Report to the Congress on Government-Administered, General-Use
Prepaid Cards, July 2013
Survey Data and Results
The Board distributed one survey to 184 government offices to collect prevalence of use data and another survey to 14 issuers to collect fee data for programs that use prepaid cards as one or the only method to disburse funds in calendar year 2012.9 One hundred one government offices and all issuers responded. Government offices reported data for 218 programs and issuers reported data for 559 programs.10 These data represent programs from all 50 states and the District of Columbia.
Because of a significant increase in the number of and change in the composition of reported programs in 2012, many of the figures in this report are not comparable with corresponding figures in previous reports.11 As the pool of reported programs stabilizes in future years, the Board intends to provide more general trends in these reports to the Congress regarding the government-administered prepaid card market.12
The Board excluded programs that do not use prepaid cards from the universe of programs used to calculate prevalence of use and fee figures. Further, the Board used different subsets of the reported program data for each calculation in this report because a few survey respondents did not provide complete data. Where possible and useful, this report notes the number and type of programs included in a calculation.
Prevalence of Use
For calendar year 2012, 94 government offices administering 186 programs reported disbursing $1.017 trillion to recipients, of which $136 billion, or 13.4 percent, was disbursed through prepaid cards.13
Total funds disbursed and the proportion of funds disbursed through prepaid cards varied widely by program type, as shown in figure 1. The Social Security Administration disbursed more than $770 billion under Social Security programs, but it disbursed only 2.4 percent through prepaid cards. Similarly, government offices disbursed less than one percent of reported payroll and veterans' programs funds through prepaid cards.14 In contrast, state government offices distributed more than $75 billion under the SNAP program, all of which was distributed through prepaid cards. Other government offices also distributed benefits almost exclusively through prepaid cards under programs such as energy assistance, and the Supplemental Nutrition Program for Women, Infants, and Children (WIC).
The proportion of funds disbursed through prepaid cards increased in certain state and local program types. Unemployment insurance programs disbursed 40 percent of the $37 billion in total benefits through prepaid cards, up from 37 percent in 2011. Similarly, child support programs disbursed 40 percent of $17 billion through prepaid cards, up from 37 percent in 2011. These increases are consistent with the increased use by state and local government offices of electronic payment methods to distribute program funds.
Issuers anecdotally indicated that several factors influence the proportion of funds disbursed through prepaid cards under a given program. For example, legal, regulatory, or policy mandates to disburse funds electronically influence the use of prepaid cards (and direct deposit) to disburse program funds. The U.S. Treasury's recent policy of disbursing program benefits electronically may increase the proportion of Social Security funds disbursed through prepaid cards (and direct deposit) in future years. Issuers also indicated that use of prepaid cards as a method of disbursement may be more prevalent in programs with a large number of unbanked payment recipients, such as TANF. Additionally, for government offices that no longer use paper methods of disbursing funds, prepaid cards may be the sole method of disbursing program funds to restrict beneficiaries' use of funds to certain types of goods and services, as is the case for SNAP and most WIC programs.
Fees Collected by Issuers
Issuers receive revenue from at least two sources: interchange fees and cardholder fees.15 In 2012, issuers reported collecting $314 million in interchange fees and $190 million in cardholder fees from 552 programs. Figure 2 illustrates the various sources of revenue collected by issuers in 2012.16
Cardholder behaviors and program attributes can affect issuers' revenue. Cardholders who regularly use prepaid cards to make purchases at the point of sale generate relatively high levels of revenue for the issuer through interchange fees. Issuers anecdotally report that cardholders are more likely to use prepaid cards like a traditional debit card when a program involves regular disbursements over a long period of time (such as child support). These recipients are also more likely to use the prepaid card's service offerings that generate additional cardholder fee revenue. Conversely, cardholders who withdraw all or most disbursed funds from a prepaid card account in a single transaction at an ATM or over-the-counter (OTC) with a bank teller typically generate little revenue for the issuer. Issuers note that cardholders are more likely to withdraw all of their funds in a single transaction when a program involves frequent, low-value disbursements (such as weekly unemployment insurance), or infrequent disbursements (such as annual income tax refunds).
As shown in table 1, the interchange fees from prepaid card purchase transactions have been relatively stable since 2010 when the Board began collecting these data. Across all programs from 2011 to 2012, the average interchange fee per purchase transaction increased by one cent, while the average purchase transaction value fell by about one dollar. As a result of these changes, the average interchange fee as a percent of purchase transaction value increased marginally from 2011. Because the Board rounded the figure, however, the average interchange fee as a percent of purchase transaction value shown in table 1 remained at 1.1 percent for 2012. The average interchange fee as a percent of purchase transaction value remained at 1.1 percent for federal programs in 2012. It increased slightly to 1.2 percent for state and local programs in 2012, compared to 1.1 percent in 2011. Like other year-over-year comparisons in this report, the calculations of average purchase transaction value and the average interchange fee per purchase transaction are sensitive to changes in the pool of reported programs, which evolves from year to year.
Table 1. Average purchase transaction value, average interchange fees
|Average value of purchase transaction (dollars)||Average interchange fee per purchase transaction (dollars)||Average interchange fee as percentage of purchase transaction value (percent)|
|State and local||27.42||29.81||28.14||0.29||0.32||0.33||1.1||1.1||1.2|
1. Some program data reported in aggregate could not be allocated between federal and state and local programs. These data, however, are reflected in the total figure. Return to table
The interchange fee standards of Regulation II generally do not apply to government prepaid cards. The average interchange fee as a percent of purchase transaction value for government prepaid card transactions is similar to the percentage for all debit card transactions exempt from the interchange fee caps of Regulation II that the Board reports in its study of 2012 average debit card interchange fees.17 In 2012, the average interchange fee as a percent of purchase transaction value for government prepaid cards was 1.3 percent for signature transactions and 1.0 percent for PIN transactions. The average interchange fee as a percent of purchase transaction value for all exempt debit cards was 1.4 percent for signature transactions and 0.7 percent for PIN transactions in 2012.
The data provided by issuers show that cardholder fee revenue as a percentage of program funds by prepaid card declined from 0.27 percent in 2011 to 0.26 percent in 2012. This decline is consistent with the anecdotal observations of some issuers and government offices that cardholder fees have generally declined over the past several years.18
Most government offices require issuers to offer cardholders a certain number of free ATM or OTC cash withdrawals and prohibit issuers from charging cardholders certain types of fees, such as monthly maintenance fees. Issuers may provide cardholders with more favorable terms than those mandated by government offices, such as unlimited in-network ATM and OTC withdrawals. Issuers rarely charge purchase transaction fees and may waive cardholder fees under certain circumstances.19
Figure 3 illustrates the total revenue issuers collected and the average charge per occurrence by cardholder fee type in 2012. For each type of fee depicted in the figure, the size of the bubble represents the total revenue issuers collected while the position of the black dot along the vertical axis represents the average fee issuers assessed.20 The Board excluded transactions for which no fee was assessed from the average fee calculations. In 2012, issuers collected $115.6 million on ATM cash withdrawals, accounting for more than 60 percent of revenue issuers received from cardholder fees. The average fee charged by an issuer for an ATM cash withdrawal was $1.12 per transaction. Customer service inquiry fees represent roughly 13 percent of total cardholder fee revenue, while account servicing, penalty, overdraft, and OTC cash withdrawal fees largely account for the remaining one quarter of total cardholder fee revenue. Overdraft fees are the highest type of cardholder fee, at an average of $6.90 per occurrence. As of July 21, 2012, the exemption from the Regulation II interchange fee standards does not apply to government prepaid cards if the cardholder may be charged an overdraft fee.21 Therefore, overdraft fees are likely less prevalent than they were prior to July 2012.22
Although figures 2 and 3 illustrate the distribution of cardholder fee revenue on an aggregate level, this distribution is not representative of any particular program. Government offices and issuers negotiate a cardholder fee schedule for each program. Furthermore, the proportion of transactions resulting in the assessment of a cardholder fee depends heavily on the type of program. As a result, there is significant heterogeneity in cardholder fees across programs that use prepaid cards to disburse funds.
Fees Paid by Issuers
Issuers pay fees to third parties when a cardholder withdraws cash from an out-of-network ATM or bank.23 In 2012, issuers reported paying approximately $133 million in fees to third parties for ATM withdrawals and approximately $31 million in fees to third parties for OTC cash withdrawals.24
9. In preparing the 2012 surveys, the Board slightly revised the format of and questions in the 2011 surveys. First, the Board included a list of check box options in both the survey of issuers and the survey of government offices to help determine the types of programs on which respondents reported and to facilitate the grouping of programs during data analysis. Second, the Board removed from the survey of issuers questions regarding the maximum and minimum fee charged for each type of cardholder fee. The survey instruments are available at www.federalreserve.gov/paymentsystems/payres_papers.htm. The Board identified issuers to survey by consulting with relevant payment card networks. Return to text
10. Survey respondents did not always list the programs covered in their responses. The Board only counted programs that it could clearly identify from each response. As a result, the program counts in this report represent lower-bound approximations. Data for three programs are not used in most calculations in this report because the survey responses were incomplete. These three programs consist of 410 individual penal institutions and represent only 0.07 percent of total funds distributed through prepaid cards as reported by issuers. Return to text
11. There was a significant change in the pool of reported programs in 2012. For example, the Board received for the first time in 2012 prevalence-of-use data for programs administered by the Social Security Administration and the Veterans Administration. These offices represent several high-value programs that collectively disbursed over $800 billion in payments. Return to text
12. The Board's previous reports to the Congress on government-administered, general-use prepaid cards are available at www.federalreserve.gov/paymentsystems/payres_papers.htm. Return to text
13. Programs included in these calculations are those for which government offices reported both total funds disbursed by all payment methods and total funds disbursed through prepaid card. Return to text
14. Some government offices reported aggregate data for multiple programs of different types (for example, unemployment insurance, TANF, and child support). Calculations by individual program type of total funds disbursed through all payment methods and the proportion of funds disbursed through prepaid cards exclude these responses because the data could not be disaggregated. Return to text
15. Issuers may also collect management fees from government offices. Government offices and issuers indicated that such management fees are uncommon. In addition, issuers may collect revenue from payment card network incentives and interest on float. The Board does not collect data on these sources of revenue. Issuers sometimes enter into arrangements with third parties to manage customer call centers or provide other cardholder services, and may share interchange or cardholder fee revenue with third parties as compensation for their services. Return to text
16. Issuers reported complete interchange and cardholder fee data for the 552 programs used to produce figure 2. Return to text
17. Government-administered, general-use prepaid card transactions constitute approximately 8.5 percent of all exempt transactions. For more information, see the "Average Debt Card Interchange Fee by Payment Card Network" at www.federalreserve.gov/paymentsystems/regii-average-interchange-fee.htm. Return to text
18. Consistent with previous reports, when calculating cardholder fee revenue as a percentage of total funds disbursed, the Board used all program data except SNAP. The SNAP program prohibits issuers from charging cardholder fees and is the second-largest reported program in terms of total funds disbursed by all payment methods. Return to text
19. For definitions of the various cardholder fees mentioned in this report, see the glossary of terms provided in the survey of issuers at www.federalreserve.gov/paymentsystems/payres_papers.htm. Return to text
20. The universe of programs included in the total revenue calculation is the same for each fee type (552 programs). However, the universe of programs included in the average cardholder fee calculation is different for each fee type (routine monthly: 72 programs; purchase transaction: 71 programs; OTC: 431 programs; overdraft: 124 programs; penalty: 401 programs; account servicing: 437 programs; customer service inquiry: 447 programs; and ATM: 522 programs). Return to text
21. Pursuant to section 920 (a)(7)(B) of the EFTA, the exemption from the interchange fee standards of Regulation II does not apply if, on or after July 21, 2012, the issuer may charge the cardholder an overdraft fee with respect to the card, or an ATM fee for the first withdrawal per calendar month from an ATM that is part of the issuer's network. 12 CFR 235.5(d). Additionally, section 12 CFR 1005.17 of Regulation E places certain restrictions on financial institutions' ability to charge overdraft fees. Currently, Regulation E applies to some, but not all, government prepaid cards covered in this report. The U.S. Treasury requires that issuers of prepaid cards that disburse federal payments provide cardholders with Regulation E protections. 31 CFR 210.5. Return to text
22. In fact, the collected data show that overdraft fee revenue as a percent of total cardholder fee revenue decreased from 19 percent in 2011 to 6 percent in 2012. Return to text
23. Issuers pay fees to ATM operators for each ATM cash withdrawal to compensate the operator for the costs of deploying and maintaining the ATMs and of providing cash services to the issuers' cardholders. Issuers pay fees to banks for each OTC cash withdrawal to compensate the bank for the costs of manning the teller window and providing cash services to the issuers' cardholders. In addition to ATM and OTC fees, issuers pay fees to payment card networks (such as switch, license, and connectivity fees). The Board does not survey issuers of government-administered prepaid cards regarding network fees. Across all debit cards, issuers paid networks approximately 4.5 cents per transaction in 2012. For further information, see "Average Debit Card Interchange Fee by Payment Card Network" at www.federalreserve.gov/paymentsystems/regii-average-interchange-fee.htm. Return to text
24. Issuers reported paying ATM and OTC fees for cash withdrawals with respect to 549 and 537 programs, respectively. On average, issuers paid approximately $0.57 per ATM cash withdrawal and $1.37 per OTC cash withdrawal in 2012. Because of limited data, the Board approximated the number of ATM and OTC withdrawals resulting in a fee. Therefore, the calculations of average ATM and OTC fees paid by issuers are estimates. Return to text