Government Prepaid Cards Cost Consumers An Average $9.69 In 2010

Consumers paid an average of $9.69 to use prepaid cards to access government benefits in 2010, according to a new report from the Federal Reserve Board.

Cardholders paid for balance inquiries, ATM withdrawals and, in some cases, purchase transactions, based on a survey of banks, state treasurers and federal officials on the use of prepaid cards for federal, state and local benefits programs.

The Fed is required to report on the programs annually under the Durbin amendment to the Dodd-Frank Act. The report was posted online on July 21.

The Fed said survey responses were too low to calculate the proportion of payments disbursed through government programs put into prepaid cards accounts. However, it said 90 federal, state and local programs in 36 states accounted for 20 million cards based on responses from depository institutions. More than 1 billion transactions worth $34.8 billion were made on such cards, the report said.

The use of prepaid cards to administer benefits such as Social Security, unemployment benefits and workers compensation has grown because of mandates by government agencies to move from paper checks to electronic payments to cut costs, analysts say.

For example, the U.S. Treasury Department in 2010 issued a final rule requiring that anyone applying for government benefits from May onward receive the funds via direct deposit to a bank account or a prepaid card. Additionally, the Treasury Department tested issuing tax refunds this year on prepaid cards to underbanked consumers (see story).

The fees banks charge to use the cards, though, have been a sticking point for consumer advocates.

The National Consumer Law Center in May released a report on the use of prepaid cards for unemployment benefits, arguing there is “considerable room for improvement in fee structures, access to information about the card, and payment options” for such programs (see story).

Some states charge overdraft fees of $10 to $20, fees of 10 cents to 25 cents to make a purchase using a PIN, fees for denied transactions caused by insufficient funds of 25 cents to $1.50 and inactivity fees of 50 cents to $3 per month for not using the card after a certain amount of time.

The National Consumer Law Center urged the Labor Department and Consumer Financial Protection Bureau to review every state’s program, ban penalty and fees for obtaining information and post their fee schedules online.