Report to the Congress on Government-Administered, General-Use Prepaid Cards, July 2014

Section 1075 of the Dodd-Frank Act, which added section 920 to the Electronic Fund Transfer Act (EFTA), requires the Federal Reserve Board to report annually to the Congress on the prevalence of use of general-use prepaid cards in federal, state, and local government-administered payment programs and on the interchange fees and cardholder fees charged with respect to the use of such prepaid cards. Federal, state, and local government offices commonly use prepaid cards to disburse funds at a lower cost than checks (or other paper-based payment instruments such as vouchers or coupons) and to provide an alternative to direct deposit for payment recipients, especially those recipients who do not have bank accounts. Government offices contract with financial institutions or program managers to issue prepaid cards, disburse program funds, and provide customer service. The Board collected 2013 data from government offices and bank issuers on programs using prepaid cards as a method to disburse funds. Government offices reported on 247 programs, and issuers reported on 563 programs. Across reported programs that provided a prepaid card option, government offices disbursed almost $1.1 trillion in 2013, 14 percent of which was disbursed through prepaid cards. A comparison of 2012 and 2013 data from government agencies shows that there was a small increase in the proportion of funds disbursed through prepaid cards from 2012 to 2013. This increase is consistent with an ongoing shift toward electronic payment methods within the government sector. Issuers collected more than $502 million in fee revenue during 2013 across reported programs, with 65 percent from interchange fees and 35 percent from cardholder fees. Issuers collected 1.2 percent of the value of purchase transactions in interchange fees for these programs in 2013, which is roughly equal to that collected by issuers for all exempt debit purchase transactions. Although the prepaid cards provided under government-administered programs usually offer cardholders one or more free automated teller machine (ATM) cash withdrawals per month, ATM withdrawal fees constitute 58 percent of all cardholder fee revenue that issuers collected in 2013. Customer service and account servicing fees constitute the next largest source of cardholder fee revenue, at 15 percent and 14 percent, respectively. Revenue from overdraft fees decreased by 83 percent in 2013, largely, it appears, because of an EFTA provision that took effect in July 2012. The provision stipulates that a government prepaid card loses its exemption from the interchange fee standards if the cardholder may incur overdraft fees.