loop gift cards can only be used at stores deny each transaction. On a daily basis, owned by or affiliated with the retailer processors settle with the associations and who issued the card (for example, a networks to determine how much money Home Depot® gift card is accepted each issuing bank owes each association only at Home Depot stores or the Home and network for transactions approved for Depot web site). Gift cards can have its cardholders. With closed loop cards, a predetermined fixed balance or they the retailer sends authorization requests can have variable funding with the card directly to its card processing system purchaser specifying the amount at the or provider. There may be settlement time of purchase. Because gift cards involved if a card is purchased in one do not require registration, banks place location of a chain or franchise store and limits on the maximum value that can be redeemed in another location. loaded onto a card to prevent the use of gift cards in money laundering. Processors also provide customer service to cardholders, including automated The table on page 7 summarizes the telephone access to account information features and characteristics of each of and balances, an online cardholder these major categories of debit cards. web site and telephone agent customer service. Particularly in the case of government benefit programs, the cost of providing agent customer service can be unmanageable if cardholders are not sure how or where to use the card, or if

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Table Summary of Characteristics of Widely Used Debit Card Products

Bank Account Payroll Debit Government General Purpose Flexible Health Savings Gift Cards Based Debit Cards Benefit Cards Reloadable Spending Cards Account Cards Cards Cards Account-Based or Account Prepaid Prepaid Prepaid Prepaid Account Prepaid Prepaid Open- or Closed- Open Open Open Open Open Open Open or Closed Loop Reloadable N/A Yes Yes Yes Yes N/A No ATM Access Yes Yes Yes Yes No Yes No Type of PIN & Signature PIN & Signature PIN & Signature PIN & Signature Signature PIN & Signature Signature Authentication Registered to Yes Yes Yes Yes Yes Yes Optional Individual Bank Identity Yes Yes Yes Yes No Yes No Validation Companion Card Optional Optional Optional Optional No No No Cardholder FDIC Yes Yes Yes Yes No Yes No Insurance Government & Government & Government & Association Only Association Only Government & Association Protection Association Association Association Association Only Funding Source Consumer Employer Government Consumer Employer Employer or Consumer or Agency Employee Business Owner of Funds Cardholder Cardholder Cardholder Cardholder Employer Cardholder Cardholder Funder Can See Yes No No Yes Yes No No Balances/Activity Direct Deposit Yes Yes No Yes No No No of Pay Reload Networks N/A Optional No Yes No N/A No Surcharge-Free Yes Yes Yes Optional No Yes No ATM Network Overdrafts Optional Optional No Optional No No No Allowed

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they are confused about whether their PIN numbers have always been treated as question should be directed to the card highly sensitive by banks and never stored provider or the government agency. “in the clear” – meaning they were always Clear communication in the collateral encrypted when stored or in transit. More “Banks, accompanying government benefit cards recently, the (PCI) associations, to minimize calls to customer service Data Security Standard was established networks, and agents is critical. by the card associations to combat theft of processors the 16-digit credit and debit card numbers have created Retailers sell prepaid debit cards to and associated cardholder names and an extensive consumers either in stores or online. card expiration dates. PCI compliance infrastructure to Generally, the cards sold in this way are requires that any company that processes, protect the safety open loop and closed loop gift cards or stores, or transmits personally- and soundness of general purpose reloadable (GPR) cards. identifiable payment information must the card payment A “card mall” is often used to display an maintain a secure environment. Issuers and processors are required to have system. There assortment of prepaid cards. Online card annual third party audits to certify their are detailed rules malls exist as well. Retailers that sell GPR cards generally also participate in compliance with PCI standards in order with which every to maintain their memberships in the member of an prepaid reload networks and consumers can load funds onto reloadable prepaid associations. Some states have adopted association or debit cards in their stores. laws requiring compliance with data network must protection rules substantially similar to adhere, as well PCI requirements. as government Check cashers, payday lenders and money transfer agents often provide GPR cards regulations.” to their customers. A portion of funds The Treasury Department and the from cashing a check or proceeds Financial Crimes Enforcement Network can be applied to the GPR card to provide developed regulations, as required by customers with the convenience of paying Section 326 of the Patriot Act, to maintain with plastic and the safety of not carrying “Customer Identification Programs” (CIP) around as much cash. to protect against use of debit cards by terrorists. These regulations require that financial institutions verify the identity Mitigating the Misuse of the person opening a bank account of Debit Cards and check to make sure that individual is not on the government’s list of suspected terrorists. Banks, associations, networks, and processors have created an extensive To combat fraud through identity theft, infrastructure to protect the safety the Federal Trade Commission (FTC) and soundness of the card payment implemented the “Red Flags Rule” system. There are detailed rules with implementing sections 114 and 315 of which every member of an association the Fair and Accurate Credit Transactions or network must adhere, as well as Act of 2003. “Red Flags” requires government regulations. card issuers to diligently protect their

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“Friendly fraud cardholders from identity theft. In the are from corporate entities, other banks, occurs when a debit card world, the focus is on fraud government agencies or reload networks, around address changes. A common scam or the cardholder herself/himself in the family member is for a criminal to acquire a card number case of bank debit cards. The assumption or friend uses and cardholder name (for example, a is that these entities have performed due the card without server in a restaurant who takes the card diligence on the businesses or individuals the permission out of view of the cardholder during the from whom they are accepting funds for or knowledge of authorization process). Then the criminal deposit onto debit cards. the cardholder. calls the bank to change the address on Friendly fraud the card and later reports the card lost or Cardholder rights in the case of disputes can be especially stolen. Thus the replacement card, when between the cardholder and the merchant serious if the mailed, is sent to the criminal. Banks and are governed by association and network cardholder has processors now have policies to monitor rules for open loop cards. Visa and disclosed his or her and validate cardholder address changes. MasterCard offer zero liability to protect PIN to a third party, Generally, banks will contact the cardholders against unauthorized charges as that individual cardholder to validate the address change as long as the cardholder promptly can then use the or request proof of the change, such as a notifies the issuer. copy of a utility bill. card and PIN at an ATM to withdraw The Federal Reserve also regulates open all the money in Another risk with debit cards is “friendly loop debit cards through “Regulation the account. This fraud.” Friendly fraud occurs when a E” that limits the cardholder’s liability family member or friend uses the card type of fraud is for unauthorized purchases or ATM without the permission or knowledge more common withdrawals to $50.00, as long as the of the cardholder. Friendly fraud can customer promptly informs the bank.2 with government be especially serious if the cardholder benefit and payroll At this time, Regulation E only applies has disclosed his or her PIN to a third to bank account-based debit cards and debit cards, as party, as that individual can then use the prepaid payroll and government benefit the recipient card and PIN at an ATM to withdraw all cards, although some GPR card providers population is less the money in the account. This type of extend the benefits of Regulation E to likely to have fraud is more common with government their customers. When a cardholder experience with benefit and payroll debit cards, as the reports a dispute, the amount of the debit cards. It is recipient population is less likely to disputed transaction must be immediately imperative that have experience with debit cards. It is credited back to the cardholder. Losses messaging to imperative that messaging to consumers can occur with false filing of disputes consumers that that accompanies debit cards clearly if, upon resolution of the dispute in the accompanies communicates the importance of keeping merchant’s favor, there are not sufficient the card secure and not disclosing the PIN debit cards clearly funds to repay the credit that was to anybody. communicates extended to the cardholder. However, the importance of since both government benefit and payroll keeping the card An additional area of protection against debit cards have recurring deposits, often fraud relates to loading of funds on the the losses are recovered upon the next secure and not cards. Banks and processors monitor deposit to the card. disclosing the PIN deposits to debit cards to assure that they to anybody.” www.TheSCANFoundation.org 9 Spring 2011 • No. 9 CLASS Technical Assistance Brief Series

Regulation E protects cardholders against Debit Cards and “Processors, friendly fraud if the cardholder reports associations, it. However, cardholders are sometimes Government Programs and networks reluctant to report the fraud as many continually scan card issuers require the cardholder to Below are overviews of some of the major authorization file a police report that would implicate types of government and tax-preferred requests to look their “friend.” Regulation E also employee benefits debit card programs in for patterns that requires financial institutions to send use today. indicate fraudulent cardholders a monthly statement, which can be delivered electronically with the activity. These Social Security Benefits — In 2008, cardholder’s consent. systems are the U.S. Treasury Department introduced complex neural Direct Express®, an open loop reloadable networks in which There are no third parties protecting prepaid MasterCard. The new card the financial consumer dispute rights with closed loop allowed government benefit recipients services industry cards. Any disputes with non-reloadable without bank accounts to receive their prepaid cards are resolved directly has invested benefits by direct deposit to the Direct between the retailer and the cardholder. billions of dollars. Express card rather than a paper check. Social Security is the largest government Fraud monitoring program using Direct Express, but takes place at Velocity limits associated with each debit card regulate the number and dollar the card is also used for recipients of every level in the value of activities that can be performed Supplemental Security Income, Veterans, process, looking on a debit card. Each issuer establishes Railroad Retirement and Office of for abnormalities its own velocity limits and they vary by Personnel Management Benefits. At the in the activity of type of card program; however, common time the Treasury Department launched the card account rules relate to the maximum daily cash the Direct Express card, there were an itself, the bank’s withdrawal limit, maximum purchase estimated 4 million Social Security card portfolio, value limit, and maximum dollar value of recipients without bank accounts. The the processor, a prepaid debit card. Treasury Department projected savings the association would exceed $300 million in the first five years alone from depositing benefit or network, Processors, associations, and networks payments to Direct Express cards rather the merchant’s continually scan authorization requests to than printing and mailing checks.3 Use processor, and look for patterns that indicate fraudulent of Direct Express is voluntary for benefit the individual activity. These systems are complex recipients. However, in April 2010 the merchant.” neural networks in which the financial Treasury Department announced that services industry has invested billions as of March 2011, electronic deposit of of dollars. Fraud monitoring takes place benefits (to either a bank account or the at every level in the process, looking for Direct Express card) will be required for abnormalities in the activity of the card new benefit recipients and all existing account itself, the bank’s card portfolio, recipients receiving paper checks must the processor, the association or network, convert to electronic deposit by March the merchant’s processor, and the individual merchant.

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2013.4 The Direct Express card has a fee Court Ordered Payments — States structure that allows benefit recipients are increasingly adopting open loop to use the card at little or no cost. The reloadable prepaid cards for delivery card is delivered to benefit recipients free of court ordered payments. All of the of charge, has no monthly maintenance savings associated with movement away fees, no charge for customer service, from production and delivery of paper and allows one free US-based ATM unemployment checks applies to checks transaction after the monthly deposit of for court ordered payments. Moreover, benefits. Additional ATM withdrawals since court ordered payments are often cost recipients 90-cents.5 delivering child support and/or alimony payments, emotions of the payer and/ Unemployment Benefits — In the same or recipient can be heated. Using open search for cost reduction and efficiencies loop reloadable prepaid cards to deliver that fueled the US Government’s court ordered payments increases the introduction of Direct Express, many state transparency around payment and receipt governments have launched their own of the funds. While judicial agencies government benefit cards for payment of at many levels in state governments unemployment insurance and other state administer court ordered payments, some benefit programs. In 2009, an estimated states have adopted one prepaid debit card $23 billion in unemployment benefits were program for use by all judicial agencies distributed unto prepaid cards, and by within the state. mid-2010 every heavily populated state except for California had either launched Food Stamps — Food Stamps were or was in the process of introducing an the first government benefit program unemployment claims payment card.6 to move to paperless benefit delivery, There are several different providers as the fraud associated with paper food of these cards, and the particulars of stamps was high. By 2009, 36 states had the programs vary from state-to-state. implemented electronic benefit programs However, the programs have in common for foods stamps and all the rest were in that the cards are open loop, reloadable, the process of planning implementations.7 with fee structures that allow recipients Merchants participating in food stamp to use the card at little or no cost. programs are required to validate that While benefit recipients own the card, each item purchased is food stamp government agencies typically do not eligible. Prepaid debit technology, as allow cards to be loaded with other than we know it today, did not exist when the government funds. Recently, a handful first EBT programs were launched. As a of states have changed their positions and result, the and merchant are allowing loading of cards with other community invested in a new technology than government funds; in essence, their infrastructure called Electronic Benefit benefit cards can serve as a checkless Transfer (EBT). New EBT networks checking account even after the cardholder were created, new cards were issued to discontinues receiving benefits. food stamp recipients, and new terminals were installed at merchant locations to

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support the more complex authorization sent in the authorization request, and requirements. Because of the costs of deny transactions from non-healthcare the dedicated equipment, merchants may merchant categories. Since large only support EBT in one check-out lane supermarket, discount, and drug stores in the store. Thus, food stamp recipients sell both medical and non-medical could be inconvenienced and potentially goods, FSA cards cannot be accepted at ostracized as the fact that they are these broad-based retailers unless the paying with food stamp funds would be retailer distinguishes between eligible apparent to other shoppers. Today, many and ineligible purchases. Most of the EBT programs are retooling their EBT large chains in these categories have platforms to “mainstream” acceptance and modified their systems to processing of EBT cards with commercial automatically identify which items are payment card equipment and processes. FSA eligible. These retailers maintain an Inventory Approval Information System Flexible Spending Accounts — The (IIAS) that lists all the approved items federal government allows employers to for sale in the store or on an e-commerce offer Flexible Spending Accounts (FSAs) site. At check-out, each item is matched which let employees set aside pre-tax pay against this list and a separate total is to fund out-of-pocket medical expenses. created for the FSA eligible and non-FSA To prevent consumers from using these eligible items. The consumer is allowed tax-advantaged funds for non-medical to pay for the qualified purchases from purchases, the government requires FSA the FSA card and use another form of plan administrators to substantiate the payment for ineligible items. eligibility of each purchase. Consumers originally were required to submit a Considerations for claim for reimbursement. This was inconvenient for consumers and limited CLASS Plan Design and the appeal to employees because FSA Implementation withholdings reduced net pay, then consumers put forth cash for the purchase and had to wait for reimbursement. In The Community Living Assistance essence, FSA users were paying twice Services and Supports (CLASS) provision for the purchase before receiving their in the Affordable Care Act requires that reimbursement. FSA cards addressed procedures be developed to allow use this issue by allowing consumers to of debit cards to access cash benefits access their FSA funds in stores via an to be deposited into Life Independence 8 FSA debit card. When FSA card issuers Accounts. This primer describes the receive authorization requests, they history and operation of debit cards must substantiate the medical nature and provides examples of their use in i of each item purchased. Issuers check government programs. the Merchant Category Code (MCC) i Additional considerations for integrating debit cards into CLASS Plan Design and Implementation are presented in The SCAN Foundation’s CLASS Technical Assistance Series Brief #10: (“Financial Management Services in Participant Direction Programs”), Brief #11: (“Options for Getting Purchasing Power into the Hands of Participants: Lessons from Participant Direction Programs”), and Brief #12: (“Considerations for Debit Card and Cash Purchasing Mechanisms in the CLASS Plan”). www.TheSCANFoundation.org 12 Spring 2011 • No. 9 CLASS Technical Assistance Brief Series

Authors:

Cathy Corby Parker, M.B.A. is founder and President of Corby & Company, Inc., a Jacksonville Florida-based strategic consulting firm specializing in debit, prepaid and emerging payments.

James Wironen, M.B.A is the Director of Product Development & Consulting Services for the National Resource Center for Participant-Directed Services at Boston College, in Chestnut Hill, MA.

Mollie G. Murphy is the co-founder of Annkissam, a Cambridge, MA-based organization dedicated to building tools for nonprofits. Mollie is also the Financial Management Services Expert Consultant at the National Resource Center for Participant-Directed Services at Boston College, in Chestnut Hill, MA.

References

1. Federal Deposit Insurance Corporation. (2009). FDIC national survey of unbanked and underbanked households. Washington, DC: U.S.Government Printing Office.

2. Electronic Fund Transfers (Regulation E), 12 C.F.R. § 205 (2009).

3. Department of the Treasury Financial Management Service. (2008). U.S. Treasury introduces Direct Express® debit card for Social Security payments [Press release]. Retrieved from http://www.fms.treas.gov/news/ press/directexpress_launch.html

4. United States Department of the Treasury. (2010). Treasury goes green, saves, green broad new initiative will increase electronic transactions, save more than $400 million, 12 million pounds of paper in first five years alone [Press release]. Retrieved from http://www.treasury.gov/presscenter/press-releases/Pages/tg644.aspx

5. MasterCard. Terms of use for your Direct Express® ® card. Retrieved from http://www. usdirectexpress.com/edcfdtclient/docs/Terms_And_Condition.pdf

6. Mercator Advisory Group, Inc. (2010). Seventh annual open loop prepaid market assessment.

7. United States Department of Agriculture, Food and Nutrition Service. (2009). EBT Alternatives Analysis.

8. Patient Protection and Affordable Care Act, Pub. L. No. 111th-111-148, § 8002 (2009). Print.

The SCAN Foundation 3800 Kilroy Airport Way, Suite 400, Long Beach, CA 90806 www.TheSCANFoundation.org 13 (888) 569-7226 | [email protected]