In the mid-1990s, when most EBT systems were implemented, many states opposed extending Electronic Funds Transfer Act protection to EBT systems on the grounds that the potential liability under Regulation E would make EBT systems more costly to states. Despite intense industry pressure, the Federal Reserve initially included EBT within Regulation E. However, states urged as part of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 that Congress statutorily exempt EBT from Regulation E. Congress agreed to this amendment, and Regulation E was revised to exempt needs-based government electronic benefit payments. The term “account” under Regulation E therefore does not include accounts distributing needs-tested benefits in a program established under state or local law or administered by a state or local agency. Therefore when an EBT card is stolen, the benefit recipient cannot reclaim the stolen benefit money.

The new California law amends California’s Welfare and Institutions Code to provide, among other things, that a 24-hour toll free telephone hotline for reporting lost or stolen cards be available, that recipients will not incur any loss of benefits after reporting a lost or stolen card, and that money that was not withdrawn using an authorized ID number for the account will be promptly replaced.

While these provisions will protect California public benefit recipients, beneficiaries in other states still don’t have the necessary consumer protections. Instead of states being forced to adopt piecemeal legislation, federal legislation is needed. For example, the Benefit Card Fairness Act (H.B. 4552), which was proposed last year, should be reintroduced. This bill would repeal the exemption of electronic benefit transfer systems established by a government agency and would provide public benefit beneficiaries with the same protections that regular Americans receive on their credit and debit cards. 

Not being able to recover stolen benefit money is just one of many barriers that public benefit recipients face on a regular basis. For example, nine states have restrictions as to where people can access TANF benefits, making it difficult for beneficiaries who do not have banks in their neighborhoods to access their funds. Additionally, unbanked benefit recipients are forced to pay ATM fees when accessing their benefits at ATMs, thereby reducing the amount available to them to meet the very needs for which the funds were intended. Finally, asset limits in public benefit programs create disincentives for saving money and building assets and ultimately keep people in a cycle of poverty. These barriers, which are built into public benefit programs, make life more difficult for people who are already struggling.

Such barriers to public benefit program access seem to be based on the same underlying reasoning used to pass the recent voter ID laws. Supposedly, they are all in place to prevent fraud and abuse, as well as to save the state money. However, the need for many of these barriers has not been proven. For instance, the laws restricting EBT card use at bars and casinos were enacted to prevent the less than 0.1 percent of TANF transactions that occurred at these locations. Although many lawmakers have expressed anxiety about fraud and system abuse when it comes to programs that serve people in lower socioeconomic levels, there is no conclusive evidence that these barriers are effective. Perhaps, instead of being so concerned about fraud and abuse among low-income communities, lawmakers should focus on the fraud and system abuse occurring among the wealthy.

To learn more about EBT cards and their lack of protections, view our webinar, The Next Frontier in Public Benefits:  Electronic Benefit Cards.

The Players. The report reveals that only three third-party contractors provide all state SNAP EBT services in the U.S. JP Morgan, the largest contractor, contracts to provide EBT services for 24 states and two U.S. territories. Affiliated Computer Services (ACS) has 15 state contracts, and eFunds Corporation contracts with 10 states and one U.S. territory.  

The Earnings. In 2004, 18 out of the 24 states contracting with JP Morgan Chase paid $560,492,596.02 to administer their SNAP EBT programs. New York’s contract with JP Morgan Chase alone was worth $126,394,917.

The Contracts. According to the report, the standard SNAP EBT contract allows the third-party contractor to earn money in five distinct ways. In the first two ways, the state and retailers pay the contractor directly. In the final three ways, the contractor can earn money directly from public benefit program recipients.

1. The bulk of a contractor’s profits come from the state payments of between $0.65-$1.45 (depending on the contract) per public benefit recipient enrolled in the program for each month. This fee can be higher if a person is in enrolled in multiple programs at once, but uses one EBT card for all programs. 
2. Point of Service (POS) machines that process transactions at retailers when beneficiaries use their cards also generate revenue for an EBT contractor. Federal regulations allow only federally authorized retail establishments to accept EBT cards, so states typically rent a POS machine (the machines used to make EBT purchases and transmit the purchasing information) for each authorized retail location and pay a monthly fee to the contractor for use of the machine. As an example, Arizona pays a monthly fee of $14.95 per month per machine.
3. ATM fees are the first way that contractors earn money directly from enrollees in benefit programs. As discussed in a recent Shriver Brief post, 88% percent of TANF recipients are subject to transaction fees when accessing their benefits. The most troubling aspect of this ATM fee is that the money is being diverted from poor people to wealthy institutions like JP Morgan Chase.
4. Another way that contractors earn money directly from public benefit recipients is through card replacement fees. Replacement fees for lost or stolen cards are typically around $5.
5. The final way that contractors earn money from benefit recipients is by charging for customer services phone calls. In New York, for example, benefit recipients are charged $0.25 per customer service phone call.

The Politics. SNAP is administered by the Department of Agriculture; therefore, the House and Senate Agriculture Committees are influential in the SNAP program. The report reveals that JP Morgan Chase significantly increased its political donations to members of both the Senate and House Agriculture Committees since becoming a SNAP EBT service provider. Between 1998 and 2002, JP Morgan Chase’s total contribution per election cycle was $82,897 on average; however, that amount ballooned to an average cycle contribution of $215,120 between 2004 and 2010. The report implies that these political dealings in Washington, D.C., directly affect state contracting decisions, however the report offers no evidence to support this claim. 

The report goes onto to argue that JP Morgan Chase bought out President Obama. JP Morgan Chase donated $807,000 to the 2008 Obama campaign, which was substantially more money than was donated to the McCain campaign. The GAI report argues that Obama was thus driven to expand SNAP because he knew it would benefit JP Morgan. While there has been an expansion of SNAP benefits under Obama’s presidency, it seems unlikely that Obama’s social policymaking was motivated by a desire to please JP Morgan Chase. Instead, it is more likely the result of a deep recession in which more families needed the food safety net support that SNAP provides.

Conclusion. People enrolled in SNAP are enrolled because they do not have enough money to pay for food. Is it fair that these essential public benefit funds are being paid to third-party administrators, both by states and recipients? While contracting EBT administration to third-parties theoretically saves states more money than it they were administering EBT services internally, the hundreds of millions of earnings by private entities, including JP Morgan Chase, which received a $12 billion dollar bailout back in 2008, raises the question of whether these fees are reasonable. Are the ATM, lost card, and phone call fees necessary for JP Morgan Chase to meet its bottom-line? Does that bottom-line include large bonuses and profits? These and other questions must be answered in order to determine whether SNAP benefits are unfairly enriching companies at the expense of poor families. And, if so, how do we design a system where benefits actually reach those they are intended for? 

This blog post was coauthored by Alex Hoffman.

Having a bank account is foundational to building financial security. Unfortunately, the lower your income, the more likely you are to be financially insecure and the less likely you are to have a bank account. According to the FDIC, about

This can be especially problematic for families receiving public benefits, such as Temporary Assistance for Needy Families (TANF), who can face significant fees to access their benefits in the absence of a bank account. Today, most public benefits are issued either directly into a participant's existing bank account or onto an electronic benefit transaction (EBT) card, which functions in some ways as a debit card.

Low levels of account ownership among participants, however, make the EBT card the default option. According to a new report, only 12 percent of TANF recipients have their benefits deposited into a bank account. The rest, who have their benefits placed on EBT cards, are subject to transaction fees at ATMs when they wish to withdraw funds. Assuming these transaction fees are 85 cents, and most are actually higher, this amounts to $1.2 million a year diverted from poor families to financial institutions. This is in addition to the $10 million a year that states pay to the financial institutions for administering states’ public benefit program, as well as surcharges beneficiaries must pay for use of out of network ATMs, which amounted to almost $900,000 in the first quarter of 2011. Consequently, families can be subject to a range of fees, depending on the terms of the contract between the state and the financial institution managing the public benefits program.

Several things can be done to combat these fees. First, EBT cards could be made more like debit cards so they can function as bank accounts for families who don't have them. That way, every TANF recipient who gets an EBT card will effectively also be getting a bank account. One way to do this is by transitioning from current EBT cards, which are typically closed loop, to so-called electronic payment cards (EPC) which are EBT cards branded with the Visa or MasterCard logo that are accepted almost everywhere, and by making the cards reloadable so they can store money in addition to benefits.

The shift towards EPC systems is already occurring, but it too raises challenges. While an EPC system allows beneficiaries to use their cards virtually anywhere that a MasterCard or VISA logo is displayed, and decreases the stigma associated with being recognized as a public assistance beneficiary because EPCs have the appearance of commercially recognized credit cards, there are potential negative ramifications for low-income families. Most importantly, effective consumer protection measures must be implemented because benefit recipients are more likely than general consumers to need these protections. Currently, 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. 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.  

Another option is to simply eliminate fees for EBT card transactions. State and federal governments shouldn't be subsidizing financial institutions with resources dedicated to helping very low-income families. Contracts with banks that administer the accounts should mandate a no-fee structure, or states could reimburse participants for fees they incur. As many states’ contracts are almost ready for renewal, this may be the appropriate time for states to take action.

A third option is for states to encourage savings by including a savings "bucket" as part of the card features and eliminating assets tests in public benefit programs that explicitly restrict the amount of savings a family can have and be eligible for the program.

Finally, there should be a broader overall effort to increase access to affordable banking options for low-income consumers. For example the FDIC’s Safe Accounts pilot, which offered basic, low-fee accounts through partnerships with several financial institutions, could be adopted more widely. At the end of the one-year pilot, retention rates for new accounts were high, 80 percent for transaction accounts and 95 percent for savings accounts, and banks reported that the cost of offering the account was comparable to that of other accounts. These outcomes suggest that there is a demand for these products and that this model could provide a sustainable way to expand availability in a way that works for consumers and financial institutions.

Senator David Frockt (D-WA) and Representative Bill Hinkle (R-WA) advocated for the need to connect TANF recipients to bank accounts to enable recipients to make safe financial transactions, build savings, and avoid EBT fees. It is clear that efforts to address the financial security of low-income families can be an area with many opportunities for bipartisan agreement. It's exciting to see that both sides of the political party recognize this important issue. 

To learn more about EBT and EPC systems in general, listen to the Shriver Center’s webinar, The Next Frontier in Public Benefits: Electronic Benefit Cards, and read the Clearinghouse Review article, The Next Frontier in Public Benefits: Electronic Benefit Cards.

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.

One reason that EBT systems have become so popular is that states have found that they can save millions of dollars by "outsourcing" the provision of these benefits to big financial firms. In fact, JP Morgan is the largest processor of food stamp benefits in the United States.

JP Morgan has contracted to provide food stamp debit cards in 26 states and the District of Columbia. JP Morgan is paid for each case that it handles, so that means that the more Americans that go on food stamps, the more profits JP Morgan makes. Considering the fact that the number of Americans on food stamps has exploded from 26 million in 2007 to 43 million today, one can only imagine how much JP Morgan's profits in this area have soared.

J.P. Morgan also provides unemployment insurance benefit debit cards in seven states which is ironic since it, along with other big Wall Street banks, was a major contributor to the financial collapse that lead to tens of thousands of Americans becoming unemployed. 

It seems grossly unjust that the very Wall Street financial institutions that caused the recession and received bailouts from the U.S. government and tax dollars during the financial crisis are now making money off the recession and their victims again – low income families and taxpayers. Moreover, one of the programs that was on the chopping block during the debt debate was the food stamp program. In other words, Congress was prepared to cut food assistance to families, but did not even bother examining whether big banks’ profits from administering food stamp program benefits should be cut.

As part of the recent Wall Street reform, the Consumer Financial Protection Bureau (CFPB) was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The CFPB, which became operational on July 21^st, is now the sole federal agency focused on consumer protections. Among its responsibilities is supervision and enforcement with respect to the laws over providers of consumer financial products and services. As such, one of its early efforts should be to review the practice of continuing to allow financial institutions to profit off the very consumers they helped to defraud and deplete their assets in the first place.

To learn more about the CFPB visit its website.

To learn more about issues surrounding the electronic payment of public benefits you can view the Shriver Center’s webinar, The Next Frontier: in Public Assistance: Electronic Payment Cards.

Federal law prohibits creditors from seizing federal assistance payments for programs such as Social Security, Supplemental Income (SSI) and veterans benefits. These laws exist to protect the low-income individuals who desperately need this assistance, however, the unfortunate reality is that banks typically freeze any account for which they receive a garnishment order, even if the account contains funds from Social Security or SSI payments. As a result, many people are left without the ability to access the money they need to provide for basic necessities like food and shelter.

New federal regulations, which became effective May 1^st, will ensure that banks comply with these existing anti-garnishment laws. Under these regulations banks are now required to determine whether or not public assistance funds have been deposited into a beneficiary’s account and, if so, make sure that the account holder has access to those funds. Specifically, after receiving a garnishment order a bank must analyze the account and determine if any exempt funds had been deposited during the previous two months (i.e., a “look-back” period). If so, the bank is required to ensure that the account holder has “full and customary” access to the amount deemed exempt from collection.

Most of the people affected by the new regulations are surviving on minimal income, so it is essential that they be able to access whatever assistance they currently receive. The primary beneficiaries of the federal assistance programs that prohibit garnishment are senior citizens, retired federal employees, veterans, and individuals with disabilities. The new regulation does not cover state benefits such as unemployment insurance or Temporary Assistance for Needy Families (TANF).

The new garnishment regulations are a huge step in the right direction, but they could be strengthened to ensure the greatest protection for individuals by:

•  Defining the “look-back” period as a full sixty-five days instead of two months to account for months with different lengths and holidays;
• Clarifying the meaning of “full and customary” and explicitly stating that accounts with garnishment orders and exempt funds cannot be closed;
• Further protecting account holders from any bank fees triggered by a garnishment order; and
• Protecting funds in special purpose saving accounts such as 529 plans and Individual Development Accounts.

Another option to protect exempt assistance funds from garnishment would be for beneficiaries to participate in an electronic payment card (EPC) system. Different from EBT, EPC systems deposit funds into an account that beneficiaries can access with a branded plastic card. The accounts are not administered by a bank and therefore cannot be frozen for debt collection. Recipients of federal benefits can participate in an EPC program by having their assistance payments loaded on a Direct Express card. This card is branded with a MasterCard logo and can be used in the same ways any debit card could be used, including paying bills online. While the DirectExpress card is a safe, government sponsored card, other EPC systems do raise consumer protection concerns since the cards are not given some of the same legal protections as traditional credit cards. Consumer advocates and legislators alike are pushing for stronger safeguards to make sure that such cards are given full protections as well as ensuring that there are adequate disclosures and no excessive fees.

We applaud the efforts of the participating federal agencies in prioritizing the needs of low-income, elderly and disabled public assistance beneficiaries.

For more information on the EBT and EPC systems please visit The Next Frontier in Public Benefits: Electronic Payment Cards. On this page you will find many resources related to the electronic distribution of public benefits, including a webinar on the topic presented by the Shriver Center. Additional analysis of this topic can be found in the 2011 May/June issue of the Clearinghouse Review.

Kelly Ward coauthored this blog post.

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,

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.