CFPB warns banks about high fees in prepaid benefits programs

Lousy customer service, excessive fees and massive fraud continue to plague state and federal programs that provide unemployment, Social Security and other public benefits, according to the Consumer Financial Protection Bureau.

The CFPB warned Wednesday that it will "take action" against financial institutions that charge excessive fees and violate consumer protection laws in distributing public benefits through prepaid card programs.

Banks face enormous regulatory and reputational risks administering federal and state benefits programs. Many states were targeted by criminals during the pandemic. A core problem is that banks that distribute public benefits through prepaid card programs are paid primarily through fees — including ATM, maintenance, balance inquiry and customer service fees — which have all been the subject of complaints to the CFPB.

In 2020, issuers of government-administered prepaid cards earned $1.3 billion of fees from that business, or 0.3% of the $409 billion in public benefits distributed through prepaid cards, the CFPB said, citing a study by the Federal Reserve. 

Still CFPB Director Rohit Chopra warned that excessive fees can chip away at the cash sent to the most vulnerable consumers who opt to receive benefits via prepaid cards including older adults, people with disabilities, the unemployed and low-income families with children. 

"When cash assistance programs are drained by unnecessary fees and poor customer service, it hurts individual recipients and taxpayers," Chopra said. "The CFPB will continue to ensure that companies delivering public benefits obey federal consumer financial laws and continue to work with federal and state officials to make public benefits delivery more effective."

The CFPB's report was issued a couple of days after U.S. Bancorp disclosed that the bureau is considering an enforcement action against the $675 billion-asset Minneapolis company related to its management of state benefits programs during the pandemic. U.S. Bancorp has contracts with a number of states including Iowa, Kansas, Kentucky, Nebraska, Ohio and Pennsylvania to distribute unemployment insurance benefits through its ReliaCard.

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Last year, Bank of America was fined $225 million by federal regulators for unlawfully freezing consumers' accounts in California's Employment Development Department and failing to provide recourse.

The CFPB said in its report that fees can result in uneven access to benefits across various states. Consumers in some states that receive unemployment benefits can be charged up to $2 for each out-of-network ATM withdrawal and up to $14 for replacement cards, while consumers in other states face no charges for the same services. The CFPB said consumers had raised concerns about inadequate protections against unauthorized transfers, high costs to replace a card, and insufficient or hypersensitive fraud filters that cause delays and account freezing. 

"A single problem, such as unauthorized charges on a card, can create a cascade of problems when customer service is not available or responsive in a timely manner," the CFPB said. 

The bureau also noted that consumers may be pushed by financial institutions into receiving a prepaid benefits card rather than enrolling in direct deposit at an institution of their choice. 

"When recipients have few choices about how they receive their benefits, there is little competitive pressure to update products or provide consumer-centric customer service," the CFPB said in the report. "This may also create the risk that companies will take unfair advantage of recipients that are locked into a relationship with a particular provider."