A new CFPB report, “Issue Spotlight: Public Benefits Delivery & Consumer Protection,” looks at what it describes as “the challenges that recipients of public benefits programs offering cash assistance encounter in accessing funds.”  The report focuses on cash assistance provided on prepaid cards because the CFPB has observed “specific recurring issues arising with the provision of benefits by that method.”

Key information, observations, and comments presented in the report include the following:

Delivery of public benefits.  In analyzing how public benefits are delivered to recipients, the CFPB focuses on Temporary Assistance for Needy Families, unemployment compensation programs (Unemployment), and various Social Security payments.  Public cash assistance is provided by direct deposit, government-administered prepaid cards, or paper checks.  The decision regarding which of these options is offered to recipients is made by each program’s administrator, subject to any relevant restrictions such as the Electronic Funds Transfer Act (EFTA).  The EFTA generally provides that recipients cannot be required to establish an account with a particular financial institution as a condition of receipt of government benefits without an alternative payment option.  This prohibition applies to federally-administered benefits (including federal needs-tested programs) and to state and local benefits that are not needs-tested programs.  Recipients of benefits subject to the EFTA prohibition cannot be required to receive their funds with a particular financial institution, whether on a prepaid card or to a deposit account.

Barriers to accessing cash assistance.  While government-administered prepaid cards offer potential convenience and economic advantages for recipients (particularly unbanked recipients), those benefits can be blunted by large service fees.  Benefit recipients may have little-to-no ability to avoid these fees due to their limited ability to choose or change the card provider.  The three largest sources of cardholder fee revenues for government-administered prepaid card providers were ATM fees, account servicing fees, and customer service inquiry fees.  Fees for the same services charged on prepaid cards issued for Unemployment varied across states, even among states that contract with the same financial institution, and such fees can represent a significant portion of a recently unemployed consumer’s temporary cash assistance.  The range of fees shows that program administrators may have room to negotiate better prepaid card arrangements that limit costs and provide better customer service to recipients of cash assistance. 

Inadequate customer service.  Complaints received by the CFPB about government-administered prepaid cards consistently reflect issues dealing with inadequate customer service.  EFTA error resolution rights and dispute procedures apply to the delivery of some public benefits and, regardless of whether the EFTA applies, prepaid card providers and financial institutions are subject to the CFPA UDAAP prohibition.

Lack of consumer choice.  Even for benefits programs to which the EFTA applies, consumers who chose to receive their benefits by prepaid card do not have a choice in which company the government selects to provide the card and “are locked into a relationship with the provider selected by program administrators.”  Because they do not have a direct relationship with the end user consumers, providers have reduced incentives to improve their products and may be more likely to “take unfair advantage of recipients,” such as by charging large service fees.  In addition, because the vendor marketplace offering government prepaid cards is limited to a small number of providers, companies may face limited competitive pressure from program innovation, new entrants, or in the contracting process even if program administrators are aware of and prioritize consumer needs. This may exacerbate or cause the issues with fees and customer service that benefits recipients face.

The CFPB offers no solutions to these issues beyond indicating that it is sharing the report with federal and state agencies that administer public benefits programs who “may want to consider changes to their benefits delivery systems to increase safety, minimize fees, improve customer service, and increase choice and competition.”

The CFPB also warns that it “will monitor and, when appropriate, take action against entities that violate the federal consumer financial laws with respect to the delivery of cash assistance.”  Financial institutions that have contracts with government agencies to deliver public benefits payments to consumers electronically through prepaid debit cards and accounts should be prepared for increased  CFPB scrutiny of these arrangements.