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In the days and months following Hurricane Katrina, Congress, policymakers, and the media spent considerable resources analyzing how the Federal Emergency Management Agency (FEMA) and local elected officials responded to the disaster. Much less attention was paid to how the financial sector, which includes banks, credit unions, payment networks, ATM operators, and various federal and state banking regulators, responded to and were affected by the hurricane. These entities ultimately provided victims with the cash and liquidity necessary to purchase fresh water, food, shelter, and other goods and services.
To better understand how the financial sector responded to the victims of Hurricane Katrina, particularly those without traditional banking relationships, the PCC’s Julia Cheney collaborated with Sherrie L.W. Rhine of the Federal Reserve Bank of New York’s Office of Regional and Community Development Studies and Education. The two wrote a report, “How Effective Were the Financial Safety Nets in the Aftermath of Katrina?,” that analyzes how financial institutions and regulators responded to the disaster, the postdisaster vulnerabilities of families without formal banking relationships, and the efforts by relief agencies to provide financial assistance.
In their paper, Cheney and Rhine reach two key conclusions. First, they find that consumers without formal banking relationships were far more vulnerable to financial disruptions after the hurricane than consumers with traditional banking relationships. Consumers without banking relations — the so-called “unbanked” — experienced a variety of difficulties as a result of their reliance on nonelectronic payments. For example, unbanked victims were particularly affected by mail disruptions, which meant that important paper-based payments, such as payroll, Social Security, supplemental Social Security income, and child support checks, could not be delivered. In addition, the businesses on which the unbanked often relied for bank-type services, for example, check cashers and money services businesses, were severely damaged or destroyed, leaving victims with few options. In contrast, those with formal banking relationships were generally able to continue to receive direct deposits and to access their funds in the areas to which they evacuated. These consumers were also able to reestablish contacts with their financial institutions and get much-needed financial help from relief agencies relatively quickly.
Second, Cheney and Rhine conclude that the relatively new introduction of branded prepaid cards served as a particularly useful vehicle for delivering financial relief to unbanked disaster victims. They find that branded prepaid cards, compared with paper-based forms of payment, proved to be less expensive, easier to distribute, and safer for recipients to carry. Cheney and Rhine noted that, despite these advantages, agencies that relied on these payment cards must balance two competing considerations: the need to quickly and efficiently provide relief and the need to control fraud and other misuses of the cards. Overall, they conclude that prepaid cards provide more than just convenience for relief agencies and consumers, particularly when paper-based infrastructures are disrupted.
The report by Cheney and Rhine generated considerable press attention, and they were invited to present their paper to various groups focused on improving the financial services industry’s ability to respond in the aftermath of such events.
The response to their presentations and paper and suggestions from various industry and government contacts encouraged the PCC to organize a conference to explore more deeply several of the themes developed in the paper. This conference, The Role of Electronic Payments in Disaster Recovery: Providing More Than Convenience, was held on May 3 and 4 in Philadelphia. The event brought together a uniquely qualified group of professionals representing financial institutions, payment providers, federal agencies, state governments, and relief agencies. The day-and-a-half of presentations and discussion were structured to develop a road map to further improve delivery of disaster relief payments. A summary of this conference will soon be available on the PCC’s website.
Jack Guynn, president of the Federal Reserve Bank of Atlanta, gave the keynote address, which, among other topics, included observations as to how his Reserve Bank, with its branch office in New Orleans, responded to Hurricane Katrina. Guynn outlined several lessons learned after he reflected on his Bank’s response to the disaster. A critical success factor for the Atlanta Fed and other financial institutions, Guynn explained, was a well-documented, well-practiced, and well-communicated contingency plan. The plan served to address issues such as employee safety, operational continuity, and customer support. Guynn also discussed the need to encourage those who presently receive their federal and state benefits by check to adopt direct deposit, noting that it was much easier to reroute undeliverable credits in the ACH system than it was to re-route undeliverable checks in the mail.
Sandra Braunstein, director of the Division of Consumer and Community Development Studies and Education at the Federal Reserve Board, opened the next day’s proceedings, emphasizing the relevance of the conference topic to the Fed’s mission of maintaining a safe and efficient payment system. She also noted the significance of an underlying theme in the conference: the need to include discussion of the plight of the unbanked as those most vulnerable to the kind of disruptions experienced in the aftermath of Hurricane Katrina.
Two panel discussions followed Braunstein’s remarks. The first panel discussed electronic payment vehicles for delivering financial relief. Panelist Doug Perry, of the U.S. Department of Agriculture, the government agency that oversees the food stamp program, described how electronic benefit transfer (EBT) cards proved to be a highly reliable channel for relief distribution after the disaster. He noted that more than $500 million was distributed through EBT cards to the victims of hurricanes Katrina and Rita. These individuals had previously used these cards to receive food stamp assistance. EBT cards worked well, he argued, because the supporting infrastructure was already in place and recipients understood how to use them. Paul Simpson of JPMorgan Chase, the issuer of the EBT cards used by hurricane victims as well as other prepaid cards distributed to victims of the disaster, suggested that the success of EBT cards may illustrate an important lesson: If the federal government could increase participation in electronically distributed benefit programs, it would significantly increase the ability to provide, with relative ease, assistance to a large portion of those affected by any potential disaster.
The second panel of the day focused on how financial educators, payment industry leaders, federal and state governments, and national relief agencies can strengthen the financial “safety net” that is in place to help victims of natural disasters, as well as similar disruptions that might accompany terrorist attacks and pandemics. Panelist Stephen Middlebrook, of the U.S. Department of the Treasury, proposed a process for strengthening the safety net. First, public- and private-sector entities must establish channels of communication, such that these entities can start working together to prepare contingency plans. Second, these organizations must, to the extent allowed by law, establish ways of sharing information and processes related to benefits registration, evacuees’ contact information, and benefit payments. Finally, he argued that the involved entities should coordinate with one another on providing relief through a common electronic payment vehicle or set of vehicles. Panelists John Gruce, of Bank of America, and Jack Antonini, of Cardtronics, agreed on the need for more coordination and described ways by which the private sector can better prepare itself for a disaster by making products and processes scalable enough to withstand the strain of a catastrophe.
In sum, Cheney and Rhine’s efforts appear to have helped stimulate a discussion among providers of financial and relief services. The conference concluded on a note of hope that these providers will begin coordinating their efforts and that federal and state policymakers will consider ways to make such coordination easier.