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 20 percent of households earning less than $30,000 are unbanked.
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.