The problem of breakage and liability in E-Transfers for Humanitarian agencies. An unrecognised risk?

m of breakage and liability in E-Transfers for Humanitarian agencies. An unrecognised risk?

The problem of breakage and liability for Humanitarian agencies.

One of the most common mistakes humanitarian agencies make when using an e-transfer solution, to enable cash transfers is not understanding how the legal differences between the different products can impact program design and open up the agency to the twin risks of breakage and liability. The different cards, mobile wallets and accounts, can sound similar and have the same functionality for a person using them. However, depending on how they are set up they can have fundamental differences that have significant impacts on how humanitarian agencies account for the money in their books and changes the nature of assistance which if not managed can open agencies up to significant compliance and audit issues. This article is designed to provide an overview of these issues so actors can be aware of the potential risks, and also to provoke debate on the topic as this is currently an area underserved by discussions on the area within the humanitarian cash community. 

What is Breakage and why is it an issue for Humanitarian actors?

Breakage is a term used to describe revenue gained by a retailer or bank through unredeemed money loaded onto gift cards, mobile wallets or other prepaid services that are never claimed. In these cases, the retailer, bank or mobile money operator pockets the money paid into these accounts as profit, without providing the service or item for which the customer initially paid. This is a very common occurrence and in the United States, an estimated $8 billion annually is lost to consumers due to breakage on prepaid cards, Reference 1 (with an average of 8% of the balance being left on Cosco gift cards for example.Reference 2

This is a core issue for humanitarian cash programs as E-transfers change the normal model in a critical way that is not immediately apparent for program teams. In a traditional humanitarian in-kind assistance, or in the distribution of physical cash assistance provided via an over the counter provider, humanitarian actors are present when the end recipient receives assistance. However, when using an E-Transfer mechanism the humanitarian actor is only providing the ability for a person to receive assistance, which they may or may not be able to use in part or fully.

The fact that not all beneficiaries are not able to withdraw the full amount of funds from an e-transfer wallet is an often-overlooked issue in humanitarian cash programs, with an assumption that after funds are transferred, they are used. However in fact, with debit card / or mobile money programs in which money is transferred into a named account, there is often no way for humanitarian actors to know if the money was withdrawn as banks will not provide balance information except to the named account holder. This lack of visibility has issues of accountability to donors as agencies may be reporting people receiving assistance when they were not able to access the funds. 

For example, if a multi-purpose cash beneficiary receives 100 USD into their account, but there is a charge of 1usd to withdraw cash from an ATM and the ATM only distribute 5$ as the smallest size, then the beneficiary will withdraw 95 USD leaving 4 USD dormant. In many cases, after one or two years the bank will start charging a fee on a dormant account and claim back this money. 

Alternatively, if the beneficiary is not able to access the account (via issues using a debit card for example) and is also not able to inform the agency then they are not able to access any of the funds, all of the transferred amount will eventually be taken by the bank. 

What is the issue of liability for Humanitarians? 

The issue of breakage however also leads to a connected issue of liability related to how the money is accounted for on the books of the humanitarian agency and how it is reported to donors. Unlike in a debit card program in which funds are transferred to a beneficiaries account and the funds cannot be returned to the humanitarian agency without action by the account holder in corporate expense cards the money does not leave the agency account until the card is used. In effect, the card is an electronic check providing an entitlement to withdraw a set amount of funds, see table 1 below. 

As a result, if a beneficiary receives a card, is allocated funds to that card but does not use the card, there remains outstanding liability against the card, which would come back to the agency once the contract with the financial service provider is closed. This can have two sets of issues for agencies, internal compliance and external reporting. 

From an internal compliance side, this can result in funds existing off-book, being accounted for as spent in the financial ledger but still actually in the control of the agency. This creates an opportunity for fraud, as any balance amount could be transferred on to new card and misappropriated without raising any red flags. Additionally, tracking programming spending will be complicated as cash transfers needing to be recorded as a potential liability will need to be tracked and any outstanding liability resolved before the end of the program date. From an external reporting standpoint, it can result in a need to update the numbers of beneficiaries dynamically as funds are pulled back to the main account, and will require clear agreement on reporting of cases when only partial assistance was received. In a worst-case scenario, the agency may only realize that it has a significant amount of balance funds after the end of the project, resulting in funds being returned to a donor and inviting an external audit of the programs.

This problem is particularly acute for corporate expense card programs but equally exists in pre-paid card programs if they are designed to prevent breakage by returning the unspent amounts to the issuing agency. 

Conclusion

The twin issues of breakage and liability are not new to the cash transfer industry and as long as humanitarian cash actors are aware of the issues they can be easily resolved or mitigated. It can become however a major issue if technical staff are not aware of the issue, or if they shift from one form of cash transfers to another without making the necessary modifications to their standard operating procedures and internal finance process. 

Currently, there is limited discussion on this topic within humanitarian cash circles and almost no publically available information on how much funds are being lost or returned due to these twin issues.

However, as in the commercial sector, these two issues are recurrent features of gift cards and corporate expense cards. As such it can be expected that these issues may be widespread within humanitarian cash but not reported upon, or actors may not be aware that they are taking place. As such it is recommended that in contexts with significant use of e-transfers, humanitarian actors review and discuss the potential impact of breakage and liability on different response options, to identify the scope of the issue and methods to mitigate them.