The financial meltdown has led many people to rely on unemployment compensation (UC) more than ever. Only 54,000 jobs were created in May, and the unemployment rate remains high at 9.1%. In this volatile market, it is becoming increasingly important for the government to protect consumers who were hit hardest by the economic crisis – the unemployed.
Forty states including Illinois, California and New York have transitioned paying UC from paper checks to prepaid cards. A prepaid card is a network branded – VISA or MasterCard – card that can be used like a bank debit card without the individual bank account. Delivering UC benefits on prepaid cards allows: (a) state government agencies to eliminate the costs of issuing paper checks; and (b) recipients, who may prefer not to have their employment payments deposited to a bank account because of the problems with overdraft fees, garnishment by debt collectors among others.
While using these sorts of prepaid card systems may offer some benefits, effective consumer protection measures must be implemented to ensure that vulnerable unemployed individuals are protected. In particular, pre-paid card fees and other charges can quickly reduce the amount of UC payments. A study by the National Consumer Law Center (NCLC), found that the typical UC check is only $294 a week. This means that it is crucial for recipients to save every dollar and penny by avoiding unnecessary fees.
The U.S. Department of Labor (DOL) has issued guidance for UC cards which states that money drawn from the federal unemployment fund may not be used to cover a state’s administrative costs related to the payment of UC.
Yet many UC card systems charge multiple fees, presumably to help defray the state’s administrative costs, in contravention of the DOL’s guidance. Out of the forty UC prepaid cards currently offered by states:
- 22 cards charge fees at network automated teller machines (ATMs), and all charge out-of-network ATMs, on top of ATM surcharges;
- 24 cards charge ATM balance inquiry fees;
- 24 cards charge denied transaction fees;
- 5 cards charge $10 to $20 overdraft fees;
- 16 cards charge for calls to automated customer service menus; and
- 28 cards charge inactivity fees.
States need to eliminate or reduce these fees. Additionally, every state should offer direct deposit and checks, in case of hardship, as well as prepaid cards in order to allow consumers to choose their preferred method of payment and the types of associated fees that they wish to incur. Currently, only 3 states, Alaska, Florida and West Virginia, offer all three payment options. Perhaps most importantly, states must clearly disclose the fees associated with UC cards on their websites. Addressing these concerns will create a UC prepaid card system that benefits both a state and its unemployed workers.
Ji Won Kim coauthored this article.