The unemployment debit-card scandal

By Felix Salmon
November 14, 2011

Few people despise paper checks as much as I do. They’re expensive, insecure, anachronistic, and dangerously reliant on the less-than-stellar delivery record of the US Postal Service. Recently, banks in my neighborhood have been swapping out their ATMs with new machines which read checks — something which must be a hugely expensive investment, for them, in a technology which deserves to be killed off with extreme prejudice.

So I’m a great fan of the way in which states including Oregon, South Carolina, and California are doing away with the unemployment check. If you want unemployment benefits, have them directly deposited into your bank account. Or, if you’re unbanked or otherwise don’t want to do things that way, get your unemployment benefits on a prepaid debit card.

Except, it hasn’t quite worked out that way. HuffPo’s Janelle Ross has been all over this — she started with an exposé of the fees associated with the prepaid cards, and followed up with a tough piece about the cozy relationship between South Carolina and Bank of America on this front. And then today, American Banker’s Kate Berry has found something truly evil going on in California:*

The states sell banks exclusive contracts to run their benefit-card programs, giving Bank of America Corp., JPMorgan Chase & Co. and their rivals millions of new customers in one fell swoop. These banks then collect uncapped, higher fees from merchants with every card swipe, often kicking back some profits to the states as part of revenue-sharing agreements. California, for example, has earned $7.7 million from Bank of America since December 2010…

B of A spokesman Jefferson George says it was California’s decision not to offer direct deposit. It takes 24 hours for B of A to transfer funds, he says, adding that further delays are caused by the other banks.

Jill O’Connell, chief of accounting for the California Employment Development Department, says the state did not offer direct deposit to recipients because doing so would have required the state to hire more employees to track the deposits.

This is, simply, bonkers. I have no idea what “hire more employees to track the deposits” means, but if California is getting $7.7 in kickbacks from BofA, it could probably afford to hire a few more employees with that money. It’s a no-brainer that direct deposit is the easiest, cheapest, and most efficient way of getting money from the state to the unemployed. And yet, faced with a first-best option like that, California doesn’t offer it, choosing to take BofA’s $8 million bribe instead. And BofA is laughing: the prepaid debit cards aren’t subject to the Durbin cap on interchange fees, so it can charge merchants through the nose every time one of these cards is used.

As Ross’s stories show, people on unemployment benefits live very stretched, high-stress lives where pennies count. And they simply can’t afford the fees that banks like BofA and US Bank are levying with abandon on some of America’s poorest and neediest. The fact that the states are going along with the banks on this is just gruesome. Check this out:

The state asserts that people who are prudent, timing their withdrawals while adhering to the limits, can secure all of their funds without charge.

“With careful use, South Carolina cardholders can avoid paying any fees,” said Fairwell.

But people who rely on such cards to collect their benefits have a difficult time hewing to polite language when they hear such characterizations.

“That’s bullshit,” said Sandra Gortman, 55, a Columbia resident who says she incurred some $10 in fees within the first weeks of using her card. “Excuse me. But, really, there is no way given the way you have to live when you have very, very little money and copious amounts of stress, to avoid paying fees.”

I’m sure the banks have been buttering the states up nicely. But let’s hope the Consumer Financial Protection Bureau, or someone, steps in and brings some common sense to bear. Because right now those who can least afford debit-card fees are being essentially forced to incur them. And there’s absolutely no reason why people getting unemployment benefits should have to worry all the time about debit-card fees and how to avoid them. Especially not when they already have bank accounts which their money could be going into directly.

*Update: Berry’s piece has now disappeared, to be replaced by a placeholder saying only that “an updated version of this story will appear soon.” The state of California says that Berry’s original piece contained errors, and specifically that California does offer direct deposit, just not with the first payment. It’s all a bit confusing; I’m looking into it.

Update 2: Here’s my exchange with someone from California’s EDD. In brief, they do offer a direct deposit option, though one has to get a debit card anyway, and they do not go so far encourage people with bank accounts to use direct deposit.


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I love paper checks, and I can’t stand direct deposit or these unemployment debit cards. Big banks just won’t learn. Best thing that can be done is for everybody to pull their money out of ‘em, and go with a small local bank or credit union.

Posted by BobBobb | Report as abusive

I read that piece with the quote from SC’s Ms. Gortman last week and had one question that I wonder if you can answer, Felix: does Ms. Gortman have any other option to receive her benefits – or does the State force her to get them on a debit card?

From the article, it sounded like it was possible to get the benefits in other ways, although she was “encouraged” to go the debit card route.

Posted by KidDynamite | Report as abusive

Gees…state governments and big banks in an incestuous relationship…what a suprise.

Posted by mfw13 | Report as abusive

I had no idea that direct deposit was not an option in California.

In that case, there are every reason to believe that banks are not just buttering the states but also state employees and elected officials. I know that local governments are not exactly havens of efficiency and common sense, especially in my Left Coast home state. But THAT is just too good to be sheer happenstance.

Don’t call the Consumer Financial Protection Bureau. Ping the other Bureau, the FBI.

Posted by Frwip | Report as abusive

And when I think about it, this story about direct deposit is plain BS.

California already has the infrastructure to manage direct deposit, thanks to its Franchise Tax Board.

If California can handle direct deposit for tax refunds, it can work just the same for unemployment benefits.

Posted by Frwip | Report as abusive

This is just more of the outsourcing-is-cheaper fairy tale that businesses have sold to governments. California also requires that all tax payments over a certain amount be done electronically; this requires that you grant certain rights to access your bank account to the state. The other options are to pay by credit card, which carries a 2.5% (or is it 3.4%?) fee to the bank, and if you pay by check, a 1% penalty (I have chosen the check + penalty route, I would rather give 1% to the state than 3% to a bank for just processing a payment).

See, it’s not just at the federal level that government serves banks, it’s like that at the state level, too.

Posted by KenG_CA | Report as abusive

Felix, thank you very much for highlighting this issue. Here in Oregon, the state’s largest newspaper – and news source – ran an editorial a few weeks back, pushing for the state Treasurer to fight for better terms. There’s also a push for real competition in the marketplace for those cards: ssf/2011/11/a_check_on_oregons_cards.htm l

Posted by NCimon | Report as abusive

Thanx Felix, I had no idea. It’s pretty bad when a state can’t dictate terms to a bank.

Posted by majkmushrm | Report as abusive

The United States Postal Service handles more mail in 1 day than most other countries postal systems handle in a year.
Just because the public developed the lie of “the check’s in the mail” to dodge bill collectors, don’t knock the postal service.

Posted by knibblet | Report as abusive

The United States Postal Service handles more mail in 1 day than most other countries postal systems handle in a year.
Just because the public developed the lie of “the check’s in the mail” to dodge bill collectors, don’t knock the postal service.

Posted by knibblet | Report as abusive

Knibblet–Felix doesn’t like payment systems that don’t generate fees for banks.

Posted by Moopheus | Report as abusive