A plastic prop

Written by The Economist | Updated: Aug 27 2009, 03:15am hrs
Earlier this year more than 1.5m residents of Pakistans Northwest Frontier Province (NWFP) fled their homes to escape fighting between the army and Islamist militants. Faced with the problem of distributing aid in a region with an honour code that frowns on cash handouts, the government turned in June to a local bank and Visa, a card-payments network. Within a week they began issuing pre-paid debit cards. Some 230,000 cardsone per displaced familywere handed out, each loaded with $300 per month that could be spent on food and medicine at any of 500 terminals in and around their camps.

Using plastic to channel aid and benefits is a growing global trend. Visa is also doing this in the Philippines, Mexico, Brazil, Costa Rica and the Dominican Republic, where 800,000 people get food aid, fuel subsidies and even rewards for attending school on its Solidarity Card. MasterCard, another card network, is active in Poland and Peru. Mature economies have caught on, too: at least 38 American states distribute benefits on cards or plan to do so.

For governments, the savings can be substantial. It costs a penny to put money into an account linked to a card, compared with 60 cents to send out a cheque, says Shane Osborn, the state treasurer of Nebraska, whose card schemes include child benefit and income support. The state has been able to halve its call-centre staff because it now gets fewer inquiries about lost cheques and the like. Card schemes mean less fraud, too. Pakistans is backed by a database of biometric information.

For recipients the advantages include an end to cheque-cashing fees (of $1.5 billion a year in America alone, Visa claims), convenience (you dont have to be at home to get the money) and greater security (the balance is safe if the card is lost). The card networks and banks, meanwhile, take a slice of every transaction from merchants.

There is also a social benefit. Ali Hakeem, head of Pakistans National Database and Registration Authority, sees the NWFP scheme as a massive financial-inclusion programme. The hope is that some of the 95% of recipients who previously had no link to the formal financial system will eventually become regular bank customers because of the scheme, or at least hang on to their cards as a way to save as well as spend.

The Economist Newspaper Limited