What might look like a win-win for state governments and beneficiaries only serves to harm them -- and send profits to some of the largest banks.
Consumers witnessed a victory this week when Bank of America backed off its threat to institute a $5 fee for using a debit card, following a public outcry that led most of the other big banks to foreswear similar moves. But not everyone has been spared debit card fees. As Janell Ross pointed out at The Huffington Post yesterday, banks are making nice profits from doling out government benefits through prepaid debit cards.
It's obvious that in a sour economy like ours, usage of programs like unemployment benefits, food stamps, and cash assistance will skyrocket. It used to be that most of these programs distributed actual money to beneficiaries. Food stamps were quite literally stamps. These days, however, things have been 'modernized' so that many benefits come through prepaid debit cards administered by banks like JP Morgan, Bank of America, and other behemoths.
So what's the problem? Doesn't this just make it more convenient for users? Isn't plastic easier than cash?
The first problem is that users, who are clearly already strapped for cash if they're turning to government benefits, are finding themselves hit with fees for using the cards. As an example, Ross points to one analysis that California families will pay over $16 million in surcharges to access benefits this year. While there has been a lot of action around limiting swipe fees and much outrage at charging customers to use regular debit cards, prepaid debit cards are a whole other animal. Even consumers using them to access their privately earned money may be charged for buying the cards, swiping the cards, and withdrawing money. And people getting benefits through them aren't any exception: they face charges for withdrawing money too many times, using an out-of-network ATM, drawing more money than is in the account, leaving the card inactive for a certain period of time, and some even charge per purchase.
Secondly, big banks are making a tidy profit by acting as middlemen for what should be publicly provided services. In just three months, from July and September, Ross reports that U.S. Bancorp, which provides unemployment benefit debit cards, made $357 million in revenue in the division that handles the cards. That amount is more than one-fourth of its total revenue. I previously reported that JP Morgan made $5.47 billion in net revenue for most of last year in the division that handles food stamp cards, and it was up two percent is the last three months of the year. The head of the division himself has said, "Volumes have gone through the roof in the last couple of years... This business is a very important business to JPMorgan in terms of its size and scale."
And while banks only make money off of unemployment benefits by charging fees to use cards, they are paid directly by state governments to administer food stamps. Florida, for example, paid JP Morgan $50 million over the last three years to administer the program. The bank is paid for each case it handles, meaning its profits rise as the rolls of those using food stamps rise (and numbers are really rising -- they were up to 43.6 million Americans in February).
And there is a third, larger problem: it's another iteration of what Suzanne Mettler has nicely termed the "submerged state." The submerged state encompasses government policies that have become more and more skewed toward hidden delivery mechanisms: from student loans subsidized by the government but offered by private banks, to tax incentives and tax breaks to aid people and encourage shared values, to benefits and services that are contracted out to private players. The direct role of the government in all three of these is obscured or completely invisible to the average American.
This is problematic in two ways. The first is that, as pointed out above, hefty profits accrue to the private sector when it can exploit the gap between the government and its beneficiaries. This isn't equally shared across the entire economy, however; most of the profits go to the FIRE sector, which Mettler points out have "outpaced growth in other sectors of the American economy... not from 'market forces' alone but rather from their interplay with the hidden policies that promoted their growth and heaped extra benefits on them." More profits mean more money to spend on lobbying to protect the very policies that allow them to profit off of these services. Rinse, wash, repeat.
It also affects political engagement. Mettler is famous among a certain subset of the blogosphere for a chart showing that majorities of people surveyed who had in fact benefitted from government programs -- many of them belonging to the submerged state -- said they had never "used a government social program." This is the larger danger of allowing the private sector to carry out government programs: "polices of the submerged state obscure the role of the government and exaggerate that of the market, leaving citizens unaware of how power operates, unable to form meaningful opinions, and incapable, therefore, of voicing their views accordingly," Mettler writes. It will only lead to a less engaged, and therefore less democratic, electorate.
Contracting banks out to provide benefits through plastic cards may at first glance seem like a win -- governments are spared the hassle of delivery, beneficiaries are spared the hassle of paying with cash -- but in the end it only benefits the banks.
Bryce Covert is Editor of New Deal 2.0.