Prepaid Post Katrina: Lessons & Opportunities For Disaster Relief & Financial Recovery

Market Impact Press Release

Tim Sloane, Director Debit Advisory Service

Waltham, MA, September 13, 2005

Mercator Advisory Group predicts that $372 million will be loaded onto prepaid instruments related to hurricane Katrina relief efforts.  These funds will come from organizations that distribute emergency funds, insurance companies that pay claims, consumers that make donations, and as a new form of providing financial services to those displaced and left jobless by Katrina. 

 

Insurance Claims

It is likely that some $300 million of initial emergency payments, of the insurance industries predicted $40 to $60 billion in total claims, will be made via prepaid instruments.  This means that the insurance industry will disburse more funds on Katrina than it disbursed on prepaid in all of 2004 ? including the payments made when hurricane Francis hit Florida.  In the report ?Prepaid Market Forecast? released in July, Mercator Advisory Group predicted that the total spending on insurance for all of 2005 would be $240 million.  This forecast did not include another disaster possibly in excess of hurricane Francis in 2005.  This calls for a revision of our estimate to factor this in for 2005.  This assumes no further disasters of this magnitude.

 

Emergency Relief ? FEMA & American Red Cross

Despite the news that FEMA and the American Red Cross have stopped their deployment of prepaid cards, Mercator Advisory Group expects research to demonstrate that these programs were hindered not by any limitations in the prepaid instrument itself, but by the process that was set up to deploy the prepaid solution.

 

While there is still more to be learned from Katrina, we have learned from past disasters where prepaid cards were deployed that four key areas must be considered:  1) Displaced survivors have little identity information, and what they do have is inconsistent.  2) Restrictions designed to prevent fraud also increase complexity in an environment where simplicity is mandatory.  3) Recipients suffering from shock and despair can not be expected to assimilate even simple instructions regarding prepaid card activation and usage.  4)  With no communications infrastructure and major confusion in the field, even the simplest one step procedure for card distribution and activation is unlikely to be implemented reliably. 

 

Despite having run into distribution problems, FEMA and the American Red Cross have already used prepaid solutions to distribute $40 ? $50 million in aid.  It is likely the American Red Cross will continue to deploy prepaid cards when they represent the best solution to a victims need, but with the majority of those that are destitute already taken care of, the American Red Cross expects most remaining claims can be satisfied using other forms of payment.

 

Corporate & Individual Prepaid Aid

Roughly $2.2 million worth of prepaid products are also being distributed to Katrina?s victims by both companies and individuals.  These prepaid products include prepaid long-distance, mobile minutes, mobile handsets, gas cards, open gift cards, and money cards.  For example, Verizon donated 20,000 long-distance cards and will work with 7-Eleven to distribute them.  Verizon also donated 10,000 prepaid cell phones to the American Red Cross and AT&T donated 35,000 30-minute cards for distribution by the Red Cross and Salvation Army. 

 

Opportunity To Assist The New Jobless

The estimate of prepaid spending on Katrina at $372 million does not include the possibility that government agencies and financial institutions might actively work together to deploy financial services through ?unbanked prepaid solutions.?  The effects of Katrina create a unique opportunity to service the displaced unbanked and under-banked population, typically identified as individuals and families that have no banking relationship or impaired credit and limited income.  As of last week 165,000 new people have filed unemployment applications in Louisiana, and this number will certainly continue to grow.  Unbanked prepaid solutions offer these individuals an account that supports direct deposits and offers services that includes access to cash, usage at the point of sale, money transfer and bill payment services.  Should government agencies and financial institutions join forces to help Katrina victims by subsidizing these unbanked prepaid solutions, then the total spending on prepaid could easily exceed $572 million as participants deposit government funds and paychecks on the prepaid solutions.

 

This press release contains Mercator Advisory Group analysis on the impact of Katrina on the Prepaid Market.  Members of Mercator Advisory Group have direct access to analyst advice and opinions.  For more information call Mercator Advisory Group?s main line: 781-419-1700 or send email toinfo@mercatoradvisorygroup.com.