California’s unemployment debit cards

By Felix Salmon
November 17, 2011
wrote about the unemployment debit-card scandal, based on articles by Janelle Ross and Kate Berry.

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On Monday, I wrote about the unemployment debit-card scandal, based on articles by Janelle Ross and Kate Berry. But Berry’s article has been down since Tuesday, replaced by a placeholder saying only that “an updated version of this story will appear soon”. And the state of California, in particular, was extremely unhappy with Berry’s coverage. So today I had a long conversation with the Californian department of employment development, trying to understand exactly what’s going on there.

The conversation was a bit frustrating, because the questions I was asking weren’t fully aligned with the answers they wanted to give. The Californians were very keen on telling me how much better their debit cards are than the old paper-check system — something I completely agree with. And they’re also very proud of the fact that it’s possible to use their debit cards without incurring any fees. That’s great, too.

Where we part ways is the issue of direct debit. California has a lot of unbanked people –  1.2 million, by one count. Many of those people are eligible for unemployment and disability benefits, and it’s important to do well by them. For those people, the debit card is great. On the other hand, there are 37 million people in California as a whole, and seems a little bit silly, to me, to design the entire unemployment system around the unbanked, when the unbanked are massively outnumbered by people with bank accounts. After all, the whole point of unemployment insurance is that you get it when you’re laid off from your paid job. And if you have a paid job, you’re very likely to have a bank account.

It’s my contention that if you have a bank account, then it’s a no-brainer that you should have your unemployment or disability benefits paid directly into that account by direct debit. But none of the Californians were inclined to agree with me on that front. “Our focus on everything we put out is to tell our claimants how to avoid fees,” said Sabrina Reed, project director for the electronic benefits project, talking about things like the nine-minute YouTube video explaining how to use the debit card. The direct-deposit part of the video starts at the 6:40 mark, where it presents direct debit as “another option”; we then cut to a woman holding a newborn who says that “with a new baby it was a good option for us to do direct deposit, because it’s hard to go to the bank”.

At no point does the state of California ever come out and say that direct deposit is a good option; it’s just an option, offered to those who would like to take advantage of it. “Many people like the convenience of using the card,” Reed told me. “People who are savvy enough to use direct deposit sign up for direct deposit.” When I asked whether, in the interests of education, it might be a good idea to encourage Californians to sign up for direct deposit, she replied by saying that “you’re making a presumption we’re not making”.

Let me rewind here for a second. In my original post, I quoted Berry’s article which in turn quoted representatives from both California and BofA, talking about the fact that California does not offer direct deposit. The truth is that direct deposit is an option — but you always have to get a debit card, and then if you want direct deposit, you need to work that out not with California but rather with BofA. And BofA has no incentive to make the direct deposit option easy or convenient or attractive — because BofA makes all of its money from the retained balance on the debit cards, and from the interchange fees it gets when those debit cards are used. If you set up direct deposit so that there’s no balance on the debit card and you never use the card to buy anything, then BofA won’t make any money off you.

Reed understands that BofA will never push the direct-deposit option — but she also sees no reason for California to push it, either. In fact, she says, people getting Californian unemployment benefits “have a better debit card process than you and I have with our banks”. And she came up with a clever example of why someone with a bank account might not want to transfer all the money over using direct deposit: if that person had a third-party ATM on their street corner, then it might be cheaper to withdraw money from that ATM using the California debit card, rather than using their bank’s ATM card. “It’s a personal choice for every individual,” said Reed. “While direct deposit may be convenient for one person, it may not be for another.”

Now it’s easy to be a bit suspicious of California’s motives here. The state has entered into a revenue-sharing plan with Bank of America, under which BofA remits back to California some percentage of the total unspent balance on the debit cards each period. The fewer people using direct debit, the more money Bank of America makes — and the more money California makes, too. The money isn’t huge — it’s about $10 million a year. But if direct deposit was easier, or was encouraged more, then California might have to start paying BofA to run this scheme, rather than getting a multi-million-dollar rebate every year. (Reed is a huge fan of high interchange fees, and hates the Durbin amendment, even though benefits debit cards were exempted from it: it’s “ultimately going to hurt the taxpayer”, she says.)

More generally, if you have a bank account, of course you should sign up for the direct-deposit option. The whole point of having a bank account is that it’s the single place through which all your transactions flow, and people on unemployment or disability benefits generally get most of their income from those schemes. The debit card can’t be refilled by anybody other than the state of California — in no sense is it an alternative to a bank account. The money on the card should be used to avoid overdraft fees; it should not simply sit unused on the card.

Reed gave me a long explanation of why it makes sense to California to outsource the direct-deposit function to BofA, and I’m pretty much convinced on that front. I do believe it’s cheaper and more efficient for California to outsource these things than to try to do them itself. But I also believe that if California wants to do right by its claimants, it should ask them to provide their bank account details when they sign up for benefits, and tell BofA to sign them up for direct deposit as the default option.

By all means give people the option to opt out, and to keep their benefits on a prepaid debit card if they’d rather do that or if they don’t have a bank account. But the opt-in system that California has setup seems designed to minimize the number of people who will use direct debit. As does the distinct lack of any documentation from California saying that direct deposit is a really good idea. The money arrives automatically in your bank account, a good two or three days earlier than it would in the bad old days of paper checks. You don’t need to keep close track of how much money may or may not be on your debit card at any given time. And you can keep all your money in one place, give it to someone else by writing a check, and enjoy all the other conveniences of having a bank account. Prepaid debit cards are all well and good, but bank accounts are always better.

In fact, if California really wanted to do right by its claimants, it would force BofA to give them a bare-bones, no-fee bank account rather than just a debit card. The bank account would come with a debit card, of course. But you could add money to it whenever you wanted, without incurring any fees — something which apparently is illegal with benefits cards. California has more than 2 million claimants receiving some $100 million per day: that gives the state a lot of negotiating power to get what it wants. And it’s a little sad, I think, that what California turned out to want was a way of maximizing interchange fees for BofA and for itself.


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I’m curious about how the revenue split between CA and BoA was determined. If that came out of a competitive process, I’d like to think that BoA isn’t netting much out of this. That leaves a (presumably) minor inefficiency from the card program, and the distributive effect of the transfers from the less savvy banked unemployed to the taxpayers of CA. The distribution can be (mostly) countered by slightly raising unemployment payments, leaving small transfers from the unsavvy banked to the unbanked and savvy banked. I won’t lose any sleep from that.

Of course, if BoA is really raking it in, then that’s another matter. What’s the split? If it’s 50/50, I can imagine $10M being somewhat reasonable overhead for running this program.

Posted by absinthe | Report as abusive

Or even better, California could set up its own state bank like the Bank of North Dakota.

Then, it would be very easy for California to set up bare-bone banking accounts for the unbanked and run its own payment system at a very low cost.

But without going to such ‘extremes’, as I said as a comment to the first story, there is NO reason whatsoever why California unemployment benefits cannot piggy-back on the California FTB direct deposit system. It’s already there and the state uses it everyday.

So sorry for the paranoia, but this relation with BofA stinks.

Posted by Frwip | Report as abusive

It can’t be that difficult to setup, even the UK job centre, not exactly known for its efficiency, has been doing this for years. In fact they actively encourage you to sign up for the direct debit payment option.

In the California example, you say that Bank of America will let you setup the direct deposit version but is that only with them? Or can you transfer the money off the prepaid card to another bank? As I could imagine it would be fairly useless if you banked with someone else, had all your direct debits for bills and credit cards setup there, and then found all your money at Bank of america.

Posted by ABT | Report as abusive

Felix, thanks for shining some light on this topic. While the issue is technical and the sums involved modest, it is disturbingly sympomatic. The current reflex position of government, whether local, state, or federal, seems to be to align its policies with the interests of major institutional players rather than its own citizens.

I know, I know, plus ca change… but the very pettiness of the examples seems to define a new low; there is apparently no pocket so thinly lined with change that B of A won’t stoop to suck a dime out of it. As for the state of California, during your interview did Ms. Reed ever claim that the number one reason for administering the program this way was because her department judged it the optimal structure for the average beneficiary? If she did not (and based on the evidence, I think she cannot) then she is not acting as a true fiduciary of the citizens and public monies in the trust of her department (an honorable bureaucrat) but rather as a functionary concerned only with particular chunks of revenue and budgetary turf (a bureaucratic hack). This the key difference between good and bad administration; and when the rot goes far enough, a system becomes insitutionally corrupt. Bribes don’t only flow through private pockets, they can flow via the public budget too.

As to the specific issue: I work for a mid-size private employer with about a thousand regular employees and a thousand indepedent contractors. All compensation payments are made via mandatory direct deposit, with an alternative freestanding “debit card” option (which charges a small monthly fee). B of A, as it happens, is the administrator. I regularly sign up independent contractors for their payment option and no one who as both arrangements explained to them ever elects the debit card. Absolutely no one. And the fee itself almost never comes into it. I have literally never signed up a contractor, let alone a regular employee, for one of these cards.

Posted by djseattle | Report as abusive

A government bureaucracy in bed with a bank that got massive bail outs from taxpayers??? Who’d a thunk it. LOL!

Posted by 1AngryAmerican | Report as abusive