June 26, 2006

Cards once again are proving just how versatile they can be as payments instruments. The latest card push is in the area of healthcare flexible spending accounts (FSAs).

FSAs are tax-advantaged accounts set up by companies for their employees. Funds are deducted from employees' paychecks pre-tax to cover estimated medical expenses for the year. Traditionally, these accounts required users to pay twice -- once out of their paychecks and once at the point of service (e.g., doctor's office) -- before being reimbursed. "Many people live from paycheck to paycheck, so the idea of having to cough up the money twice becomes a problem," explains Ariana-Michelle Moore, a senior analyst with Boston-based Celent.

Since the IRS approved the use of prepaid cards for FSAs in 2003, according to Moore, FSAs have seen an increase in participation. In the late '90s, she relates, less than 10 million Americans opened an FSA. Coupled with new allowances for over-the-counter drugs and an extended grace period by which funds must be used, the introduction of cards led to an estimated 20 percent to 40 percent increase in employee participation in FSA programs at some firms, Moore asserts.

With the use of prepaid cards, Moore notes, much of the hassle behind maintaining FSAs is eliminated. For example, users no longer have to save every single receipt in order to prove to their employers/FSA administrators that they spent the funds on an approved service or product since the information is captured when the transaction is processed.

The introduction of FSA debit cards has created an opportunity for banks, adds Moore. "There will always be cross-sell opportunities for banks with FSAs, along with interchange collection," says Moore. "It might be a good way to solidify your relationships with your commercial clients."

Still, Moore concedes, FSA-linked cards are not perfect. Among the wrinkles to be ironed out is finding a means to obtain more-detailed transaction information for easier processing/substantiation, she relates. Overall, though, cards have proved valuable in simplifying the FSA process. "It's interesting to see how a stored value card can add efficiency to a cumbersome process," says Moore. * --Maria Bruno-Britz

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