Observations About the Economic Impact Payment Cards

The IRS recently sent out $600 stimulus payments. Some of them were sent out by check, which is how I received the stimulus payment last year. But this time I received a prepaid debit card. The card was sent out by Money Network Financial, a subsidiary of Fiserv, and was issued by MetaBank, which is a separate financial institution. It functions like other prepaid debit cards, or gift cards, and is not reloadable. So I decided to write an article about how the situation is different because the government sent out debit cards instead of checks.

What Money Network Financial Does

Money Network Financial is serving in the role of a neobank in the economic impact payment rollout process. Neobanks often start out as money transfer companies that can’t make loans or offer deposit accounts themselves until they get their banking licenses. So for their first few years, they function more like software development companies that specialize in financial apps. They build middleware like online banking apps that connect their users to their partner bank’s computer systems.

Money Network Financial set up the EIPCard website and developed a mobile app that provides balance information and other services. Additionally, it provides customer service to debit card holders. But its third-party banking partner MetaBank received the stimulus money from the IRS and set up bank accounts for the stimulus recipients. MetaBank is the financial institution that manages the bank accounts and collects fees for the banking services it provides to the stimulus recipients.

MetaBank Gets the Interchange Fees

Banks collect interchange fees from merchants when their customers make purchases with debit cards. The value of these fees is a percentage of the value of the stimulus payments. According to the AARP, the IRS sent out 4 million debit cards in the first batch and will send out 8 million cards in the second batch. That’s 12 million cards. They each have a balance of $600, so their total value is $7.2 billion. MetaBank collects a percentage of that when consumers use the cards to go shopping.

Consumers can withdraw the money from the cards at a bank, of course, but the reason why the IRS sent out the prepaid cards in the first place was to help unbanked taxpayers who might not have checking accounts. Checking accounts charge a monthly fee if you have a low balance, so low-income people don’t always use them. So it’s likely that many of the economic impact payment recipients will make purchases with the cards and the merchants will have to pay the fees.

The easiest way to calculate the value of the interchange fees collected by MetaBank would be to multiply $7.2 billion by the average debit card interchange fee. But it’s hard to find that statistic because the fee calculations are very complex. Merchant Maverick estimated that the average debit card interchange fee was 0.3 percent in 2020, but warns that this statistic could be misleading. A 0.3 percent fee on $7.2 billion in transactions would generate $21.6 million in revenue. But this estimate draws on data from every bank and smaller banks can charge higher debit card fees, so the cards may generate more revenue than that.

The Durbin Amendment to the 2010 Dodd-Frank bill limits the fees that large banks can charge for processing debit card transactions. These banks are defined as banks with over $10 billion in assets. On September 30, 2020, MetaBank reported $6.10 billion in assets according to US Bank Locations. The first round of payments was worth $2.4 billion and if it was spent already, the bank would have been able to charge higher interchange rates on those transactions. The second round of payments was worth $4.8 billion, so part of it may have been spent while the bank was subject to the fee cap.

Cash Withdrawal Fees Generate More Revenue

The interchange fees on debit cards aren’t very high, so it would be difficult to run a major bank on this source of revenue alone. This has been a problem for neobanks and challenger banks that don’t have access to the additional revenue streams that major financial institutions like Fiserv have. And I’ve written about this topic and discussed it on LinkedIn before, which is how I learned about another stream of income that’s important for neobanks. As the VC firm Andreessen Horowitz explains, some British neobanks added cash withdrawal fees to reduce their losses recently.

Axios recently reported that the neobank Chime generates 21 percent of its revenue by charging fees on cash withdrawals from out-of-network ATMs. This is a fee charged by the bank directly, on top of any fees charged by the ATM operator. And it’s controversial because neobanks often promote themselves as fee-free alternatives to traditional banks. It’s possible to use in-network ATMs and avoid the fees but apparently many of Chime’s customers aren’t doing that.

That’s relevant for economic impact payment cards because MetaBank charges fees on cash withdrawals from these cards after the first withdrawal. Specifically, it charges a $2 fee on out-of-network cash withdrawals from ATMs and a $5 fee on withdrawals from banks. The cards aren’t reloadable and it is possible to withdraw the entire $600 stimulus payment at once, so this won’t provide an ongoing stream of revenue for MetaBank like it does for Chime. But if debit cards are used to distribute further stimulus payments or unemployment compensation, the bank that helps the IRS distribute those payments could collect cash withdrawal fees from those cards as well.

The Economic Impact Payment Cards Are Legitimate

I did not expect to receive a prepaid debit card in the mail, and I’ve heard that many other people were not expecting them either. The card was issued by MetaBank, not the IRS, and by using it you enter into a contract with MetaBank. So many people threw their cards away. They weren’t familiar with MetaBank and were skeptical about spending money on a card issued by an unknown financial institution. For example, an offer to sign up for a credit card might look very similar.

This isn’t a scam. It’s a prepaid debit card funded by the IRS and sent out with the help of Fiserv’s subsidiary Money Network Financial. Like other fintechs, Money Network Financial isn’t issuing the card itself so you’re actually opening a new account at MetaBank when you activate the card. MetaBank’s a regional bank that has branches in South Dakota and Iowa.

Conclusion

By sending out prepaid debit cards instead of checks, the IRS is allowing MetaBank to earn additional revenue from interchange fees and cash withdrawal fees in exchange for managing the accounts. And MetaBank may be able to collect higher debit card interchange fees than major banks can because of its smaller size.

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