MarketWatch: Government is partnering with big banks, fintech to speed payments to Americans

The increased collaboration could lead to a more seamless distribution of government benefits, greater access to lending programs, and even digitized currency.

Last Updated: Oct. 16, 2020 at 9:26 a.m. ET

By Emily Bary

ILLUSTRATION BY KEVIN WHIPPLE

As Los Angeles sought to disburse relief funds to its poorest residents at the height of the pandemic, it found itself in uncharted territory.

Unlike state and federal entities that process unemployment claims and tax refunds, cities typically lack the infrastructure to make payments to individuals. So Los Angeles turned to the private sector for assistance, working with Mastercard Inc. MA, 0.92% and economic-development nonprofit Accelerator for America on a program that collected private donations, partly via text message, and distributed funds to qualified residents on prepaid “Angeleno” debit cards.

The program, which ultimately paid out more than $36 million to 38,000 families and sparked similar initiatives in other cities, is one of a number of financially focused public-private partnerships that emerged during the pandemic, fostering optimism that governments will increasingly work with private payments companies to broaden access to financial services even after the crisis subsides.

Ultimately, the increased collaboration could lead to a more seamless distribution of government benefits, greater access to lending programs, and even digitized currency.

“Public-private partnerships before all this were typically finance-type arrangements, like building a toll road or bridge,” said Miguel Gamiño, Mastercard’s head of global cities. “The pandemic forced some conversations to happen more quickly than what would’ve happened in a pre-COVID world, and now we’re continuing to develop beyond emergency scenarios.”

Lessons from Los Angeles

Looking past the pandemic, people involved in the Angeleno Card project think it could pave the way for an expansion of digital government services around the country, done through partnerships with non-governmental organizations and private companies.

In general, distributing monetary benefits to poor residents can be difficult because some people lack bank accounts or incur fees when they use their accounts, and handing out physical cash is dangerous, said Rick Jacobs, the chief executive of Accelerator for America, a non-profit focused on tackling economic instability at the local level.

“If you were just cutting checks to people and then they had to go to a check-cashing service, the fees they would end up paying would totally go against the sort of program we were building,” added Matt Johnson, who served as the head of Los Angeles’ philanthropic and private-sector COVID-19 response efforts.

Now that residents have come to trust something like the Angeleno Card after receiving funds on it during the COVID-19 crisis, Jacobs thinks governments may look to move additional services to these prepaid cards, including food-assistance and reduced-fare transit benefits.

They may also seek to incorporate cards into other programs, something Accelerator for America experimented with as it helped design a parallel domestic-violence shelter system in Los Angeles after the pandemic made it more difficult for residents to transfer out of the existing shelter system, which essentially froze the traditional program in place.

“With public-health concerns and convenience concerns and the particular focus on trying to support small businesses, you can see where all the vectors of interest just converge.”

The parallel program, called Project Safe Haven, temporarily placed victims of intimate-partner violence in alternate forms of safe housing and gave them reloadable debit cards that were programmed to work for food purchases.

“One dynamic of domestic violence is the control of finances and the control of someone’s movement,” said Chanel Smith, the director of domestic violence policy for Los Angeles. “Many clients come in and have never been able to do budgeting,” she explained, and the debit cards allowed residents to learn about weekly meal budget preparations in a way “that won’t happen in a communal space,” where staffers typically buy groceries for a group of people.

Johnson said that L.A. paid for the small cost of the physical cards used in its pandemic-related relief efforts but that it didn’t incur other costs from Mastercard for the program as the company waived some fees. Jacobs said that the total cost of the Angeleno card project, which paid out more than $36 million, was under 2% of that.

Digital government

Beyond government payouts, other services like business and motor-vehicle registrations were already ripe for digital upgrades, and COVID-19 could prove a key catalyst for this transition as the pandemic has highlighted the pitfalls of making essential government services reliant on in-person visits.

State governments increasingly began allowing remote-notary services due to the crisis, an allowance that could become permanent, according to George Whitridge, an analyst at Ark Invest. “If you live in a rural area, a lot of these fintech services are huge wins for you because you don’t have to hop in a car and go to town 15 to 20 minutes away as long as you have access to internet,” he said.

More online options for government services could generally come as welcome relief for people whose schedules don’t easily allow for in-person appointments during business hours. Mastercard’s Gamiño is upbeat about digital government services given his past experience as the chief information officer for San Francisco, where his work to let businesses get their permits online drove 13-times growth in new business registrations during its first month.

“Fast forward to now, with public-health concerns and convenience concerns and the particular focus on trying to support small businesses, you can see where all the vectors of interest just converge,” Gamiño said.

Mastercard’s City Possible program, a public-private partnership, has “effectively doubled since March,” according to Gamiño, with inbound interest from about 200 cities.

The key will be rolling out these features in a way that’s inclusive of those who aren’t typically part of the digital ecosystem.

“We’re not saying the only way to get into the library is a digital card but we want to enable that experience,” Gamiño said. The focus is “making sure that everyone has access to those cards whether they be formally banked or not.”

Lending assistance

The COVID-19 crisis could usher in expanded lending partnerships between private companies and the government as well as tech-like focus on user experience when it comes to loan applications.

The initial days of the Paycheck Protection Program showed that it’s not always easy for the government to reach the smallest businesses, especially those without deep banking relationships. The program drew criticism early on as some high-profile businesses were able to obtain funding while smaller operations got shut out.

Once fintech companies like PayPal Holdings Inc. PYPL, 1.01% and Square Inc. SQ, -0.74% got approval to be PPP lenders in addition to the banks, they say they were able to deliver loans to the sorts of mom-and-pop businesses the program was meant to help but who were largely excluded from the first round of funding.

Lending data bear that out. The Small Business Administration cites an average PPP loan size of about $107,000 as of June 30, while Square Inc. averaged less than $11,000 and PayPal averaged about $25,000.

Traditional banks may have been partial to customers they knew well given the way the program was set up, but Square Capital lead Jackie Reses said that her company’s product, which looks at things like transactional data from payment processing customers when making loan decisions, served merchants “who get locked from the financial system because they’re too small for a traditional bank to operate with them.”

As the U.S. grapples with the long-lasting economic effects of the crisis, PayPal Chief Executive Dan Schulman says that new-school ways of lending that use machine learning and other algorithms to determine the creditworthiness of business customers deserve emphasis. “Clearly moving beyond FICO scores is essential if we’re going to lend responsibly to more of the population,” he argued.

Schulman said that PayPal is “always looking at ways in which we can partner that’s helpful for government programs.” Square’s Reses said she wasn’t sure whether her company would pursue loan products with the SBA because those are structured differently than Square’s normal loans, but that the company “would absolutely want to continue the relationship” if the right opportunity presented itself.

One further legacy of the fintech world’s involvement in the PPP could be an approach to lending paperwork that’s more focused on user experience, building on the way that tech companies create their products. Reses said that Square emphasized easy-to-understand language in its loan applications and answered seller questions publicly on Twitter while looping in SBA officials in order to provide more simplicity and transparency for merchants.

“If we can abstract away all the pain by making the language and design easy to use, there’s an incredible power in that that can be used in future programs,” she said.

Rethinking dollars

While the financial crisis a decade back drove greater regulation of the financial industry including the credit-card networks, the COVID-19 crisis seems to be sparking more cooperation on the federal level, according to MoffettNathanson analyst Lisa Ellis. Such collaboration could bode well for longer-term initiatives on digital payments, she said.

The credit-card companies had a unique window into the pandemic as they were able to track spending in real time. This data proved useful to the federal government, as well as lower levels of government, as the U.S. tried to gauge the impact of stimulus payments and other initiatives.

Ellis is hopeful the warmer feelings will persist, leading to “a deeper collaboration and partnerships between payments companies and governments, which by and large have the same goals around the digitization of cash, financial inclusion, and empowering small businesses.”

Payments companies also worked with governments internationally, including to lower transaction limits on contactless transactions so that more people could pay in a touchless manner, according to Visa Chief Financial Officer Vasant Prabhu.

Visa V, 0.80% cooperated with international partners on aid efforts, too, such as one in the Dominican Republic that nearly doubled the number of people who’d be reached by the country’s emergency disbursement program. The Dominican Republic used the Visa Direct platform, which lets people receive money using their debit-card or credit-card credentials.

Prabhu argued that the COVID-19 crisis has served as a wake-up call for governments about building out access to e-commerce.

“If you’re not setting up digital infrastructure and ensuring that a vast majority of the population has some access to digital credentials, then you’re taking a risk as a country,” he said.

Now that the relationship between payments giants and the government seems warmer, Ellis said the ultimate goal would be a joint initiative that looks into issuing dollars in a digital form rather than as fiat currency. The Federal Reserve recently said that it would build and test a hypothetical digital currency but that it wasn’t yet positioned to issue a virtual version of the dollar.

Talk of digitizing fiat currency began before the pandemic, and there’s debate about how useful it could be. Visa’s Prabhu argued that the COVID-19 crisis doesn’t necessarily highlight a greater need for dedicated digital currency since those with debit- or credit-card credentials can already tap into the payment ecosystem in a digital manner.

Others are more enthusiastic, including Ellis, who said that that digital currency could bring “a level of stability in the global financial system that is unprecedented,” though “obviously the Fed can’t do this without the help of big players.”

PayPal’s PYPL, 1.01% Schulman said that the payments universe is “in the very beginning innings” of thinking about central-bank-issued digital currencies but that the accelerating growth of digital spending during the pandemic is making governments increasingly consider the evolving role of currency.

Cash “is still an important element of currency and it will be a long time before we see the demise of cash,” Schulman said, though digital currency could help money flow more smoothly.

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