Survey of Government-Administered General-Use Prepaid Cards Fees and Costs
Among the many provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was one requiring the Federal Reserve Board to report annually on the prevalence of general-use prepaid cards in federal, state, and locally administered payment programs and the interchange transaction fees and cardholder fees charged with respect to the use of such general-use prepaid cards.
General-use prepaid card programs are used as a method for disbursing funds to individuals and allowing government agencies to make payment in the administration of government benefit, assistance, and other miscellaneous programs. The cards can be used to provide payments such as social security, veterans’, disability, unemployment, and other benefits. Government-administered programs that are funded and managed at the federal level largely comprise three Financial Management Services (FMS) programs: (1) Direct Express, (2) U.S. Debit Cards, and (3) Navy/Marine Cash Program. The Direct Express program is used to disburse federal benefits on behalf of several agencies, the largest percentage of which are social security and supplemental security income (SSI) payments. The U.S. Debit Card supports programs such as disaster relief payroll and petty cash, whereas the Navy/Marine cash cards are only issued to personnel who have been assigned to a ship.
According to the survey, in 2010 depository institutions provided cardholder use information for 90 federal, state and local programs operating in 36 states--five federally operated programs and 85 state and locally operated programs. These programs used 20 million cards (2 million for federal programs and 18 million for state and local programs), representing more than 1 billion transactions that were valued at $34.8 billion.
Recent initiatives of the U.S. Treasury Department will increase the usage of the Direct Express Program. In December of last year, Treasury issued a final rule to require anyone applying for benefits after May 2011 to receive payments electronically (either via direct deposit or a Direct Express prepaid card). Those already receiving benefits will be required to switch to electronic payment by March 2013. This is in addition to two pilot programs by the Treasury to expand prepaid card usage. One of the pilot programs offers taxpayers electronic delivery of their federal tax refunds via a MyAccount Card prepaid card and the other pilot encourages current and potential payroll card users to have their 2010 federal tax refunds deposited directly onto payroll cards.
There were approximately 185.5 million ATM cash withdrawals, and the average withdrawal was $179.04 for federal programs and $130.68 for state and local programs.
In terms of interchange fees, which are the fees set by networks, charged to the merchant acquirer and received by issuers as part of the purchase transaction, the average interchange fee was lower for state and local programs than federal programs, but as a percentage of the transaction value, the average interchange fee for federal, state, and local programs was essentially the same. Generally, interchange fees for both signature based and PIN based networks are structured similarly to credit cards in that they include both an ad valorem and a fixed component. The average interchange fee was 30 cents or 1.1% of the transaction amount, which is lower than the 2009 average debit card interchange fee of 44 cents and the average 2009 prepaid card interchange fee of 40 cents. The reason for the disparity is that most government programs are PIN based, which have significantly lower fees than signature based programs.
Cardholder fees averaged $9.69 per card in 2010, or 0.3% of the total amount disbursed to cards. Examples of cardholder fees include balance inquiries, penalty fees, card replacement fees, and statement request fees. Most respondents indicated that there are no monthly fees associated with the cards, that cardholders were allowed at least one free ATM withdrawal per disbursement period, and that most programs allow for more than one. The average ATM cash withdrawal fee was 47 cents or 0.3% of the amount withdrawn. Other fees included balance inquiry fees ranging from $0 to $2.95 per inquiry, penalty fees ranging from $0 to $20 per occurrence, and monthly fees from $0 to $2.25. Card issuers also charged from $0 to $1.75 per ATM cash withdrawals.
Unfortunately, the response rate to the survey was low, particularly from state governments, and many of the responses provided incomplete data, thus data does not provide information on the prevalence of use of general-use prepaid cards as a proportion of total payments disbursed through related government-administered programs.
Nonetheless, the data that is reported shows that the use of such prepaid cards is on the rise. As a result it is more important than ever that government prepaid cards be afforded the same protections that are provided to other types of cards under the Electronic Funds Transfer Act. Specifically, these cards should have the same consumer protections and terms as other credit and debit cards.
The full report is available at the Federal Reserve’s website. More resources on prepaid cards and the consumer issues that arise from them are available on the Shriver Center’s website.
