U.S. Treasury Seeks Bank Bidders for Its Controversial Direct Express Prepaid Card

The U.S. Treasury Department this month began soliciting bids from banks to run its Direct Express prepaid card for Social Security recipients and other beneficiaries. The card program is currently run by Dallas-based Comerica Bank and has encountered political controversy in Washington.

Treasury’s Bureau of the Fiscal Service is taking applications until Feb. 28. On April 1, it intends to notify finalists, and it will designate the winner on June 17. The government wants bids for a program to run five or more years.

To reduce administrative costs, Treasury for years has been actively encouraging benefits recipients to forgo receiving paper checks and opt for direct deposit. If they don’t want direct deposit or don’t have a bank account, Treasury is pitching the Direct Express card as the best alternative. For the October-December 2013 period, the card had 4.8 million active accounts and an average monthly load of $2.7 billion, with nearly 208,000 new cards being issued each month, according to a Treasury document. Social Security recipients account for a little more than half of the cardholders; the rest receive Supplemental Security Income (SSI) or veterans benefits.

Comerica began issuing its Direct Express MasterCard in 2008. With the current contract expiring in 2015, soliciting bids about a year out is not unusual, according to sources in the prepaid card industry. But the exclusive Comerica contract has attracted flak from Capitol Hill watchdogs and Congress. The nonprofit Center for Public Integrity (CPI), a Washington-based nonpartisan investigative news agency, last June said Treasury agreed to consider hiring a new vendor after CPI reported that Treasury “quietly amended the contract to add tens of millions in new payments to Comerica. The bank had complained that it was having trouble profiting under the financial terms to which it originally agreed.”

Treasury’s independent inspector general also probed the contract because the department reportedly failed to consider other banks, CPI said. And at a hearing of the U.S. Senate’s Special Committee on Aging, Democrats grilled a Treasury official about the agreement’s lack of vendor competition and transparency, according to CPI. Treasury has paid Comerica about $30 million, according to testimony cited by CPI.

How much all that figures into the bidding process Treasury started this month is unclear. A department spokesperson did not respond to Digital Transactions News requests for comment. A Comerica spokesperson deferred to Treasury for comment.

Political controversy aside, whoever wins the new contract will have to find a way to make a profit in a much different economic climate from when Direct Express first started, says Tim Sloane, director of the Prepaid Advisory Service at Maynard, Mass.-based Mercator Advisory Group Inc. The Durbin Amendment that Congress passed in 2010 has limited big banks’ debit card revenue streams, and merchants have become more aggressive in trying to control their interchange expenses, he says. In the face of such pressures, one of the nation’s biggest banks, JPMorgan Chase & Co., recently exited the open-loop gift card business altogether.

“There’s the margin compression driven by Durbin, and additional margin compression driven by large merchants negotiating directly with networks,” Sloane says. “Since 2008, a lot of water has gone over the dam.”

It’s unclear whether Comerica will bid for the new contract. The bank has the right to solicit current cardholders for another product, so “it is unknown how many existing cardholders may remain in the Direct Express program,” the Treasury document says. But whoever is the issuer, Treasury wants Direct Express to continue with low consumer pricing.

“We recognize that in light of the low fees, as well as the unique customer-service needs and card usage patterns by the Direct Express cardholder population, the program may operate at a loss without additional compensation from Treasury,” its document says.

The department therefore wants bidders to submit three-tier proposals that account for operating costs to serve fewer than 1 million cardholders, 1 million to 3 million users, and more than 3 million. The document has a chart noting that call-center volume for the program from August 2012 through August 2013 ran at a minimum of 10 million calls per month and sometimes exceeded 15 million.