Report to the Congress on Government-Administered, General-Use
Prepaid Cards, July 2013
Section 1075 of the Dodd-Frank Act, which added section 920 to the Electronic Fund Transfer Act (EFTA), requires the Federal Reserve Board to report annually to the Congress on the prevalence of use of general-use prepaid cards in federal, state, and local government-administered payment programs and on the interchange fees and cardholder fees charged with respect to the use of such prepaid cards.1
Federal, state, and local government offices commonly use prepaid cards to disburse funds at a lower cost than checks (or paper vouchers or coupons) and to provide an alternative to direct deposit for payment recipients, especially those recipients who do not have bank accounts. Government offices contract with financial institutions to issue prepaid cards, disburse program funds, and provide customer service.
The Board collected 2012 data from issuers and government offices on programs using prepaid cards as one or the only method to disburse funds. Government offices reported on 218 programs (including large, previously unreported Social Security and veterans programs) and issuers reported on 559 programs.2 Government offices reported disbursing more than $1 trillion, 13 percent of which was disbursed through prepaid cards. Issuers reported collecting more than $504 million in fee revenue during 2012--62 percent from interchange fees and 38 percent from cardholder fees.3 Issuers of prepaid cards collected an average interchange fee of 1.1 percent of the average purchase transaction value in 2012 for these programs, which is roughly equal to that collected by issuers for all exempt debit purchase transactions.4 Although the prepaid cards provided under government-administered programs usually offer cardholders one or more free automated teller machine (ATM) cash withdrawals, ATM withdrawal fees constitute more than 60 percent of all cardholder fee revenue that issuers collected in 2012. Customer service and account servicing fees constitute the next largest source of cardholder fee revenue, at 13 percent and 10 percent, respectively.
The Congress began facilitating the use of prepaid cards for government disbursements more than two decades ago. In 1990, the Congress passed the Mickey Leland Memorial Domestic Hunger Relief Act, which allowed state governments to use prepaid cards to disburse funds under the Food Stamp program (now called the Supplemental Nutrition Assistance Program (SNAP)).5 In 1996, the Congress passed the Personal Responsibility and Work Opportunity Reconciliation Act, which, in part, mandated that state government offices disburse SNAP benefits exclusively through prepaid cards.6 More recently, some government offices have mandated use of electronic methods, including prepaid cards, for disbursing program benefits. For instance, as of March 1, 2013, the U.S. Treasury requires electronic disbursement, either by direct deposit or prepaid card, of Social Security, Veterans Affairs, Railroad Retirement Board, Department of Labor (Black Lung), and Office of Personnel Management funds.7
Today, nearly every state offers a prepaid card for child support, unemployment insurance, and Temporary Assistance for Needy Families (TANF) programs. Although many government offices continue to offer check payments as well, a number of government offices now mandate that recipients receive payments electronically, either through a prepaid card or direct deposit.8 Additionally, several state and local government offices indicate that they plan to add prepaid cards as a method for disbursing tax refunds and other payments in the next few years. As a result, the share of government disbursements made through prepaid cards continues to increase.
Prepaid cards can be a convenient disbursement method and viable alternative to paper vouchers, coupons, checks, or direct deposit for payment recipients. Prepaid cards allow recipients to receive benefits without depositing checks into bank accounts. For recipients who do not have bank accounts, prepaid cards eliminate the need for recipients to cash paper checks and carry cash. Additionally, many issuers offer services to cardholders such as bill payment and mobile text or e-mail alerts that increase convenience and provide important information regarding the cardholders' accounts. Some issuers also offer a 24 hour customer service call center to cardholders receiving funds under certain programs.
1. Section 1075(b) - (d) of the Dodd-Frank Act amends benefits statutes such that electronic benefit transfer (EBT) cards issued in connection with the relevant program are not subject to the provisions of section 920 of the EFTA. The amended benefits statues are the Food and Nutrition Act of 2008, the Farm Security and Rural Investment Act of 2002, and the Child Nutrition Act of 1966. Although EBT cards issued in connection with relevant programs are not subject to section 920 of the EFTA, the Board believes that it is appropriate to include in this report information about such EBT cards because they represent a significant portion of prepaid cards issued pursuant to government-administered programs. A program is considered government-administered regardless of whether a federal, state, or local government office operates the program or outsources some or all functions to third parties so long as the program is operated on behalf of a government office. In addition, a program may be government-administered even if a federal, state, or local government office is not the source of funds for the program it administers. For example, child support programs are government-administered programs even though no federal, state, or local government office is the source of the funds. Return to text
2. For the purposes of this report, "Social Security" includes Old-Age, Survivors, and Disability Insurance (OASDI) and Supplemental Security Income (SSI). Return to text
3. An interchange fee is any fee established, charged, or received by a payment card network and paid by a merchant or a merchant acquirer for the purpose of compensating an issuer for its involvement in an electronic debit transaction. 12 CFR 235.2(j). Merchant acquirers typically pass these fees on to merchants. So, interchange fees, in effect, become a cost to merchants and revenue to issuers. Return to text
4. The Board's Regulation II provides that an issuer subject to the interchange fee standard may not receive an interchange fee that exceeds 21 cents plus 5 basis points multiplied by the value of the transaction, plus a 1-cent fraud-prevention adjustment, if eligible. The interchange fee standards of Regulation II do not apply to the following types of debit cards: (1) debit cards issued by an issuer that, together with its affiliates, has assets of less than $10 billion ("exempt issuers"); (2) debit cards issued pursuant to a federal, state, or local government-administered payment program; and (3) certain general-use, reloadable prepaid cards. 12 CFR 235.5. Return to text
5. Pub. L. 101-624, § 1729, 104 Stat. 3359, 3789-90 (1990). Return to text
6. Pub. L. 104-193, § 825, 110 Stat. 2105, 2324-36 (1996). Return to text
7. Financial Management Service (Treasury) Electronic Fund Transfer Rule, 75 FR 80315 (Dec. 22, 2010) (amending 31 CFR part 208). Return to text
8. Prepaid cards also have lower administrative costs--including printing, postage, and exception processing--for government offices than paper checks. Return to text