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Federal government chooses direct deposit and prepaid cards over mailing checks

4March saw the culmination of a 17-year effort to eliminate federal benefit payments by check.

The 1996 Debt Collection Improvement Act contained a set of provisions, called “EFT 99,” that directed the federal government to make all payments except tax refunds by electronic means by 1999. Fourteen years later, that vision is finally coming to fruition.

While the government made rapid and substantial progress in moving payroll, vendor and other payments to electronic means, such as direct deposit and government purchasing card, moving payments for benefits such as Social Security disability and old age benefits continued to be a challenge because many recipients did not have bank accounts and could not receive direct deposits.

The FDIC estimates that eight percent of all U.S. households are unbanked.  The advent of the prepaid debit card, however, offered a promising solution to provide electronic benefit payments to these citizens.

In 2008, the Treasury Department launched the Direct Express Debit MasterCard card program with Comerica Bank. The program offers a prepaid debit card to any federal benefit recipient who lacks a bank account or elects to receive benefits via card. Federal benefits are loaded to the card like a direct deposit to a bank account, bringing the government into compliance with the law, saving taxpayers millions of dollars each month and offering a number of advantages for benefit recipients.

The Treasury Department estimates that it saves $0.93 for each payment it can make electronically rather than via check. The migration to all-electronic disbursement of federal benefits is estimated to save taxpayers $1 billion over 10 years.

The federal government is not alone is turning to prepaid debit cards to disburse payments to individuals. Most states use prepaid card programs for unemployment compensation and child support programs. States are also increasingly turning to prepaid cards to pay income tax refunds to those who lack bank accounts. Employers are also increasingly adopting prepaid cards as a payroll solution.

In each case, prepaid cards offer the payer the efficiency and ease of electronic payment. The recipients of the payments benefit, too, because they save the cost of check cashing, which can be substantial. A 2008 study by the Brooking Institution estimated that the typical fee for cashing a payroll check was $40.

The Direct Express card offers lower fees and there are no fees to use the card to make payments at merchants who accept MasterCard debit cards. Cardholders receive one free ATM withdrawal for each deposit to the card and there are no fees for cash back with purchase, cash withdrawals from a bank teller, calls to customer service, ATM balance inquiries, low balance notifications and many other services.

There are only a handful of fees cardholders can  be charged for optional services, such as transfers to a bank account, overnight delivery of replacement cards, using the card outside the U.S. and for paper statements.

Cardholders can view and manage their accounts online for free and balances on the Direct Express card are insured by the FDIC like a bank account.

In a 2012 survey of Direct Express cardholders by GoDirect.org, 95 percent indicated they were satisfied with the card, and 93 percent said they would recommend the card to friends or family.

Comerica Bank and MasterCard recently announced that additional free benefits would be added to the Direct Express card -  a financial education program offering cardholders an opportunity to learn how about general financial topics, such as budgeting and saving, as well as how to best use their Direct Express cards while avoiding fees.

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