By Andrew Gillen
Mastercard
A few months ago, the Social Security Administration announced that benefit recipients would receive an 8.7 percent cost of living adjustment (COLA) in 2023, the largest COLA in 40 years. Congress established automatic COLAs for Social Security benefits during the economically tumultuous 1970s. Previously, benefits were increased only by a special act of Congress.
The 2023 COLA will help millions of benefit recipients meet the increasing cost of living. However, federal benefit payees who rely on check cashing will discover that higher benefit checks often lead to higher check cashing costs, with fees that can be as high as 3 percent or more to cash a government check.
For Americans without a bank account, check cashing businesses have historically provided a way to convert paper checks into cash, but this service has always come at a cost: Fees allowed for check cashing vary by state, but fees of 2 percent to 5 percent are common.
Over time, that expense takes a toll: A 2022 report from the nonprofit Financial Health Network (https://tinyurl.com/bde8j6fe) estimated that Americans paid $1.5 billion in non-bank check cashing fees in 2021.This doesn't account for the cost and inconvenience of traveling to the check cashing location, the risk associated with carrying cash, and other issues of convenience and safety.
Fortunately, alternatives exist. For recipients of federal government benefits, for example, the U.S. Department of the Treasury offers the Direct Express prepaid debit card. While the Direct Express card is intended primarily for the unbanked, it's available to any recipient of federal benefits. Direct Express gives beneficiaries a way to receive payments automatically and electronically each month.
Sign up for the Direct Express card is free, and there are no monthly account fees. For safety and convenience, customers can check account balances by ATM, phone or mobile app. Direct Express charges no fees to make purchases in stores, online or via telephone. Cardholders are entitled to one free ATM cash withdrawal for every federal benefit deposit to their card accounts, and they can access more than 95,000 surcharge-free ATMs across the country. The few fees Direct Express cardholders encounter are for optional services such as receiving paper statements via mail or transferring funds to a personal bank account. In general, however, Direct Express is very low-cost, and it's possible to use the card for free.
In its recent report to Congress on government-administered, general-use prepaid cards (https://tinyurl.com/2znm48jy), the Fed confirmed the low cost of government benefit cards such as Direct Express, noting that "[t]otal cardholder fee revenue received by issuers of [such] prepaid cards. . . remained constant, representing 0.1 percent of program funds disbursed." That's 0.1% for a card compared to 2% or more to cash a check."
In 2022, approximately 3.4 million Americans received 53 million federal benefit payments, totaling $40 billion, on Direct Express cards. The program has helped the Treasury Department meet the statutory mandate that all benefit payments be made by electronic funds transfer, saving significant taxpayer dollars. Even more striking than the savings to the government, however, is how much Direct Express saves benefit recipients compared to receiving paper checks: an estimated minimum of $140 million and probably closer to $500 million, given the check cashing fees allowed in many states.
(The low $140 million estimate is based on the lowest widely available check cashing service ($4 per check), multiplied by the 53 million payments distributed on Direct Express in 2022, multiplied by 66 percent (the percentage of cardholders who are unbanked). The high end of the estimate range is based on the 2 percent check cashing fee allowed in nearly all states multiplied by the total disbursed via Direct Express ($40 billion) times the percent of unbanked cardholders (66 percent). The latter figure is still somewhat conservative because many states allow check cashing fees higher than 2 percent.)
Such large numbers sometimes make it hard to appreciate the impact on individuals, so here's a specific example: For a federal benefit payee receiving a monthly payment of $700, a 2 percent check cashing fee would be $14. Over the course of a year, that recipient would pay $168 in check-cashing fees, just to access their own money. Today, with many Americans struggling to make ends meet, saving an extra $168 over the course of a year could make a real difference.
As Barbara Ehrenreich said, it's expensive to be poor (tinyurl.com/3md6kyzz). People shouldn't have to struggle to access their money. Better options exist for Americans to access their money than check cashing services. For the millions of unbanked federal benefit recipients, the Direct Express prepaid card program is that better option: it lets them keep more of their own money. 
Andrew Gillen is vice president for account management and head of federal government programs for Mastercard. He has twenty years of experience in the payments industry and has also served in government at both federal and state levels. He holds a Master of Public Administration degree from the University of Pennsylvania and an MBA from the Kellogg School of Management at Northwestern University. Contact Andrew via LinkedIn at www.linkedin.com/in/publicfinance/.
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