In California, New Consumer Protections for TANF Families

In August, I wrote about a new bill in California that would extend basic consumer protections to participants in CalWORKs, the state’s cash assistance program, who receive their benefits on prepaid cards. On Friday, Governor Brown announced that he had signed the bill. Here’s why it matters.

The bill, AB 1280, makes a very specific and in some ways narrow policy change – but it’s an important one, which could establish a precedent for other states. Over the past few years, the popularity of prepaid debit cards has increased enormously, particularly among unbanked consumers: in 2009, 12% of unbanked households used a prepaid card, increasing to 18% in 2011. The number of active prepaid debt and payroll cards is expected to grow from 9.7 million in 2010 to 29.2 million by 2016.

This trend has extended to the public benefits sphere. As of March, the federal government issues Social Security and Supplemental Security Income via its “Direct Express” debit card, while many states now offer their own prepaid cards for unemployment insurance.  Most states deliver Temporary Assistance for Needy Families (or TANF) through EBT cards, though many also give TANF recipients the option of having their benefits directly deposited into an account of their choice -- which may include onto a prepaid card. In the few states that don’t offer EBT cards for TANF, such as Wisconsin, a prepaid card may be unbanked participants’ only option aside from a paper check.

However, while prepaid cards may offer some advantages to unbanked consumers, such as wider ATM access and the ability to make online payments, inadequate protections and hidden costs may undermine these benefits, and do little to mitigate the traditional costs associated with being unbanked. According to the Federal Reserve Bank of St. Louis, “unbanked consumers spend approximately 2.5 to 3 percent of a government benefits check and between 4 percent and 5 percent of payroll check just to cash them.” Yet some prepaid cards don’t offer a much better deal; according to a 2011 study from Consumers Union, some would cost an average consumer over $600 a year if they weren’t vigilant about avoiding fees, with overdraft charges often being the most costly.

To ensure that cards used to distribute public assistance are actually a less costly alternative to paper checks, they need to meet a certain set of standards and protections. This is where AB 1280 comes in. The law requires that if CalWORKs assistance is deposited onto a prepaid card, that card must be held at an insured financial institution, cannot be attached to any overdraft or credit feature that is automatically repaid from the account, and must benefit from all the same protections as cards covered by the Electronic Fund Transfer Act.

As with many public policy issues, the devil is in the technical details. But more broadly, the passage of AB 1280 speaks to the fact that financial inclusion is a complex and multi-faceted goal. It’s not solely about connecting families with bank accounts and financial education. Financial inclusion is about a spectrum of services, structures and protections that creates a more fair and transparent financial system and affords low-income families the opportunity to fully participate in the economy.