Fintech has started to revolutionise the way we manage our money: companies such as Monzo and Revolut have transformed personal banking, and to many, fintech is the answer to helping more vulnerable people access financial services. However, the current crisis has shown that there’s still some way to go. Back in 2013 – shortly after the introduction of Universal Credit – we looked at the effectiveness of prepaid cards as a way of distributing direct payments, similar to the ‘companion card’ schemes now being considered by UK banks.
Read The Power of Prepaid here, and the executive summary below.
The Coalition Government has ushered in a welfare and public service reform agenda of unparalleled ambition: sweeping away the welfare system as we know it and introducing the Universal Credit; dismantling primary care trusts and creating new local health structures; and, within the next few months, potentially developing a new funding regime for social care. Underpinning these radical plans are two central themes – personalisation (seen in the Government’s commitment to rolling out personal budgets not only in social care, but also in health, children’s services and supported housing), (1) and integration, with local health and wellbeing boards being charged with coordinating a range of local services to support different need groups and the social care draft legislation proposing new duties for local authorities to integrate their health, care and housing activities. (2) Even the Universal Credit, merging six separate benefits into a single payment, can be seen as an integration of sorts. (3)
This project was undertaken with these significant policy changes, and an era of unprecedented budgetary cuts, as a backdrop. Together, they create a perfect storm for thinking about radical and inventive new solutions to the distribution of benefits and services. In particular, as public services and welfare are being reformed in parallel, there is an obvious opportunity to explore the inevitable overlap of benefits payments and personal budgets. A single pot of money given to an individual – rolling up all benefits payments and a personal budget associated with the use of perhaps several different services – could be the gold standard of a personalised and empowering state. The Right to Control pilots, which are bringing together disability benefits, social care and supported living funding into a single pot for a small group of disabled people, are the first tentative steps towards this goal. (4)
Yet to achieve such radical steps in personalisation and integration, equally radical changes to the way in which people purchase, consume and interact with services and benefits will need to be countered. Our goal in this report is to marry the big, ambitious questions on the increased spread of personal budgets and launch of Universal Credit with the nitty-gritty of implementation. Big picture reforms often stand or fall on the processes and infrastructure which can often be overlooked by policymakers: the IT systems, budgetary processes, data sharing and so on that underpin the headline-grabbing policy change. In particular, we will focus on one such nitty-gritty development – the quiet spread of ‘prepaid’ cards in local authorities as a means of distributing and administering direct payments.
We discuss in this report how well they are working now, and how they might be used more ambitiously in the future – as a tool for the distribution of Universal Credit, as a means of bringing together personal budgets and welfare benefits, and possibly in wider applications related to encouraging financial capability.
To explore the prepaid card phenomenon, Demos carried out a series of interviews, supplemented by desk research, to collate a number of case studies illustrating how prepaid cards are being used in different contexts in the UK and the USA. To give us a more comprehensive overview, we sent a freedom of information (FOI) request to all 152 unitary local authorities in England and Wales.
To gain an insight of what the public felt about prepaid cards in practice and some of the wider questions they posed in relation to their use in a benefits context and as a means of integrating benefits and direct payments, we also hosted a series of focus groups with current and potential prepaid card users in Wigan, Southwark and Merton. In parallel, we hosted expert workshops in Leeds, Newcastle and London with representatives from local authorities and charities who were interested in or involved with the use of prepaid cards in a personal budget or benefits context. We also commissioned a survey of 2,000 members of the public to find out what the public mood was on monitoring or controlling spending of personal budget users and those receiving state benefits. As this report was finalised, it was revealed that the Secretary of State for Work and Pensions, Iain Duncan Smith, has asked officials at the Department for Work and Pensions (DWP) to look into the payment of benefits via smart cards (essentially prepaid cards) rather than cash to ‘troubled families’ to ensure benefits are spent on essentials like food, rather than to fuel substance abuse. (5) The findings in this report on policymakers’ and the public’s views on this controversial idea – and the practical challenges of such an endeavour – are, therefore, extremely timely.
Further details of the organisations attending the workshops and the questions we asked in our polling can be found in appendix 2.
Having drawn on these different sources we have come to the conclusion that the first generation of prepaid cards, mainly being used for the distribution of direct payments in social care, are proving very successful and are well received by card users, who, along with local authorities pioneering this payment system, are the cards’ most enthusiastic advocates. The reduction in paperwork and administration associated with managing and monitoring direct payments is substantial and can generate valuable back-office cost savings at a time when local authorities are prioritising front-line delivery in the face of resource constraints.
As a result of some initial teething trouble – on the ability to support card users via the telephone as well as the internet, and the charges and fees associated with the cards and levied by the issuing banks – implementation has not been smooth for everyone. This, plus the challenge in encouraging prospective users to adapt to the new system (which is often wrapped up in wider concerns about the move from directly delivered services to a personal budget), means thoughtful implementation is key, requiring planning, securing a good deal from the card issuer and programme manager, taking on board care users’ and providers’ concerns and adapting the card package accordingly.
Demos also foresees a variety of further important applications for prepaid cards:
- for distributing benefits (in particular Universal Credit) for the unbanked and underbanked
- as a tool to encourage improved financial inclusion among some of the hardest to reach and those learning to live independently
- as a means of integrating several separate direct payments as they are applied in a variety of new service areas
- ultimately – as a way of realising a more ambitious vision of bringing together direct payments for services with benefit payments.
The first generation of prepaid cards is working well in the distribution of direct payments, but if they are to flourish in the more varied and challenging contexts outlined above, then the second generation of prepaid cards will need to learn from early teething problems, and those looking to administer them will need to engage pro-actively with potential users and other stakeholders to ensure a smooth transition from a paper-based system. Welfare reform and the personal budgets agenda have created significant new opportunities for more creative and innovative thinking regarding how people relate to local and national government and public services. Prepaid cards are an important tool to make these grander visions logistically possible, and cannot be overlooked as policymakers seek to turn this vision into a reality. With this in mind, Demos has made seven recommendations:
- In the face of unprecedented budget cuts, local authorities should explore the possibility of using prepaid cards for the distribution of personal budgets, as a tool to reduce administrative costs and reduce the budgetary cuts passed to front-line services. We recommend, given the importance of the planning and implementation of these cards, that local authorities pilot prepaid schemes before rolling them out, and draw from the experiences of local authorities already pioneering such schemes.
- Local authorities considering using prepaid should engage with a range of different banks and prepaid programme providers and payment companies offering prepaid (such as All pay and Advanced Payment Solutions) to compare different charges, and ensure they secure the best deal for local people. We support the National Consumer Law Center (NCLC) recommendation for US states to work together to reap economies of scale when negotiating with banks, and suggest local authorities could work together (perhaps in regions or local improvement networks) to adopt a prepaid scheme, giving them more ‘purchasing power’ in negotiating a good deal with the banking sector and potentially enabling their direct payment users to purchase services in neighbouring local authorities.
- Local authorities should think creatively about using prepaid in other areas, such as asylum seeker and care leaver payments, and for local emergency fund schemes destined to replace the Social Fund and community care grants. This would reap wider cost savings, including through opportunities to integrate funding streams where a local citizen draws on more than one service or grant, thereby making the initial investment in this technology more financially feasible.
- Prepaid cards should be used as a secure way to distribute Universal Credit for the unbanked. The details of the Simple Money Transmission Service (SMoTS) scheme are limited so it is difficult to ascertain if these cards will have the functionality of the prepaid cards described in this report (such as chip and pin, direct debit and online or telephone banking and support functionality) or if they are simply a single withdrawal card to be used at pay points. We recommend that the Government adopts a fully functional card to help people develop the money management skills required for monthly Universal Credit payments, and to provide non-cash point of sale payment and direct debit options, as well as credit-building opportunities. Less functional cards keep the unbanked in a cash-based economy.
- In the longer term, the Government should explore the possibility of using prepaid cards to distribute Universal Credit or other benefits to financially vulnerable groups, possibly integrated with direct payments in health or care. Some care users (such as those with learning disabilities, mental health needs or older people vulnerable to financial abuse) might find prepaid cards a beneficial way to spend both their health or care personal budgets and their disability-related benefits. If the practical complexities and ethical questions can be adequately settled (taking on board the legitimate benefits associated with safeguarding, but balancing these with concerns about a ‘nanny state’ controlling people’s personal spending, and whether benefits should be treated as private income), the Government should explore the co-location of personal budgets and benefits payments on prepaid cards for some groups.
- The Government should resurrect a form of targeted and less generous matched savings scheme to replace the now defunct Savings Gateway, using prepaid cards – in particular for the unbanked or underbanked in receipt of Universal Credit. We recommend that the Government recognises the popularity of savings cards, like the Asda card, and consider creating a targeted savings encouragement scheme facilitated through prepaid cards. The primary target market for such a scheme would be the unbanked, particularly if they began to receive their Universal Credit through prepaid cards as it could be added to this card to encourage savings made from benefits income. Those benefiting from people using prepaid cards to make payments more reliably – such as housing providers, local authorities or utilities companies – might contribute to such a matched savings pot.
- Invest in greater information, advice and hands-on support to facilitate the transition to a more digital, cashless society. With the ongoing spread of direct payments and the imminent roll out of Universal Credit, Demos recommends the Government reviews its financial inclusion and digital inclusion activities and creates greater synergies between the two. This may involve investing further in awareness raising and information and support services delivered through local authorities or local agencies such as Citizens Advice regarding online financial services, the use of direct debit and debit and prepaid cards. Without such activities, many of the groups most likely to benefit from a shift from a cash-based public service and welfare framework will be excluded.
Definition of terms
Card payment scheme: a four-party card payment scheme, such as MasterCard or Visa, enables a bank or any other eligible financial institution to become a customer of the scheme, thereby licensing them to issue cards (issuer) with the scheme brand(s) on them and/or acquire the transactions (acquirer) performed within the scheme by signing up merchants to accept cards with the scheme brand(s). Cards that operate in the scheme include credit, charge, debit and prepaid cards. The open and competitive nature of four-party schemes optimises the incentive for issuers to issue cards with scheme brand(s) and merchants to accept them, thus enabling efficient growth of both sides of the market. The payment scheme may also process, clear and settle transactions performed on their system.
Direct payments are a cash sum given directly to individuals to choose, organise and pay for the services they need, rather than using the services offered by their local authority. They are mainly used in social care, where they are cash payments in lieu of community care services; however, they are being trialled in health, housing (to replace housing benefit going to landlords) and children’s social care services.
The issuing bank: a bank or financial institution, and member of a card payment scheme, which has a contractual relationship with a cardholder for the provision and use of a card of that card scheme.
Personal budgets are an allocation of funding given to care and health service users after an assessment, which should be sufficient to meet their assessed needs. Users can either take their personal budget as a direct payment, or – while still choosing how their care needs are met and by whom – leave councils with the responsibility to commission the services. Alternatively, they can have some combination of the two.
Prepaid cards are similar to normal debit cards, and in some cases are actually more flexible and user-friendly than a bank account. Funds are loaded into an account linked to the card and then spent by the cardholder until the balance reaches zero – they do not have an overdraft facility and so can never have a negative balance. They can be used to make online purchases and some come with sort codes and account numbers, enabling the card holder to set up direct debits and standing orders linked to them. They can also be used to withdraw cash at ATMs if this function is enabled, and can come with full managed account functionality and ‘jam jar’ technology (where cash is visible and can be physically apportioned to pay for different items).
Prepaid programme manager: MasterCard and Visa prepaid card schemes work with private companies that administer the prepaid cards programmes, called Programme Managers. Programme managers provide a range of services, including card operations, fraud and transaction monitoring, online account management and in-house call centres.
Universal Credit is a new benefit payment, replacing six existing income-related benefits and tax credits with a new combined monthly payment in arrears to a single household rather than individual recipients. Distributed solely by the DWP, it is described as a ‘dynamic benefit’, designed to support individuals returning to work and lessen their reliance on the state.
(1) The Open Public Services: White paper, outlining the principles for public service reform, has suggested that personal budgets could be used in children’s services and specialist education, and possibly even housing services. See HM Government, Open Public Services: White paper, Cm 8145, 2011, http://files.openpublicservices.cabinetoffice.gov.uk/OpenPublic Services-WhitePaper.pdf (accessed 1 Nov 2012).
(2) Local Government Association, Get in on the Act, Health and Social Care Act, 2012.
(3) In 2010, the Government announced it would replace six individual benefits, covering unemployment, sickness, housing and family benefits and tax credits with an individual payment. This is being brought to legislation in the Welfare Reform Bill.
(4) Office for Disability Issues, ‘Right to Control trailblazers’, HM Government, http://odi.dwp.gov.uk/odi-projects/right-to- control-trailblazers.php (accessed 6 Sept 2012).
(5) C Hope, ‘120,000 troubled families could be legally banned from spending benefits on alcohol and tobacco’, Telegraph, 13 Oct 2012, www.telegraph.co.uk/news/politics/9605858/120000- troubled-families-could-be-legally-banned-from-spending- benefits-on-alochol-and-tobacco.html (accessed 1 Nov 2012).