Exposing Extreme Fees on Prepaid Cards Used for Public Benefits

Mastercard© TanjalaGica / Getty Images Signature / Canva

The Consumer Financial Protection Bureau (CFPB) recently released a new issue spotlight examining how the financial products used to deliver public benefits, like Social Security and unemployment compensation, affect the individuals’ ability to fully access the assistance provided through those programs. The issue spotlight outlines how governments often choose to deliver public benefits through financial products, particularly prepaid cards, that may subject recipients to high fees and cut into the amount of funds the consumer receives. Differences in states’ decisions about how to deliver benefits can make the receipt of benefits, like unemployment compensation, uneven across similarly situated individuals in different states. The issue spotlight also highlights that inadequate customer service can leave consumers unable to rectify problems with their accounts, as well as can render them unable to access critical funds.

“When cash assistance programs are drained by unnecessary fees and poor customer service, it hurts individual recipients and taxpayers,” said CFPB Director Rohit Chopra. “The CFPB will continue to ensure that companies delivering public benefits obey federal consumer financial laws and continue to work with federal and state officials to make public benefits delivery more effective.”

The issue spotlight highlights that:

  • Public benefits are eroded by fees: Some prepaid cards charge numerous fees, such as maintenance, balance inquiry, customer service, or ATM fees, that chip away at people’s benefits. These fees can quickly erode the amount of available funds. According to the Federal Reserve, in 2020 prepaid card administrators collected $1.3 billion in transaction fees on the $409 billion in public benefits distributed.
  • Fees can result in uneven access to benefits across states: Temporary Assistance for Needy Families and Unemployment are administered at the state level, and in some cases, by county administrators, leading to significant variation in program structure and delivery. Not only do the fee amounts vary across states, but the types of fees charged to access cash assistance vary as well. For example, Unemployment prepaid card users in some states pay up to $2 for out-of-network ATM withdrawals or up to $14 for replacements cards, while recipients in other states pay nothing for those same services.
  • Individuals experience inadequate customer service: Across public benefits programs, consumers had numerous issues dealing with unrecognized charges and poor customer service card issuers. Consumers raised concerns with inadequate protections against unauthorized transfers, high costs in order to replace a card, and insufficient or hypersensitive fraud filters that cause delays and account freezing. A single problem, such as unauthorized charges on a card, can create a cascade of problems when customer service is not available or responsive in a timely manner.
  • Consumers may be trapped by lack of choice and competition: Consumers may be pushed toward a prepaid card provided by a particular financial institution rather than direct deposit to an account at an institution of their choice. When recipients have few choices about how they receive their benefits, there is little competitive pressure to update products or provide consumer-centric customer service. This may also create the risk that companies will take unfair advantage of recipients that are locked into a relationship with a particular provider.
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Although the concerns that the CFPB has identified are not limited to cash assistance provided by prepaid cards, the issue spotlight focuses in particular on cash assistance provided by prepaid cards because of specific recurring issues arising with the provision of benefits by that method. Prepaid cards often have numerous fees that reduce the amount of funds available for consumers who are most in need.

In order to ensure that those involved in the delivery of cash assistance comply with their obligations under the law, the CFPB will monitor and take action against entities who violate federal consumer financial protection laws. The CFPB has previously brought action against entities that left distressed consumers receiving government assistance in a lurch during the height of the pandemic.

Additionally, the findings of this issue spotlight will be shared with federal and state agencies that administer public benefits programs to support efforts to increase competition or otherwise address the findings of this spotlight.

Read the issue spotlight, Public Benefits & Consumer Protection.

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