Ending The Benefit Card Monopoly
The National Consumer Law Center recently released a survey on the use of pre-paid cards to provide unemployment benefits. With the use of government benefit program pre-paid cards growing, it’s time for credit unions to start complaining loudly and clearly about these programs, which amount to state sanctioned monopolies granted to banks to provide services to people whom credit unions are often best positioned to serve. I wouldn’t be as concerned if prepaid card programs were limited to unemployment benefits but the use of these programs is becoming an increasingly important means of providing funds to all benefit recipients.
According to the NCLC, there are currently 40 states, including New York, that use prepaid cards to provide unemployment compensation. Six of those states, including California, do not offer direct deposit as an alternative to prepaid cards, even though federal law requires that recipients be given a direct deposit option. Only three states provide recipients with a prepaid card option, a direct deposit option and the option to receive a check. An appendix provided in the report provides a state-by-state assessment of the programs. The Center is neutral on New York’s program, which it describes as providing “ample access to information [account information] and numerous opportunities to withdraw funds for free” but noted it could be improved by eliminating fees such as those charged for denied transactions.
Although the report analyzes unemployment benefits, its conclusions undoubtedly reflect larger trends since so many state level benefits can now be provided with pre-paid cards. In preparing this report, the NCLC is primarily concerned that recipients don’t have much needed funds chipped away with unnecessary fees. For instance, only 18 states grant between two to five free in-network withdrawals per month, and only 11 states grant one or more free withdrawals per deposit. While I share this concern, another one that should be added to the list is a public policy that grants a handful of large banks a monopoly over public funds and does so at the expense of recipients most in need of banking services that go beyond a simple debit card. In 2009, the U.S. Department of Labor even recommended that payment of unemployment benefits be made by direct deposit rather than debit cards for individuals with bank accounts and urged states to offer the direct deposit alternative as soon as possible.
I think the DOL should take it one step further and mandate that recipients not only of unemployment benefits but all government benefits presumptively choose direct deposits over prepaid cards. According to the report, the use of direct deposit in lieu of prepaid cards varies widely. Minnesota has the highest direct deposit rate at 82%, while Arizona has the lowest at 16%. Some states even presumptively enroll recipients in prepaid debit programs, meaning that the recipient has to opt out and choose direct deposit. What about the individual who doesn’t have a bank account? Well, in states like New York financial institutions are already required to offer life line banking accounts and tying direct deposits to opening such accounts is a great way to get the unbanked connected to a financial institution be it a credit union, community bank or one of the behemoths. Perhaps the banks that administer these programs would provide us with information on the percentage of prepaid card recipients who go on to open accounts at their institutions. Maybe these programs provide an important gateway to financial independence. Somehow, I doubt it.