Food Stamps Have a Procurement Problem
Soon, only two companies will make the cards that people get government benefits with. Here's why that matters.
In late June, the federal agency in charge of food stamps put out a distress call of sorts. The U.S. Department of Agriculture wanted to know why so few businesses compete to administer prepaid cards for government food assistance. As it stands, three companies make the cards for the majority of states, but one of them, JP Morgan Chase, announced last year that it is leaving the marketplace.
Understandably, federal officials are worried. At least 22.3 million households that receive federal benefits through the Supplemental Nutrition Assistance Program (SNAP) use prepaid cards to buy food. But the total number of active Electronic Benefit Transfer (EBT) cards is actually higher because some states also provide other kinds of government benefits, such as Temporary Assistance for Needy Families, through the cards. In 2013, the Federal Reserve Board of Governors estimated that government offices across the country distributed about $142 billion through prepaid cards, almost half of which came from SNAP.
With so much money flowing through these card programs, why is JP Morgan Chase getting out of the business? When the firm won new EBT contracts in 2008 and 2009, it proudly proclaimed itself "the national leader in bringing electronic benefit and banking solutions for low-income households." In 2012, the company's managing director of treasury services told Bloomberg News that the SNAP EBT card business was not only important "in terms of its size and scale" but also "in the sense that we are delivering a very useful social function here. We are a key part of this benefit delivery mechanism."
But recent media coverage hasn't presented the contracts as social work by firms like Chase. In fact, it's just the opposite. After the recession, a wave of stories revealed that large financial corporations profited when unemployment and poverty grew. That's led to pushback from state lawmakers. Washington state, for example, passed a law in 2011 requiring JP Morgan Chase to warn welfare recipients that withdrawing cash benefits from an ATM would result in a 85-cent transaction fee. The following year, the state's Department of Social and Health Services negotiated with Chase to eliminate the fee altogether.
As states have pushed vendors to reduce fees that generate revenue, they have also sought additional features to prevent fraud. Some states, for example, now require photo identification on EBT cards. But those kinds of security features increase the cost of producing the cards. Between efforts to waive fees and add new antifraud measures, said Kurt Helwig, president and CEO of the nonprofit Electronic Funds Transfer Association, "I don't know that a number of companies see a compelling business case."
As a result, federal officials are worried that a lack of competition between the remaining card companies will lead to more expensive contracts. In fact, that may be a best-case scenario: Some smaller states might not even get responses when they ask for bids for prepaid card contracts. That could become a big problem as dozens of state agencies are scheduled to hire vendors in the next five years to provide card services.
States that work with JP Morgan Chase will certainly need to find a replacement when their contracts expire. Currently, 16 states and U.S. territories use JP Morgan Chase for SNAP's EBT cards. (See a handy state-by-state list of SNAP EBT vendors here.)
The implications go beyond SNAP though. Between now and 2020, all 90 state and local agencies that administer SNAP for Women, Infants, and Children (WIC) are also required by federal law to provide these services though prepaid cards. For most of the country, WIC benefits still come in the form of a paper voucher with a prescriptive list of groceries people can buy. So far, 14 agencies have made the transition to prepaid cards for WIC and about a dozen have contracts with private vendors to roll out cards in the next few years. Most states have yet to award their WIC EBT card contracts.