Report to the Congress on Government-Administered,
General-Use Prepaid Cards, July 2014
Print- Background
- Survey Results
Background
Prepaid cards are a ubiquitous disbursement mechanism in the government sector. Today, all states disburse Supplemental Nutrition Assistance Program (SNAP) benefits through prepaid cards.7 In addition, nearly every state offers a prepaid card for child support, unemployment insurance, and Temporary Assistance for Needy Families (TANF) programs.8 As of April 2013, 10 states offered prepaid cards as a tax refund payment option.9 Although many government offices continue to offer check payments, a number of offices now mandate that recipients receive payments electronically, through either a prepaid card or direct deposit. For instance, as of March 2013, the U.S. Treasury requires all-electronic disbursement of funds under several major federal benefit programs, including Social Security and Veterans Affairs programs.10 Virginia also eliminated paper checks as an option for individuals to receive tax refunds in 2013, offering only direct deposits and prepaid cards.11 In addition, state agencies administering the Women, Infants, and Children (WIC) Supplemental Nutrition Program are required to replace paper vouchers with an all-electronic disbursement system by October 1, 2020.12 As a result of this shift toward electronic payments, the share of government disbursements made through prepaid cards continues to increase.
Government offices generally contract with a bank issuer to implement a prepaid card payment program. Replacing paper checks with prepaid cards enables a government agency to outsource many administrative responsibilities associated with managing a payment program. Disbursing funds by check is resource intensive; government agencies must pay postage costs and hire personnel to physically handle checks and resolve transmission errors. In contrast, issuers typically assume the cost and responsibilities associated with operating a prepaid card program, including cardholder enrollment, card mailing, transaction processing, account servicing, and call center operations. A government office typically selects an issuer through a competitive bidding process. In its request for proposal (RFP), the government office stipulates required program services and limitations on cardholder fees. The government office then compares issuer proposals and selects the issuer that best fits the needs of the cardholders and government office.13
Prepaid cards can be a convenient alternative to checks and other paper-based payment methods, such as vouchers and coupons, for payment recipients. Prepaid cards allow for faster disbursement of funds and allow recipients to receive benefits without depositing checks into bank accounts. For recipients who do not have bank accounts, prepaid cards eliminate the need to cash paper checks and carry cash. Compared with paper-based payment methods, prepaid cards generally provide enhanced security. Funds disbursed by prepaid card are less susceptible to mail fraud than those disbursed by check. Most card issuers and payment card networks employ advanced analytics to identify potentially fraudulent activity. Further, prepaid cards generally offer enhanced liability protections to government agencies and cardholders for fraudulent activity.
References
7. State agencies administering SNAP have distributed funds exclusively by prepaid card since 2004. See Department of Agriculture, Food and Nutrition Service, "Electronic Benefits Transfer (EBT) Status Report by State,"www.fns.usda.gov/sites/default/files/snap/electronic-benefits-transfer-ebt-status-report-state.pdf.
See also Board of Governors of the Federal Reserve System (2013), Report to the Congress on Government-Administered, General-Use Prepaid Cards (Washington: Board of Governors, July), www.federalreserve.gov/publications/other-reports/files/government-prepaid-report-201307.pdf, for further historical information on SNAP. Return to text
8. Association of Government Accountants (2013) "Government Prepaid Cards Lower Costs and Improve Access," Corporate Partner Advisory Group Research Series, Report No. 34 (June), www.agacgfm.org/AGA/ResearchPublications/documents/CPAG-Research-Report-34_VISA-Prepaid_final2.pdf 
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9. See note 8. Return to text
10. The U.S. Treasury's rule provides for certain limited waivers from the all-electronic requirement. Waivers may be granted to recipients born prior to May 1, 1921, who received payments by check on March 1, 2013. Waivers may also be granted in instances where the requirement would be overly burdensome for the recipient, for example, in cases where the recipient suffers from a mental impairment or resides in a remote geographic location. U.S. Department of the Treasury, Fiscal Service, Financial Management Service (2010), "Management of Federal Agency Disbursements," final rule (RIN 1510-AB26), Federal Register, vol. 75 (December 22), pp. 80315-335. Return to text
11. Virginia Department of Taxation, "Virginia Tax Refund Debit Card,"www.tax.virginia.gov/site.cfm?alias=refunddebitcards. Return to text
12. Healthy, Hunger-Free Kids Act of 2010, Pub. L. No. 111-296, § 352(d), 121 Stat. 3183, 3255 (2010). Return to text
13. Occasionally, third-party program managers are involved in government prepaid card programs. Program managers are often subcontracted by the issuer to provide services traditionally carried out by the issuer, for example, call center management and transaction processing. In certain cases, a program manager contracts directly with the government office and provides almost all functions that are traditionally carried out by an issuer. In these instances, the issuer's role is limited to maintaining an FDIC-insured bank account for program funds and providing the program manager with a connection to the relevant payment card network. Nonbank institutions are ineligible to join the Visa and MasterCard networks and require an intermediary bank to connect to these networks. Return to text