The change could potentially save South Carolina as much as $1 million in printing and mailing costs this year, state projections indicate. And for the nearly 200,000 South Carolina households that do not have bank accounts, a prepaid debit card offers an end run around check-cashing fees and protects against the risk of holding so much cash.
But the biggest winner could be Bank of America, which will issue the prepaid cards and stands to collect an untold amount in fees from card users and merchants who own the stores where the cards may be used. The arrangement allows the Charlotte, N.C. bank to charge some card users fees as high as $10 per transaction. And unlike ordinary debit cards linked to a bank account, there are no caps on the fees banks can charge merchants when customers use prepaid debit cards.
The South Carolina Department of Revenue’s decision is part of a larger movement inside government. In 41 states, unemployment benefits are issued via prepaid debit card. Nearly every state issues food stamp and cash welfare benefits on prepaid debit or similar cards. Even the federal government will stop issuing traditional social security checks early next year. Government agencies stand to save millions while banks stand to gain much more.
The nation's largest banks have been eager to help government agencies make the transition to prepaid debit cards, industry analysts say. The reason: banks hungry to replace revenue lost to new financial regulation stand to collect millions in small fees from multiple card users and merchants.
Bank of America declined to answer detailed questions about the way that prepaid debit cards are most often used or the bank’s projected earnings from the tax refund cards. But the bank insists the potential fees won’t hit many customers.
“There are no [card user] fees for many typical uses of the card,” Jefferson George, a Charlotte-based Bank of America spokesman said in an email. George provided a link to a story describing critics of South Carolina's newest prepaid card option as overwrought.
Prepaid cardholders can visit a bank teller anywhere a Visa logo is displayed and, during their first visit, remove their entire tax refund at no cost, according to the fees listed on the South Carolina Department of Revenue's web page. They can also use the card to make purchases in stores.
If a card user decides to gradually access their refund at a teller -- one way to avoid walking around with large amounts of cash or get around ATM limits -- they will face a $10 fee each time. At an ATM, the fee is $2.50 for bypassing one of the more than 300 Bank of America ATMs in South Carolina. That's a problem for some rural South Carolina residents and families without cars.
The average tax refund in South Carolina was $837.44 last year. Many ATMs have maximum daily withdrawal limits typically under $1,000. Plus, card users will have to figure out how to withdraw the last few dollars from their card; most ATMs only allow withdrawals in increments of $10 or $20. Card users that request cash back at a store register will likely encounter similar limits.
And at some gas stations and other stores, when a prepaid debit card is used, the store charges the card user the amount due and holds additional money as a security deposit for a few days after the purchase is made.
These aren’t simply hypothetical experiences.
In 2010, when the state's unemployment agency launched the prepaid debit card option, state officials and the bank assured the public that with typical use, unemployed people would not pay fees to access their benefits. But under the initial terms of the deal, some South Carolina residents wound up paying ATM fees each time they needed to access cash or for calling customer service. They faced limits or security deposits while using their prepaid debit card that were not described in materials provided by the bank or state, The Huffington Post reported in November. (The customer service fee has since been eliminated.)
State officials said they have not tracked how much customers or merchants have paid Bank of America in fees on unemployment benefits. The bank has declined to provide these figures.
But documents obtained through a Freedom of Information Act request by The Huffington Post reveal that Bank of America aimed to generate such fees from at least $40 million in transactions in one year. The bank offered to pay South Carolina a one-time $35,000 "resource allocation" payment if the state awarded the contract to Bank of America and signed up enough people for the unemployment prepaid debit card to meet that goal.
South Carolina officials hope that about 350,000 people will receive tax refunds on prepaid cards this year.