When Derrick Johnson visits the ATM in his Florida town to tap his jobless benefits, he regularly pays fees to the companies that administer the state's unemployment program. That sort of agreement has become commonplace in many states.
But when Johnson uses his card, the state of Florida also takes a piece of the action. Under the terms of the deal between benefit administrators Affiliated Computer Services and Wells Fargo bank, Florida collects a small share of the unemployment benefits paid out in that state. In the 11 months since Florida entered into the agreement, ACS charged unemployed people in Florida like Johnson nearly $1.12 million in fees, and shared about $12,000 with Florida.
The agreement between Florida and ACS marks what some consumer advocates say is the latest abusive practice financially battering the unemployed. Banks and other companies have turned the work of administering public benefits into a profit center in almost every state. Now states are negotiating for a share of the gains.
Technically, Florida isn't charging any extra fees; the arrangement entitles the state to a small share of the total average daily balance on all the prepaid debit cards. But Wells Fargo and ACS are paying Florida its share by tapping the money they earn from merchants as the cards are used.
"Wow," said Johnson, 43, after The Huffington Post told him about the deal. "That, right there, explains why they suggest the card and why there are so many fees. The bank is going to make sure it makes plenty of money if it has to turn around and share a little with Florida."
In the last two years California and Tennessee have entered into deals similar to Florida's. While the details of the contracts differ, the arrangements can be lucrative -- California has brought in $7.7 million in the nine months since the debit card option was rolled out. And as contracts in about a dozen other states expire next year, some states may follow Florida, California and Tennessee's example, industry analysts and consumer advocates said.
"It is outrageous," said Bill Newton, executive director of the Florida Consumer Action Network, a nonprofit organization that advocates for consumer-friendly policies and practices based in Tampa, Florida. "What you have here is banks taking money from poor disadvantaged people when they are down on their luck and then sharing what they've grabbed with the state. It's Darwinian, or maybe Dickensian. Whatever it is, it's immoral."
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Officials inside the state agencies that oversee unemployment benefits in Florida, California and Tennessee all deny that state governments are "making money" on the unemployed or sharing in the spoils of the fees that banks can charge prepaid card users as they access their unemployment benefits.
State officials instead describe the deals as shrewd and savvy attempts to save state or federal taxpayers money. The money they collect is more like interest on unemployment benefits or a fee states can charge a bank or company like ACS for an exclusive contract to provide a service to unemployed people. States say that the contracts allow states to cut or completely eliminate the number of paper checks that must be printed and mailed, saving millions of dollars and reducing check theft and fraud. Prepaid debit cards also save unemployed people who don't have bank accounts the cost of check cashing fees, state officials say.
"Florida's decision to pursue the best value for the citizens of Florida by negotiating a revenue share model actually has no cost impact on the claimants," said James Miller, a spokesman with the Florida Department of Economic Opportunity. "We make every effort to ensure that those Floridians and their families receiving benefits have free access to them."
In Florida, unemployed individuals eligible for benefits can receive them via check, direct deposit or prepaid debit card. Anyone who opts for a prepaid debit card -- about 20 percent of people receiving unemployment benefits in October -- can face a range of fees as they use the card, state officials said. But there are also ways to avoid them. The state's agreement with ACS saved the state about $300,000 a year in check printing and mailing costs, Robbie Cunningham, another Florida Department of Economic Opportunity spokesman said.
Florida's arrangement with ACS and its subcontractor Wells Fargo calls for ACS to pay the state 0.5 percent of the average daily balance on the cards. Between the start of the program last December and October, that arrangement generated $12,363 for Florida. The state used that money to cover some of the administrative costs of the unemployment program, Miller said.
ACS described its agreement with Florida in straight-forward but magnanimous terms.
"ACS helps Florida reduce costs and give people convenient access to their funds," said Kenneth Ericson, a spokesman for ACS from his Washington, D.C.-area office.
In California, unemployed individuals eligible for jobless, paid family leave and disability benefits all receive them on prepaid debit cards issued by Bank of America. Anyone who wants the money put in a bank account can arrange a transfer from the card to an account after receiving their first payment. Bank of America initiates those transfers for subsequent benefit payments within 24 hours, state officials said. But depending on the bank the unemployed person uses, it may take a few days for the funds to arrive. Only about 24 percent of the people receiving unemployment benefits in California have set up a transfer from the card to their own bank account, according to state data. Consumer advocates say the transfer delay forces most cash-strapped unemployed people to stick with the prepaid debit card.
Eliminating checks is expected to save California about $4 million a year. For the 1.08 million people receiving unemployment benefits from California on a prepaid debit card, there are also ways to avoid paying fees. Bank of America sends card users information, and the state has even created a Twitter account and a YouTube video to show people how to avoid fees.
But the state does not track what card users have paid in fees. California's contract with Bank of America also calls for the bank to pay the state a portion of the average daily balance on all the prepaid debit cards that carry unemployment, paid family leave and disability benefits. The state's deal with Bank of America includes an absolute minimum revenue guarantee based on the federal funds interest rate. The formula has generated $7.7 million for the state, officials said.
"Because of the size of California," said Patti Roberts, a spokeswoman for California's Employment Development Department, "EDD was able to put in place a very favorable contract."
Bank of America issued a statement describing its prepaid debit card as a quality service but declined to answer detailed questions about its contract with California.
In Tennessee, the agreement between the state and JP Morgan Chase calls for Chase to pay Tennessee 10 cents for each prepaid debit card in use each month. This is not a "revenue sharing" agreement but rather a fee the state collects from the bank, state officials said. Tennessee offers the unemployed the option of receiving benefits via direct deposit or on a prepaid debit card. About 45 percent of the unemployed people receiving benefits do so via direct deposit. The remaining 55 percent did so on a debit card, generating $40,339 for the state since the debit card was first offered in December 2010. That money has been used to cover some of the administrative costs of Tennessee's unemployment program, state officials said.
"We are not making money," said Jeff Hentschel, a Tennessee Department of Labor spokesman.
Tennessee also does not track the fees card users have paid to the bank. But eliminating paper checks will save Tennessee about $3 million a year, Hentchel said.
Banks and other companies have aggressively pursued contracts to provide unemployment and many other public benefits via prepaid debit cards for much of the last decade, according to a July analysis by Mercator Advisory Group, a Massachusetts-based company that monitors the consumer payment industry. Interest in this business spiked when federal regulators began discussing a cap on the fees that banks earn when customers use ordinary debit cards at stores. This year, a new federal law made the cap a reality. But the fees banks can collect when consumers use a prepaid debit card remain unlimited.
Banks and other companies are hungry to either get into or expand their reach in the prepaid debit card business, said Ben Jackson, a senior analyst with Mercator. Right now, there are 41 states that have entered agreements with banks to provide access to public benefits via prepaid cards, Jackson said. But states -- many of which are facing budget shortfalls and outright crises -- have also become aware of the full value of these contracts, said Jackson.
"It would not surprise me if more states were to say, 'we have plenty of costs to manage, and we are bringing you a lot of business and we would like to see some return on that,' " said Jackson.
And the amount of money that states collect through the agreements are poised to grow as more states renegotiate their contracts and request revenue sharing deals, he said.
Consumer advocates say that while deals between states, banks and payment processors in Florida, California and Tennessee do save states money and can potentially save customers without bank accounts from check cashing fees, the revenue sharing agreements are highly questionable. All the deals are designed to generate larger sums of money as unemployment grows, said Lauren Saunders, The National Consumer Law Center's managing attorney. And then there's the question of what makes the prepaid debit card business so profitable.
"The banks aren't going to share money at a loss," said Saunders. "The payments come from the money the banks are making off these cards. And that money, without question, comes from fees paid by card users and merchants. To say that states and banks aren't making money off of unemployment -- directly or indirectly -- is like asking what the definition of 'is' is. They are playing semantic games."
Some states, such as California, have even structured their programs so that more prepaid debit cards are in circulation and therefore more revenue is generated for the state, Saunders said.
Back in Delray Beach, Fla., Johnson's own financial situation registers like a cruel joke, he said. He held a job making signs for banks that he was laid off from in April. By June, another bank closed his checking account because he had overdrawn it and couldn't pay what he owed. Now yet another bank is collecting fees on his unemployment benefits.
"Nobody mentioned the fees until I got the card and the little brochure that kind of tells you where you can use it," he said.
Johnson can't afford a car and sometimes his cash reserves get so low that he can't afford to take a bus to the closest of Wells Fargo ATMs, where unemployed people with prepaid debit cards in Florida can make unlimited free withdrawals. He has to access his unemployment benefits at an ATM within walking distance, he said. That's an out-of-network ATM in a corner store. When he uses it, he pays nearly $5 in surcharges and fees. So far this month, Johnson estimates that he's paid nearly $15 to access his benefits.
If it weren't for the $396 Johnson receives each month (the state garnishes another $396 to cover child support for his four children) he would be destitute, he said. So Johnson is quick to say that he's grateful for unemployment and appreciates the prepaid debit card's convenience and the instant access it provides to his unemployment benefits. Still he isn't pleased with the fees or Florida's deal.
"I would ask you if you were kidding if this weren't so serious," he said. "I don't know that I would have gone for the card if I knew about the fees or I knew about their deal. I don't like it. I don't like it one bit."
Note: This story has been updated to include information provided by California officials late Wednesday.