It almost feels like the states are shilling for the banks. Regardless of intent, these state-mandated arrangements force people (who already don't have enough to get by) to pay those hidden fees with little guidance on the matter. But riddle me this: Why should states allow banks to treat the prepaid cards issued to the unemployed like their own personal piggy banks?
We must do better. In its report, the National Consumer Law Center recommends many different ways that government could make unemployment benefits more efficient and less costly for recipients. Their suggestions include making direct deposits into workers' bank accounts the first option for delivering unemployment benefits, mandating that all banks allow at least one free ATM withdrawal and teller withdrawal per pay period, and eliminating fees for balance inquiries and customer service. These are good ideas, and unemployed families would be well served if states implemented them.
The good news is that we already know how to help families while wasting very little money on junk fees and drastically reducing the role of banks in the process. The Food Stamp program, now officially called the Supplemental Nutrition Assistance Program (SNAP) has been transitioning from coupons to prepaid debit cards in recent years. Nearly $73 billion worth of food aid was delivered to needy families using such cards in 2011, according to a study by the Federal Reserve.
Banks are involved in the process because they issue the cards, but under the SNAP program, which accounts for 73 percent of all government funds disbursed by prepaid cards, issuers are prohibited from charging fees to cardholders. Other federal programs also disburse benefits using prepaid cards, including Temporary Assistance to Needy Families. For these programs, banks are allowed to charge fees, but they are modest. On average, ATM withdrawals and card purchases cost about 1.1 percent of each transaction's value. State-run prepaid debit card programs take a similarly small slice of each transaction, and ATM fees associated are even lower, totaling .3 percent of the average transaction's value.
This makes sense. Banks have costs. ATMs and in-store payment machines require constant maintenance, and each transaction costs banks a small amount to process. Federal and state programs that use those networks should contribute their fair share. No one gets a free ride, and no one gets ripped off. Unlike the current situation with unemployment benefits, the cooperation between government programs and bank-run infrastructure should not be an excuse to gouge.
We should extend the model of SNAP and other successful, low-cost debit card programs to unemployment benefits. Using its giant purchasing power as a bargaining chip, the federal government should negotiate with banks to set a ceiling for fees on unemployment benefit prepaid cards, even as states remain responsible for making the actual payments. These limits should be akin to the fees already in place for SNAP, averaging about one percent of each transaction's value.
This approach would give banks steady, predictable and fair compensation for use of their systems. And it would protect jobless workers from high fees, unexpected traps and hidden tricks that currently bleed millions of dollars every year from their already depleted finances.
We can make unemployment benefits fairer for everyone, and we can do it without reinventing the wheel. Let's use the tools we already have to put more money back into jobless workers' pockets, and back into the economy.
Adam Levin is chairman and cofounder of Credit.com and Identity Theft 911. His experience as former director of the New Jersey Division of Consumer Affairs gives him unique insight into consumer privacy, legislation and financial advocacy. He is a nationally recognized expert on identity theft and credit.