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Social Security Payments Move to Debit Cards: Is Fund Industry in Step for Second Digital Decade'?

The Treasury Department will begin offering Social Security recipients the option of receiving payments by debit card instead of traditional checks, signaling a further effort by the government to move toward electronic technology.

"The explosive growth in the prepaid card industry offers an important opportunity for the Treasury to give unbanked payment recipients secure, easy access to their funds, at low or no cost to the cardholder," said Treasury Financial Management Service Commissioner Judy Tillman.

There could be a use for debit cards or data aggregation for fund companies that deal with retirement income distributions, said Mike McLaughlin, a manager at kasina. However, he is not aware of any companies currently considering it.

"A lot of defined contribution plan providers are thinking about how to provide a more holistic financial picture for their clients, McLaughlin said. "I can see how data aggregation could fit there. You've got a pool of money coming on a regular basis, and you want to have access to it," he said.

The Treasury's move is part of a broader effort by federal agencies to move away from paper communications and payments toward instant, electronic methods.

The mutual fund industry and the Securities and Exchange Commission are preparing to transition toward electronic prospectus profiles this year, which could save the industry $300 million a year in printing and shipping fees. Besides the savings in cost and resources, electronic communications are also more convenient for the average user, who has become much more comfortable with computers and the Internet in recent years.

Many state agencies currently offer prepaid debit cards to recipients of unemployment benefits, child-support payments and emergency-relief funds for hurricane victims. The transition is free and completely voluntary.

Customers who sign up to receive their payments through direct deposit or by debit card, have faster access to their money and avoid security problems like stolen checks.

At last week's International Consumer Electronics Show in Las Vegas, Microsoft's Bill Gates said the "first digital decade," which centered on the keyboard and mouse, is over.

"The second digital decade will be more focused on connecting people," he said, adding that technology will continue to become easier for the average consumer to use.

After last year's successful pilot program with Social Security debit cards in Illinois, the Treasury department announced a plan last week to offer the cards in Texas, Oklahoma, Louisiana and Arkansas by the spring, and nationwide by the end of the summer.

Comerica Bank is offering the debit cards, called "Direct Express."

"In the pilot program, 85% of respondents said they were satisfied, and 88% said they would recommend it to their family or friends," said Ronda Kent, director of the agency enterprise solutions division of the Treasury.

Based on 2006 costs, Tillman said the department will save 80 cents for every payment that uses the cards instead of checks, and switching all of the nation's four million unbanked benefit recipients could save the department $44 million a year.

Approximately 28% of Social Security recipients and about 59% of Supplemental Security Income (SSI) recipients don't have bank accounts, according to the Treasury.

Recipients who rely on checks face a greater risk of check delivery delays due to poor weather, national or local emergencies and lost or stolen checks. There were 58,000 cases of forged Social Security checks last year, Tillman said, and nine out of 10 people experienced problems with check payments.

The federal government is in the process of moving all payments from checks to debit cards and direct deposit, said Alvina McHale, a Treasury spokeswoman.

The Treasury department's "Go Direct" campaign has already seen 1.6 million customers switch from paper checks to direct deposit.

"The Direct Express card provides an opportunity for people outside of the banking system," said Nora Arpin, director of government electronic solutions for Comerica, "either because of personal choice or perhaps their inability to obtain a bank account, to gain a foothold in the financial mainstream."

While there is no monthly maintenance fee and free point-of-sale transactions for cardholders, Comerica will earn money on cardholder fees, interchange fees at the point of sale and the float on funds in cardholder's accounts.

Cardholders get one free ATM cash withdrawal per month, but Comerica will charge 90 cents for each additional withdrawal. Cardholders can avoid surcharges by using any of the 56,000 designated ATMs, including ATMs at PNC Bank and 7-Eleven, but may face surcharges at other ATMs.

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