Report to the Congress on Government-Administered,
General-Use Prepaid Cards, July 2014
Print- Background
- Survey Results
Survey Data and Results
The Board distributed a survey to 151 government offices to collect prevalence of use data and another survey to 14 issuers to collect fee data for programs that used prepaid cards as a method to disburse funds in calendar year 2013.14 One hundred three government offices and all issuers responded. Government offices reported data for 247 programs, and issuers reported data for 563 programs.15 These data represent programs from all 50 states and the District of Columbia.
Because of the change in composition of reported programs each year, some of the figures in this report are not comparable with corresponding figures in previous reports.16 As the pool of reported programs stabilizes in future years, the Board intends to provide more information on general trends in these reports to the Congress regarding the government-administered prepaid card market.
The Board excluded programs that do not use prepaid cards from the universe of programs used to calculate prevalence of use and fee figures appearing in this report.17 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
In this Section:
Calendar Year 2013
For calendar year 2013, 98 government offices administering 205 programs reported disbursing $1.054 trillion to recipients, of which $142 billion, or 13.5 percent, was disbursed through prepaid cards.18
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 $810 billion under Social Security programs, but it disbursed only 3.2 percent through prepaid cards.19 Similarly, government offices disbursed less than 1 percent of reported payroll program funds and less than 2 percent of veterans' programs funds through prepaid cards.20 In contrast, state government offices distributed $75 billion under SNAP, all of which was distributed through prepaid cards. Other government offices also distributed benefits almost exclusively through prepaid cards under programs such as TANF and WIC.
Year-over-Year Comparisons
To measure year-over-year trends in government prepaid card use, the Board compared 2012 and 2013 data provided by the 77 government offices that responded to the survey in both calendar years. As shown in table 1, 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 2013.21 This increase is consistent with the increased use by government offices of electronic payment methods to distribute program funds. The proportion of funds disbursed through prepaid cards increased in most program types, including child support, Section 8 housing, and TANF. The proportion was unchanged in WIC and payroll programs, and it decreased in unemployment insurance programs.
| Program type | Proportion 2012 (percent) |
Proportion 2013 (percent) |
Change |
|---|---|---|---|
| Social Security | 2.4 | 3.2 | 
|
| Veterans Administration | 0.8 | 1.1 |
|
| Unemployment | 44.2 | 38.3 | 
|
| Child support | 38.9 | 39.4 |
|
| Payroll | 0.5 | 0.5 | 
|
| TANF | 83.0 | 91.6 |
|
| WIC | 96.6 | 96.6 |
|
| Section 8 housing | 6.3 | 6.8 |
|
| Total | 4.7 | 5.0 |
|
Factors that Influence Prepaid Card Use
Issuers 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 to disburse program funds. The U.S. Treasury's policy of disbursing program benefits electronically largely accounts for the increased use of prepaid cards to disburse Social Security payments (see table 1). 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, certain government offices, such as SNAP and WIC, traditionally issued paper vouchers or coupons to restrict the use of program funds to specific retailers or types of goods and services. These agencies have largely replaced vouchers and coupons with prepaid cards that offer functionality to restrict certain purchases.22
Fees Collected by Issuers
In this Section:
Issuers receive revenue from at least two sources: interchange fees and cardholder fees.23 In 2013, issuers reported collecting $327 million in interchange fees and $175 million in cardholder fees from 563 programs.Figure 2 illustrates the various sources of revenue collected by issuers in 2013. Compared with 2012, issuers collected a slightly larger share of their total revenue from interchange fees.24
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 note that cardholders are more likely to use prepaid cards like a traditional debit card when a program involves regular disbursements over a long period, such as child support. These recipients are also more likely to use the prepaid card's service offerings that generate additional cardholder fee revenue for the issuer. 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 interchange or cardholder fee 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.
Interchange Fees
As shown in table 2, the interchange fees from prepaid card purchase transactions have been relatively stable since the Board began collecting these data in 2010. Across all programs from 2012 to 2013, the average interchange fee per purchase transaction increased by 2 cents, while the average purchase transaction value fell by 5 cents. As a result of these changes, the average interchange fee as a percent of purchase transaction value increased marginally from 1.1 percent in 2012 to 1.2 percent in 2013.
The average interchange fee as a percent of purchase transaction value remained at 1.1 percent for federal programs in 2013. It increased slightly, to 1.3 percent, for state and local programs in 2013 compared with 1.2 percent in 2012. As a percent of purchase transaction value, the average interchange fee decreased 0.1 percentage point across single-message transactions and increased 0.2 percentage point across dual-message transactions. 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 differs from year to year.
| Average value of purchase transaction 1 (dollars) | Average interchange fee per purchase transaction 2 (dollars) | Average interchange fee as percentage of purchase transaction value 3 (percent) | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2010 | 2011 | 2012 | 2013 | 2010 | 2011 | 2012 | 2013 | 2010 | 2011 | 2012 | 2013 | |
| Total | 28.41 | 30.94 | 29.99 | 29.94 | 0.30 | 0.33 | 0.34 | 0.36 | 1.1 | 1.1 | 1.1 | 1.2 |
| Federal programs | 35.49 | 36.82 | 38.11 | 44.83 | 0.38 | 0.40 | 0.40 | 0.48 | 1.1 | 1.1 | 1.1 | 1.1 |
| State and local programs | 27.42 | 29.81 | 28.14 | 25.58 | 0.29 | 0.32 | 0.33 | 0.33 | 1.1 | 1.1 | 1.2 | 1.3 |
| Dual-message transactions 4 | -- | 30.16 | 28.70 | 25.42 | -- | 0.37 | 0.37 | 0.39 | -- | 1.2 | 1.3 | 1.5 |
| Single-message transactions 5 | -- | 32.95 | 31.58 | 36.34 | -- | 0.32 | 0.31 | 0.32 | -- | 1.0 | 1.0 | 0.9 |
1. Average value of purchase transaction: value of settled purchase transactions divided by the number of settled purchase transactions. Return to table
2. Average interchange fee per purchase transaction: total interchange fees divided by the number of settled purchase transactions. Return to table
3. Average interchange fee as percentage of purchase transaction value: total interchange fees divided by the value of settled purchase transactions. Return to table
4. Dual-message transaction: transaction type by which the issuer receives authorization information in one message and clearing information in a separate message. Dual-message transactions normally require signature authentication, although a subset of these transactions (such as small-value purchases) may not require any cardholder authentication. Some issuers classify a single-message transaction routed over a network that primarily processes dual-message transactions as a dual-message transaction. Return to table
5. Single-message transaction: transaction type by which the issuer receives authorization and clearing information in one message. Single-message transactions normally require personal identification number authentication, although a subset of these transactions (such as small-value purchases) may not require any cardholder authentication. Return to table
Transactions made using government prepaid cards are generally exempt from the interchange fee standards of Regulation II. The average interchange fee as a percent of purchase transaction value for government prepaid card transactions is similar to that for all debit card transactions exempt from the interchange fee caps of Regulation II.25 In 2013, the average interchange fee as a percent of purchase transaction value for government prepaid cards was 1.5 percent for dual-message transactions and 0.9 percent for single-message transactions. The average interchange fee as a percent of purchase transaction value for all exempt debit cards was 1.4 percent for dual-message transactions and 0.7 percent for single-message transactions in 2013.
Cardholder Fees
The data provided by issuers show that cardholder fee revenue as a percentage of program funds disbursed by prepaid card declined from 0.26 percent in 2012 to 0.23 percent in 2013.26 This decline is consistent with the anecdotal observations of some issuers and government offices that tougher contract negotiations and increasingly stringent contractual requirements have put downward pressure on cardholder fees over the past several years. For example, in 2008 and again in 2014, a consortium of states jointly issued an RFP for prepaid card services to obtain lower fees and more favorable terms from prospective issuers.
In addition to negotiating cardholder fee rates, government offices often restrict the number and type of cardholder fees that an issuer can charge. 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.27
Occasionally, issuers provide cardholders with more favorable terms than those mandated by government offices, such as unlimited in-network ATM and OTC withdrawals. Indeed, issuers rarely charge purchase transaction fees and may waive cardholder fees under certain circumstances.
Figure 3 illustrates the total revenue issuers collected and the average charge per occurrence by cardholder fee type in 2013.28 The Board excluded transactions for which no fee was assessed from the average fee calculations. In 2013, issuers collected $100.8 million on ATM cash withdrawals, accounting for 58 percent of revenue issuers received from cardholder fees. The average fee charged by an issuer for an ATM cash withdrawal was $1.19 per transaction. Customer service inquiry fees represent roughly 15 percent of total cardholder fee revenue, while account servicing, penalty, overdraft, and OTC cash withdrawal fees largely account for the remaining 27 percent of total cardholder fee revenue. Account servicing fees are the highest type of cardholder fee, at an average of $6.01 per occurrence. As of July 21, 2012, prepaid cards that may incur overdraft fees are ineligible for the exemption from the interchange fee standards of Regulation II.29 It appears that, rather than lose the exemption, issuers have largely abandoned overdraft fees; in 2013, issuers collected $2.0 million in overdraft fee revenue, an 83 percent decline from the $11.8 million collected in 2012.
Note: Size of bubble represents total revenue from fee. Position of black dot on vertical-axis represents average fee when charged.
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.30 In 2013, issuers reported paying approximately $100 million in fees to third parties for ATM withdrawals and approximately $29 million in fees to third parties for OTC cash withdrawals.31
References
14. See Board of Governors of the Federal Reserve System, "Payment Research,"www.federalreserve.gov/paymentsystems/payres_papers.htm, for the two surveys, which are conducted annually to collect information for this report.
The Board identified issuers to survey by consulting with relevant payment card networks. Return to text
15. 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. Return to text
16. See Board of Governors of the Federal Reserve System, "Payment Research,"www.federalreserve.gov/paymentsystems/payres_papers.htm, for the Board's previous reports to the Congress on government-administered, general-use prepaid cards. Return to text
17. For example, unemployment insurance programs that disburse payments only by check or direct deposit are not included in the calculation used to generate the unemployment bar in figure 1 in this report. Return to text
18. 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
19. For the purposes of this report, Social Security programs include Old-Age, Survivors, and Disability Insurance (OASDI) and Supplemental Security Income (SSI). Return to text
20. 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
21. The Board excluded SNAP data obtained from the Food and Nutrition Service (FNS) from the total year-over-year calculation in table 1 to highlight the increased use of prepaid cards across all other government offices that reported data in both 2012 and 2013. As discussed earlier in this report, state agencies administering SNAP have distributed funds exclusively through prepaid cards since 2004. In addition, SNAP distributions account for more than half of all funds disbursed through prepaid cards across all reported programs. Because of the program's large size relative to other reported programs, including SNAP in the total year-over-year calculation in table 1 diminishes the overall increase in the proportion of funds disbursed by prepaid cards to 2 basis points, from 11.98 percent in 2012 to 12.00 percent in 2013. Return to text
22. For example, WIC programs generally load a food "prescription" onto prepaid cards rather than dollar funds. The prescription specifies food items that a recipient may purchase. Similarly, TANF offices often configure their prepaid cards to prohibit purchases at establishments where program funds are not intended to be used. Return to text
23. Although uncommon, issuers may also collect management fees from government offices. In addition, issuers may receive revenue from payment card network incentives and interest on program funds. The Board does not gather data on these sources of revenue.
As discussed in the background section of this report, issuers sometimes enter into arrangements with third-party program managers to manage customer call centers or provide other cardholder services and may share interchange or cardholder fee revenue with program managers as compensation for their services. Return to text
24. The ratio of interchange fee revenue to cardholder fee revenue was 65:35 in 2013 compared with 62:38 in 2012. Return to text
25. See Board of Governors of the Federal Reserve System (2014), "Average Debit Card Interchange Fee by Payment Card Network,"www.federalreserve.gov/paymentsystems/regii-average-interchange-fee.htm. Government-administered, general-use prepaid card transactions constitute approximately 4.5 percent of all exempt transactions. Return to text
26. Consistent with previous reports, when calculating cardholder fee revenue as a percentage of total funds disbursed by prepaid cards, the Board used all program data except SNAP. SNAP 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
27. See Board of Governors of the Federal Reserve System (2013), Government-Administered, General-Use Prepaid Card Survey, FR 3063a, OMB No. 7100-0343, pp. 31-33, www.federalreserve.gov/paymentsystems/files/FR3063a_government_issuer_survey.pdf, for definitions of the various cardholder fees mentioned in this report. Return to text
28. The universe of programs included in the total revenue and average fee calculations is different for each cardholder fee type: routine monthly: 59 programs; purchase transaction: 76 programs; OTC: 448 programs; overdraft: 58 programs; penalty: 437 programs; account servicing: 461 programs; customer service inquiry: 481 programs; and ATM: 558 programs. Return to text
29. 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 (15 U.S.C. § 1693o-2(a)(7)(B)). Return to text
30. 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 staffing 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 4.4 cents per transaction in 2013. See Board of Governors of the Federal Reserve System (2014), "Average Debit Card Interchange Fee by Payment Card Network,"www.federalreserve.gov/paymentsystems/regii-average-interchange-fee.htm, for further information. Return to text
31. Issuers reported paying ATM and OTC fees for cash withdrawals with respect to 555 and 536 programs, respectively. On average, issuers paid approximately 52 cents per ATM cash withdrawal and $4.77 per OTC cash withdrawal in 2013. 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
