Public Benefits and Prepaid Cards: Key Issues for Consumers

1. Public Benefits and Prepaid Cards: Key Issues for Consumers The Next Frontier in Public Benefits: Electronic Benefit Cards February 3, 2011 Suzanne Martindale Consumers Union

2. What This Presentation Covers • Prepaid card basics • Public benefits issued on prepaid cards • Potential benefits • Which federal laws apply • Fees • What needs to be done • What agencies can do now • Resources

3. Prepaid Card Basics • What is a prepaid card? • Consumer “loads” funds onto prepaid debit card • Card funds typically sit in a pooled, third-party account • Who issues them? • Private prepaid companies (e.g., Green Dot) • Government agencies • Employers (payroll cards)

4. Prepaid Card Basics • How many people use them?

5. Public Benefits Issued on Prepaid Cards • Private, self-arranged cards • Consumers can arrange direct deposit of benefits onto general-use prepaid cards issued by private companies • Government-issued cards • Federal benefits (VA, SS, SSI, etc.) • State benefits (unemployment, disability, etc.) • Some needs-tested (EBT) programs moving toward open-loop prepaid cards • Note: traditional EBT cards (e.g., for food stamps) are different from reloadable prepaid cards, and subject to different laws

6. Potential Benefits • For Agency Issuing Prepaid Cards: • Paperwork reduction • Prevent check fraud • For Consumer: • Faster delivery of benefits • Can use card on Visa/MC networks • Don’t have to carry cash • Don’t need to use check cashing • No background check (ChexSystems)

7. Applicable Federal Laws • EFTA/Reg E • Covers traditional, bank account-linked debit cards • Reg E amended in 2006 to include payroll cards • Government-issued cards appear to be covered • Private, general-use prepaid cards not covered…yet • [Food Stamp Act – not discussed here] • FTC Act/Consumer Financial Protection Act • FTC prohibits unfair and deceptive practices • New CFPB will have authority to prohibit unfair, deceptive, and “abusive” practices

8. Applicable Federal Laws • Some government-issued cards are covered under EFTA/Reg E • Covers “government benefits,” not including EBT, from an “account” set up by the agency • Exemption for EBT does not apply to benefits such as unemployment, so unemployment and disability benefits should be covered • Unclear whether benefits such as child support would be covered

9. Applicable Federal Laws • EFTA/Reg E governs: • Disclosures • Dispute rights re: unauthorized transactions and billing errors • Right of recredit • Transaction information • Overdraft fees (opt-in protection) • Does not govern fees in general…

10. Fees • Government-issued and private prepaid cards can come with multiple types of fees • Typical fees include: • Monthly maintenance • ATM transactions, balance inquiries • Teller transactions • Bill pay • Point-of-sale (POS) transactions • Declined transactions (POS or ATM) • Dormancy/inactivity • Overdraft • Customer service

11. Fees • Examples of high fees from government-issued cards • $10-$20 overdraft fee (AR, HI, MN, OH, OR, SD, WY) • $1.50 declined transaction fee (MI, NC) • $3 customer service fee (1 free) (MI, MN) • $2 inactivity fee (US Bank) • Examples of high fees from private prepaid cards • $10-$20 activation fee (RUSHCard, NetSpend,Vision Premier, etc.) • $1 POS transaction fee (RUSHCard, NetSpend, Vision Premier, etc.) • $10 inactivity/dormancy fee (Mi Promesa card) • $29.95 overdraft fee (Club América card)

12. What Needs to be Done • Extend EFTA/Reg E protections to all prepaid cards, regardless of issuer • Dispute rights for unauthorized transactions and billing errors • Right of recredit • Right to receive periodic statements • Full Reg E vs. “Reg E Lite” for payroll cards? • Amend EFTA to limit types of fees issuers can charge (Menendez bill) • Prohibit fees for ordinary use of a prepaid card • Limit to a low monthly fee, and limit all other fees to nominal events (e.g., second replacement card)

13. What Agencies Can Do Now • Give consumers a choice • Offer direct deposit before prepaid card • Permit paper checks for hardship cases • Negotiate good contracts with issuers • Treasury Interim Final Rule for federal payments • Individual FDIC insurance for each cardholder • No links to lines of credit that offset balance • Same consumer protections, by contract, that payroll cards have under Regulation E

14. What Agencies Can Do Now • DOL Guidance • Makes recommendations for UI cards • Five areas to negotiate: • >1 free ATM withdrawal per deposit • Unlimited free POS transactions • Unlimited in-network ATM balance inquiries • No overdraft or decline fees • Unlimited free customer service • Look to good examples on the market • Federal Direct Express Card for federal benefits • California’s EDD Debit Card for unemployment and disability insurance

15. Resources • Consumers Union – DefendYourDollars website • http://www.defendyourdollars.org/money_topics.html • DOL Guidance • http://wdr.doleta.gov/directives/attach/UIPL/UIPL34-09.pdf • Federal Direct Express Card • http://www.usdirectexpress.com/edcfdtclient/docs/faq.html • CA EDD Debit Card • http://www.edd.ca.gov/About_EDD/FAQs_The_EDD_Debit_Card.htm