Over the past 20 years, electronic deposit and electronic benefit transfers (EBT) have replaced paper checks for the delivery of public assistance benefits. EBT systems deliver government benefits by allowing recipients to use a plastic card to access their benefits through ATMs and point of sale (POS) devices located in select retail outlets (e.g., the LINK card in Illinois is the card for SNAP funds). Recently, more and more states are transitioning away from EBTs and toward the use of electronic payment cards (EPCs) – i.e., prepaid Visa or MasterCard branded cards. In 2008, The U.S. Government Accountability Office (GAO) released a report to highlight this trend. In addition, the U.S. Treasury recently finalized a new regulation that requires federal public benefit payments to be delivered via direct deposit or Direct Express Debit MasterCard, a form of EPC.
Both EBT and EPC systems provide improved delivery in that they avoid delays due to slow mail, mail theft and long waiting lines to pick up benefit checks. Using EPCs particularly decreases the stigma associated with being recognized as a public assistance beneficiary because EPCs have the appearance of commercially recognized credit cards. Moreover, transitioning to an EPC system allows beneficiaries to use their cards virtually anywhere that a MasterCard or VISA logo is displayed.
Although EPC systems appear to be an effective and efficient way to distribute benefits, there are potential negative ramifications for low-income families. For instance, mandatory use of EPCs, while easing benefit delivery, may pose difficulties for people with special needs. It also requires regulations to limit associated fees and education and training on the use of EPCs for the beneficiaries unfamiliar with debit card systems. Most importantly, effective consumer protection measures must be implemented because benefit recipients are more likely than general consumers to need basic consumer protections. Public benefit recipients are already living at the margins and cannot afford to suffer out-of-pocket losses from potential consumer fraud or other problems that may arise under the EPC systems.
In particular, the Electronic Funds Transfer Act and Regulations (Regulation E), which provide several consumer protections through error resolution and disclosure regulations, do not cover state-based EPC programs and privately issued prepaid cards receiving benefits through direct deposit. In order to address this lack of sufficient consumer protections, Congressman Sandy Levin and Congressman Jim McDermott introduced a Benefit Card Fairness Act (H.B. 4552) last year. This bill will be reintroduced in the new session in attempt to repeal the exemption of electronic benefit transfer systems established by a government agency.
Last month, Treasury also announced the interim final rule on the Federal Government Participation on the Automated Clearing House. This rule permits the delivery of federal payments to prepaid cards that meet particular standards and extends Regulation E coverage from payroll prepaid cards to other prepaid cards. It also prohibits card issuers from offering line of credits or loan features that trigger automatic repayment from the prepaid card account. Because using government issued cards such as the Direct Express card is different than using direct deposit to general prepaid cards, beneficiaries must be aware of the consumer protection issues that arise with respect to prepaid cards.
On February 3, 2011, the Shriver Center, the National Consumer Law Center (NCLC) and Consumers Union will host a free webinar to discuss the differences between various electronic benefit payment methods and investigate the implications of the new trend toward electronic payment cards (EPCs) for low-income families. Readers are encouraged to learn more and join an in-depth discussion of the new regulation and the consumer protection issues surrounding electronic benefit cards, by attending the upcoming webinar.
Ji Won Kim co-authored this post.