Paper or Plastic?

If someone offered you a technology that can increase customer service, save expense dollars and has a short term, demonstrable ROI wouldn’t you be interested?  …….. I thought so.

So why is it that in 2007 (almost 2008) only a small hand full of carriers are now piloting the use of Stored Value Cards (SVC) to pay claims rather than sending paper checks?  What other major industry still relies on the US Post Office to deliver pieces of paper by way of payment?  Paper checks are slow, they arrive at unpredictable times, they get lost, get delivered to old addresses (or to addresses which no longer exist in the case of catastrophes) and require a trip to the bank or check cashing store to be converted to money.  So why are insurance carriers still using checks to pay claims?  We use plastic cards everyday for most commercial transactions and are moving towards a society where the use of paper money or checks is relatively rare.  Increasingly we pay our bills online.  Even state agencies, not exactly the vanguard of technology utilization, have established many successful programs which employ SVCs, for example Child Benefit programs. 

Clearly not every type of claim is a candidate for an SVC form of payment.  Essentially P&C claims are one off events in which the claim occurs and (if covered) gets paid.  In this simple view there is little advantage in issuing a SVC rather than a check.  But what if the claim is for a Workers Compensation loss where there may be repetitive payments for years to come?  Or if the claimant has suffered a loss as part of a catastrophe and has no access to their home or bank or may have been forced to move more than once (as per many Katrina victims)?  Wouldn’t a SVC provide a level of convenience not afforded by checks?

Let’s take a look at the SVC value proposition:

·                     The SVC replaces a stream of paper checks.  The initial issuance of the card requires that the carrier be able to send the card to a known location.  The insured then phones an 800 number and activates the card.

·                     Once the card is activated the insurer makes the appropriate intermittent payments to the SVC and the claimant can use the card immediately, without restriction and from almost any location.

·                     Payments are placed into the SVC account at a certain date and time via an internet credit transfer.  There is no uncertainty as to when funds will arrive or be available.

·                     There is no visit to the bank or time lag due to clearance for the claimant.

·                     For lower income claimants there is no cost for a check cashing service; neither is there the problem of not having a bank account.

·                     The carrier has control over the ATM fees charged to claimants.  One implementation option is to provide one free ATM withdrawal per month and then charge for subsequent withdrawals.

·                     Studies done by several states have concluded generally the same expense savings:  it cost between $10 - $12 to process, print and mail a single check.  By contrast one pilot has shown that it cost about $2.75 to issue a SVC and $1 - $1.50 to reload the card.  This is about an 85% saving.

·                     The carrier can brand the SVC in order to gain some marketing advantages

·                     The implementation requires negotiation and agreement with a servicing bank, the enhancement of the carrier’s payments system to send transfers to the bank rather than write checks, and the modification to certain workflows.  This is a relatively “easy” implementation project with a relatively modest price tag.

Given that the implementation of a SVC scheme should lead to lower expenses associated with the payments operation, has the potential to increase claimant satisfaction, can even have a beneficial marketing impact and comes at a modest price tag, why is this a “new” technology in the P&C space?  There is no good answer to this question.  Certainly it is not because the technology is unproven or that the benefits are not real.  The answer has more to do with lack of awareness and innovation within our industry and the response by carriers to an ongoing list of mission critical system portfolio updates.

Certainly Stored Value Cards is a technology which aught to at least feature on the 2008 radar screen of workers compensation carriers and those carriers who plan to continue to improve their catastrophe response capability in 2008.   

Comments

[Alex Naddaff]

George, I enjoyed your post but I must clarify one point. Most companies in the United States P&C space are still using paper checks. In fact, if I make the mistake of mentioning a check when traveling to other countries people look at me like I am crazy. The majority of payments are made through money transfers and plastic cards in many countries around the world. One possible reason for the reluctance in the United States may be because our post office and check cashing process is actually reliable. The same issue has forced our cellular telephone system to lag behind other countries. I guess the pony express has some legacy:)

[Bill Garvey]

George, good point. I'm struggling to find an airtight rebuttal to your hypothesis only because I enjoy an argument, but I'm still struggling. The only points I could offer seem lame but here they are... Insurers need to place certain State Required language on checks relative to fraud and stuff like that. Also, how would one include other Payees on an SVC, especially Payees that are not banks?

My arguments, I will admit, do not outweigh the value of your suggestion especially as a younger generation - who rely on plastic more than ever - replaces old people like you and me.