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This is a guest blog post from our friends at Credit Land, a website which features credit card selection and application assistance.
The switch from paper checks to debit cards will save the U.S. Department of Labor approximately $4 million a year, but the underlying fees and costs are pinching consumers pockets.
The program varies from state to state, but nationwide consumers are generally charged $1.50 to withdrawal money from ATMs, and 50 cents for bank calls, when using the unemployment debit card. Thirty states have signed contracts towards making the debit card option a reality.
The state incentive is that is saves them money. A typical contract between a bank and state look like the one between Kansas and Citigroup. In exchange for providing the debit cards free of cost, the banks will charge consumers and merchants to make revenue. The state expects to save $300,000 a year by making the simple switch to debit cards rather than printing paper checks.
The problem with collecting fees from these consumers is that they are unemployed, and with an unstable job market, it isn’t clear when they will find work again. In some states the unemployed are required to use the debit cards, while other states still provide direct deposit and traditional mail options. Some banks charge overdraft fees of $20 rather than declining charges that are more than what is on the card. In Pennsylvania, the banks have begun charge for lost cards, calling the call center, checking balances, withdrawals and balance inquires.
A couple cents here and there adds up to a lot of money. For example in Missouri, 94,883 people claimed unemployment benefits through debit cards. According to Rupert McAllister who is a financial analyst at Credit-Land.com, recipients use the card anywhere from six to 10 times a month. Now if each cardholder makes three withdrawals from an ATM of which they are not a customer of (at a charge of $1.50 per transaction), the bank would collect a half a million dollars from that state alone.
This venture is profitable for banks and credit card companies who receive, one to three percent from each transaction made with one of the cards. Also some banks, depending on the agreement made with the state, make money on interest after the state deposits the money.
The people are outraged. In states such as New Mexico, cardholders have attempted to bargain with Bank of America to reduce the fees, but to no avail. The state saves $1.5 billion a year by using the debit system. “Neither banks nor credit card companies will say how much money they are making off the programs, or what proportion of the revenue comes from user versus merchant fees or interest. It’s difficult to estimate the profits because they depend on how often recipients use their cards and where they use them,” McAllister said.
The article fails to mention a few key facts:
— in most states, unemployment benefit recipients are given the option to receive payment by either direct deposit or by debit cards. The majority of states do not provide debit cards as the only payment option.
— there are numerous ways to use these cards without ever incurring a fee. Most states allow a certain number of free ATM and over-the-counter withdrawals per pay period. Cards can also be used at no cost wherever Visa is accepted, and most states allow you to get cash back at grocery stores or pharmacies without a fee.
Derrik, as the article states, the rules vary from state to state. Here is what I know; he banks will generally do what is in their best interest (i.e. profits), not the consumer.
One of my thoughts was how much money the banks make off of all of the little uncollected balances on the cards. For example, if someone has 0.68 or $1.25 left on the card, are they going to try to use that card for that precise amount in conjunction with another form of payment? My guess is no and that means the bank still wins.
Am I anti-big bank? Yes! If you want to know why watch the movie called “The Inside Job” and read the book “The Pirates of Manhattan” by Barry James Dyke.
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