Right now more than 5 million Americans receive unemployment benefits. And right now, a big chunk of those unemployment benefits are going straight to the bottom line profits of the nation's biggest banks because of junk fees tied to the prepaid cards used to distribute these funds.
While we can't take banks entirely out of the process, it's critical they get a smaller piece of the pie. We can certainly provide a more direct conduit from our tax dollars to get into the pockets of the unemployed without such a huge vig. It would be one thing if banks were mandated to use the profits from junk fees to hire more people, but they aren't. As much money as possible should go to regular people so they can spend it, putting the American economy back on track.
Most states now provide unemployment benefits to workers using prepaid debit cards. While some states are much worse than others, most states allow banks to load these cards with hidden junk fees, according to a recent study by the National Consumer Law Center. In California alone -- one of the better states -- unemployed workers lose $1.8 million every year on their state-issued prepaid debit cards. That's $1.8 million more in Bank of America's profit column, and $1.8 million less for families to cover necessities like rent, gasoline and food.
If you take a look at the way the following states allow unemployment benefits to be nickeled and dimed by megabank prepaid card programs you will see why it's time to change the system:
Alaska: JPMorgan Chase charges $5 every time cardholders talk to a teller, $1.50 to withdraw money from an ATM more than once week, and 35 cents just to call the automated customer service line. Chase even charges 40 cents to check the card balance from the bank's own ATM.
Minnesota: U.S. Bank gets $3 every time someone calls the bank's customer service department, after one free call per month.
Iowa: Wells Fargo charges unemployment recipients 50 cents every time they check their balance, plus another 50 cents every time a transaction is denied for insufficient funds.
Maine: Chase charges 25 cents every time an unemployment benefits recipient uses his or her debit card to make a purchase at a store using a PIN.
Ohio: U.S. Bank's 750 in-network ATMs charge no fees, but 16 counties in that state don't have a single U.S. Bank ATM. Vinton and Clinton Counties, in the southern part of the state, have some of the highest jobless rates in Ohio, lingering at between 12.6% and 15%. Neither county has an ATM those unemployed people can use for free.
It gets worse. The Electronic Funds Transfer Act (EFTA) mandates that consumers must have the choice between a check, direct deposit or a prepaid debit card.
Five states currently violate that law: California, Indiana, Kansas, Maryland, and Nevada. These states force unemployed workers into debit card programs, according to the National Consumer Law Center study. Three of those states -- California, Kansas and Maryland -- allow workers to set up automatic transfers from prepaid cards to their own bank accounts. In practice, less than 25% of unemployment benefits recipients take advantage of this feature. Perhaps that's because these transfers can take up to four days, enough time to cause a crisis for families already trying to subsist on a fraction of their former wages.
Nevada and Indiana offer a prepaid debit card with all the hidden fees. No direct deposit. No paper checks. No fee-less transfer into your bank account.
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.