America's Poor are Paying Big Banks for Benefits
States have recently begun renegotiating with banks to lower fees on electronic benefit transfer (EBT) cards after pushback from beneficiaries and growing negative press coverage over the past few months.
EBT systems are a means of delivering government benefits to recipients electronically via a plastic debit-type card. A Shriver Brief blog post published earlier this year provided an overview of the transition from mailing checks to using EBT cards (i.e., direct deposit and closed-loop debit-type cards) to the current trend of issuing branded prepaid benefit cards (EPC). The Shriver Center also hosted a webinar on this trend and its negative impacts on low-income consumers in February of this year.
Forty-one states have switched from issuing paper checks for everything from unemployment benefits to Temporary Assistance to Needy Families (TANF) to other state public benefits to either EBT systems or, more recently, prepaid cards. All Supplemental Nutrition Assistance Program benefits across the country are paid electronically. By distributing benefits electronically, states are able to save millions on postage and printing, which is particularly attractive given states’ budget deficits.
Banks, such as Bank of America, Wells Fargo, US Bank and JP Morgan Chase, generally provide states with EBT and EPC cards free of charge and then earn revenue on swipe fees, penalties, and other fees, such as ATM and balance inquiry fees. Such arrangements have come under fire because these same banks that taxpayers bailed out in 2008 during the economic downturn are now earning money from poor, disadvantaged people who are down on their luck and then sharing what they've grabbed with the state. Although banks do not report how much revenue they receive from these types of arrangements, JP Morgan Chase, for instance, collects around $100,000 a month from EBT card usage fees under its contract with Washington State—this is on top of the $800,000 the state pays it.
In May, the National Consumer Law Center (NCLC) published a report examining the electronic payment of government benefits in the unemployment context. This report has garnered a lot of attention and, it appears, prompted some states to take action by entering into renegotiations with the banks to lower or eliminate fees.
After being identified as one of the states having the cards with the worst fees in NCLC’s report, Oregon renegotiated with US Bank to provide unlimited US Bank ATM and teller withdrawals and two free withdraws per month at non-US Bank ATMs (although the bank that owns the ATM might still assess a fee). Although these fee changes are an improvement, they don’t benefit all Oregonians. Those who live in rural areas, where unemployment is especially high, have to travel over 80 miles at times just to get to the nearest US Bank ATM. This problem would have been better resolved if US Bank had agreed to unlimited withdrawals at out-of-network ATMS.
Colorado has also taken steps to save money for those receiving unemployment benefit payments by renegotiating its contract with JP Morgan Chase. The state was successful in saving card users over $500,000 a year. Some of these changes include eliminating point-of-sale fees, allowing cardholders to withdraw up to $809 in a 24-hour period, and allowing one free denied transaction. California, which was applauded by NCLC for having low fees on its unemployment benefit cards, has tried to reduce fees further. In September 2010, the California Department of Social services sent letters to companies that own and operate large ATM networks such as Wells Fargo, Bank of America, JP Morgan Chase and Cardtronics asking them to waive surcharges for EBT card users at their ATMs. Unfortunately, none of the banks complied. Interestingly, South Carolina, whose unemployment EBT cards are fraught with high fees, demanded fee reductions from Bank of America when it learned that its fee arrangement with the bank was substantially higher than the bank’s similar contracts with California and New Jersey.
Almost all of the states’ contracts for EBT cards are up for renegotiation in 2012, either because the contract expires or because the state has an option for a one-year renewal. When renewing their contracts, states should, at a minimum, ensure that banks do not continue to earn fees off of the backs of low-income consumers and the unemployed.
Alison Terkel coauthored this blog post.
