More state and federal agencies are expanding the types of benefits distributed using prepaid cards, including unemployment and Social Security, to reduce costs.
Roughly 30 states use prepaid cards to distribute unemployment benefits, and each touts the economic and practical reasons to make the switch from distributing checks. Printing checks and buying postage can costs millions of dollars, they said.
But while states slash expenses, many consumers who have their benefits deposited directly into prepaid accounts say fees applied to card use are eating away at their funds as issuers profit. Program managers and issuers insist, however, that benefit cards are a public service, not a revenue generator, as agencies have pressed them to keep fees as low as possible or avoid them altogether.
JPMorgan Chase & Co., which issues prepaid cards to distribute unemployment benefits and manages the disbursement programs for 12 states, said it has faced unwarranted scrutiny from the mainstream media and consumers over the unemployment cards it issues.
"We're unfortunately an easy target in that space because we're a big bank and it's unemployment," said Tracy Dangott, JPMorgan Chase's vice president of public-sector card solutions. "Anytime you get charged any fee it becomes about the big bank going after your money."
Dangott said the criticism partly stems from being grouped into the same category as general-purpose reloadable debit card providers. "We look at [prepaid] very differently than they do," Dangott said.
States deliver a request for proposals to issuers that documents the requirements a vendor must meet, according to Jeff Hentschel, a spokesman for the Tennessee Department of Labor and Workforce Development. Chase issues the state's prepaid unemployment-benefits card.
"Vendors will then bid on the contract, and the state selects the vendor based upon the bid and being able to meet all requirements," Hentschel said. Tennessee and other states do not pay JPMorgan Chase, but the issuer does incur costs to operate the program. It charges some fees to make up for those expenses.
There are not many differences between the fees JPMorgan Chase applies to unemployment benefit cards and those prepaid card providers apply to general-purpose reloadable prepaid cards.
Unemployment cards are free and there is no reload fee because benefits are directly deposited into the card account.
JPMorgan Chase would prefer that recipients of unemployment benefits receive their funds by direct deposit into a demand-deposit account, Dangott said. "We advocate direct deposit, because when you already have a retail banking relationship with someone else, you don't want our card," he said.
JPMorgan Chase regards unemployment prepaid cards as tools that meet a public need, not as marketing vehicles, Dangott said.
"People tend to forget these kind of programs cost money," said Adil Moussa, an analyst with Aite Group LLC. "You have to pay for the cost of the plastic, customer service centers and workers and other expenses."
The states make the final decision on the card's fee schedule, which is why fees vary, Dangott said.
Chase provides recommendations and options for cardholders to access funds at no cost. "We pride ourselves on it; we make sure of it, and we then educate the cardholders on how to do it," Dangott said.
The Treasury Department is taking a similar approach with a pilot program that involves distributing 2010 tax refunds to reloadable prepaid card accounts.
Bonneville Bank, a subsidiary of Bonneville Bancorp of Provo, Utah, is issuing the cards. Green Dot Corp., which has an application to buy Bonneville Bancorp pending regulatory approval, will help manage the pilot program, which already is under way.
As states do, the Treasury sets the fee schedule for its cards and is testing cards with no or few fees. The monthly maintenance fee for some cardholders is $4.95. Some cards have an interest-bearing savings account feature in addition to the prepaid account.
The Treasury will determine which combination of fees and features cardholders prefer before proceeding with a full rollout, said Josh Wright, the director of financial access innovation in the agency's Office of Domestic Finance.
"The Treasury Department is definitely not trying to make a profit off the cards," Wright said. "We're viewing this simply as another choice to provide people with a way to get their tax return and then have ongoing access to a basic financial account."
Wright said he is unsure whether the pilot program will expand. If it does, the department would solicit bids from issuers to manage the program.
Fees have been a central issue in prepaid cards. Various legislative attempts have been made to rein them in.
Proposed and recently enacted state and federal regulations for debit and reloadable prepaid cards have put card programs used for disbursing unemployment, Social Security and other benefits in serious jeopardy, Dangott said.
"I would say within two years, prepaid's interchange potentially will be eliminated if not by regulation then by market practice," he said.
Reloadable debit cards are exempt from the Durbin amendment to the Dodd-Frank Act. But Dangott said prepaid card interchange may soon come under attack much the way traditional debit card interchange did.
If that happens, it essentially would eliminate prepaid card programs that issuers manage for government benefit disbursement, he said.
Sen. Robert Menendez, D-N.J., introduced a bill in December that would prohibit prepaid card providers from charging fees for card inactivity, balance inquiries, overdrafts and other activities.
It also would require disclosure of fees issuers would charge customers.
The bill did not come to vote last year, but Dangott expects it to pass this year.
"We will have to abide by that law, and that means we'll go back to every one of our clients and ask, What do we do now?" he said. "We'll have to ask the states, Do we charge you, or do we charge the cardholder?"
The Menendez bill is asking prepaid card providers to charge a single, flat and fair fee for all transactions instead of multiple fees for what are considered "everyday activities," according to Suzanne Martindale, Consumers Union associate policy analyst.
Consumers Union, publisher of Consumer Reports, is an independent nonprofit organization based in Yonkers, N.Y. The organization worked closely with Menendez on the bill.
"If you have a flat, monthly fee up front, it gives consumers a chance to decide if they want the card," Martindale said.
Martindale said Consumers Union views the Menendez bill as a blueprint for the Consumer Financial Protection Bureau, which Congress created under the Dodd-Frank Act.
The bureau will have the authority to regulate a wide variety of consumer financial products, and that may include reloadable prepaid cards.
Prepaid provider support for the Menendez bill appears mixed.
Martindale claims Green Dot is in favor of the bill to bring others in line with its low fees. "Green Dot has said what they don't like is that they're the good actors and get lumped in with the bad actors," she said.
Green Dot said executives were unavailable to comment.
Dangott said the government benefits market has regulated itself with regard to fees. "I can't go in and gouge and just market my way through it," as opposed to what general-purpose reloadable prepaid card marketers can offer, he said.
