Report to the Congress on Government-Administered,
General-Use Prepaid Cards, July 2014
Print- Preface
- Executive Summary
Executive Summary
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.2
Federal, state, and local government offices commonly use prepaid cards to disburse funds at a lower cost than checks (or other paper-based payment instruments such as 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 or program managers to issue prepaid cards, disburse program funds, and provide customer service.
The Board collected 2013 data from government offices and bank issuers on programs using prepaid cards as a method to disburse funds. Government offices reported on 247 programs, and issuers reported on 563 programs.
Across reported programs that provided a prepaid card option, government offices disbursed almost $1.1 trillion in 2013, 14 percent of which was disbursed through prepaid cards. A comparison of 2012 and 2013 data from government agencies shows that there was a small increase in the proportion of funds disbursed through prepaid cards from 2012 to 2013.3 This increase is consistent with an ongoing shift toward electronic payment methods within the government sector.
Issuers collected more than $502 million in fee revenue during 2013 across reported programs, with 65 percent from interchange fees and 35 percent from cardholder fees.4 Issuers collected 1.2 percent of the value of purchase transactions in interchange fees for these programs in 2013, which is roughly equal to that collected by issuers for all exempt debit purchase transactions.5 Although the prepaid cards provided under government-administered programs usually offer cardholders one or more free automated teller machine (ATM) cash withdrawals per month, ATM withdrawal fees constitute 58 percent of all cardholder fee revenue that issuers collected in 2013. Customer service and account servicing fees constitute the next largest source of cardholder fee revenue, at 15 percent and 14 percent, respectively. Revenue from overdraft fees decreased by 83 percent in 2013, largely, it appears, because of an EFTA provision that took effect in July 2012. The provision stipulates that a government prepaid card loses its exemption from the interchange fee standards if the cardholder may incur overdraft fees.6
References
2. Subsections 1075(b)-(d) of the Dodd-Frank Act amend 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 statutes 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 they are funded by individuals. Return to text
3. The Board analyzed the subset of data provided by the 77 government offices that responded to the survey in both 2012 and 2013. The proportion of funds disbursed by prepaid cards across this subset of respondents increased 30 basis points, from 4.7 percent in 2012 to 5.0 percent in 2013. For further discussion, refer to the "Survey Data and Results" section of this report. Return to text
4. 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
5. Regulation II (12 CFR 235) provides that an issuer subject to the interchange fee standards 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: debit cards issued by an issuer that, together with its affiliates, has assets of less than $10 billion ("exempt issuers"); debit cards issued pursuant to a federal, state, or local government-administered payment program; and certain general-use, reloadable prepaid cards (12 CFR 235.5). Return to text
6. 15 U.S.C. §1693o-2(a)(7)(B). Return to text
