Prepaid cards represent a hot topic in the payments world right now. A growing segment of payments, prepaid cards are seen by some as tools that add convenience, help control spend and can introduce consumers into the financial mainstream.
Yet not everyone agrees. On July 1, The New York Times published a profile of private sector employees who are paid via prepaid cards that defended this viewpoint. The Times cited a “lack of regulation in the payroll card market,” profiled how companies are benefiting financially from the system and referred to prepaid cards as “expensive financial services.”
However, private sector employers aren’t the only institutions using prepaid cards. Federal and state programs have used prepaid payroll cards since 1990. Now, a new study released on July 23 has provided insight into how consumers are being financially affected by these options.
Entitled, “Report to the Congress on Government-Administered, General-Use Prepaid Cards,” the study was conducted by the Board of Governors of the Federal Reserve System, the body charged with implementing financial reforms passed by U.S. legislators.
In this PYMNTS.com Data Point, we’ll take a closer look at the numbers to illustrate which government programs are using payroll cards, how users are being affected by fees and what’s driving government payroll card use.
How Common Are Government-Issued Prepaid Cards?
The Federal Reserve found that in 2012, 94 government offices and 186 programs issued $136 billion through prepaid cards, though many are only using them for a fraction of their total payments. For example, this sum accounted for just 13.4 percent of the total funds.
The Social Security Administration (SSA) issued the most through prepaid cards, distributing 2.4 percent of its $770 billion in payments through this method. Less than 1 percent of veterans benefits were paid out through prepaid cards.
Certain government programs used prepaid cards more often. Unemployment insurance programs issued roughly $15 billion in benefits, or 40 percent of $37 billion in total benefits, through prepaid cards in 2012. This was up from the 37 percent observed in the previous study. Child support programs issued roughly $7 billion, or 40 percent of $17 billion, via prepaid cards. Thirty-seven percent of child support payments were issued via prepaid card in 2011.
How Much Are Issuers Collecting In Fees?
The report also examined the additional charges that issuers are collecting from prepaid card users, as well as who might be most at-risk for these fees. The researchers said their anecdotal reports suggested long-term payroll card users are more likely to use them like debit cards, and more likely to garner increased fees for such use.
Issuers collected $341 million in interchange fees and $190 million from cardholder fees in 2012. Of this total, $12 million came from overdraft fees, $13 million were the result of penalties and $116 million stemmed from ATM use.
Cardholder fee revenue as a percentage of program funds by prepaid card declined to 0.26 percent in 2012, falling from 0.27 percent in 2011. The report suggested this is evidence that cardholder fees are on the decline.
What’s Influencing Government Prepaid Use?
The report also detailed the factors that influence the amount of federal funds distributed through prepaid cards in a given program. These included factors such as legal, regulatory and policy mandates.
The researchers found that the U.S. Treasury’s policy of disbursing funds through prepaid cards may increase the proportion of Social Security funds distributed via prepaid in the future. Programs with larger amounts of underbanked recipients, such as Temporary Assistance for Needy Families (TANF) were also projected to be more likely to distribute funds with prepaid cards.
The report also suggested that prepaid cards will continue to be used as a cost-effective alternative to paper vouchers, coupons and checks. It cited cardholder benefits such as mobile bill payment, email alerts and customer service as additional consumer advantages.
To read more of the Board of Governors of the Federal Reserve System’s report, click here.