Payments 3.0: Prepaid Cards, State Aid, And the CFPB

Last month, the Consumer Financial Protection Bureau released an “Issue Spotlight” on government benefits that attacked the use of prepaid cards for delivering state benefits. The agency cited what it sees as a lack of choice for consumers, inadequate customer service, and, of course, fees.

“In 2020, for example, issuers of government-administered prepaid cards collected approximately $1.3 billion in fees,” the “Issue Spotlight” item said. “While this fee revenue reflects only 0.3% of the $409 billion distributed, these fees may have a significant impact on the individual consumers that pay them.”

It is an interesting choice of data, since the Federal Reserve noted in its latest report to Congress on government prepaid cards that “[f]or cardholder fees, government offices negotiate rates for each program with issuers and often restrict the number and type of cardholder fees an issuer can charge.”

The Fed also noted that, since the time mentioned by the Bureau, cardholder fees have fallen: “Total cardholder fee revenue received by issuers of government-administered, general-use pre-paid cards decreased 16 percent between 2020 and 2021, from $271.5 million to $228.6 million.”

The Bureau’s critique seems to ignore the cards’ cost savings for governments. Fair enough. This is the Consumer Financial Protection Bureau. But it also ignores the cost of the alternative for unbanked recipients. Paper checks would lead to check-cashing fees and costs for things like money orders, as recipients without cards would be cut off from electronic payments.

Additionally, the Bureau’s critique about choice ignores the reality that governments are not going to pay the cost of contracting with multiple vendors, and that recipients have the choice to use accounts not offered by the government. And, as always, the discussion of fees ignores the costs of offering a service.

For example, when the Department of the Treasury first put the Social Security program out for bid, six applicants offered to provide prepaid cards for Social Security recipients at no cost, according to a report by the Treasury Office of the Inspector General. Comerica won the bid in 2008, but in June 2013 the government paid the bank $32.5 million for enrollment fees and infrastructure costs. Without that payment, Comerica would have lost $24.1 million, the report said. When businesses cannot afford a product’s costs, they typically stop offering it.

Some banks may have already gone down that path at the state level. In December 2021, Illinois announced it would no longer offer prepaid cards for unemployment benefits. Instead, cardholders would receive paper checks. The state said this was because KeyBank had decided to stop providing cards. To my knowledge, KeyBank has not spoken publicly about why it stopped offering the cards, but it is not a big leap to think the program was too costly.

Before condemning government prepaid programs, the Bureau should take a holistic look at the benefits the programs provide and what would happen if they disappeared. Forcing unbanked recipients back to paper checks would not protect them. Their costs would increase, and they would be at increased risk of fraud. In February, for example, the Financial Crimes Enforcement Network warned of a surge in mail-theft check-fraud schemes.

All forms of payment have their pros and cons. But when the Treasury Department renewed its contract with Comerica for Direct Express, it said the program “has maintained cardholder satisfaction ratings of 94% or higher for the last 10 years.”

Instead of hunting for opportunities to take action against financial institutions, and encouraging state agencies to drop prepaid cards, the Bureau should help them make programs more effective and sustainable.

—Ben Jackson, bjackson@ipa.org