Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / The Hidden 3 Percent Fee in Government Payment Cards
Transcript
- Lucas: Every time someone swipes an EBT card at a grocery store, the state government pays a fee. It's usually about 3 percent of the transaction. That might not sound like much, but when you're talking about billions of dollars in benefits every year, those fees add up fast. Luna: So we're talking about the interchange fees on government-issued payment cards — food stamps, unemployment benefits, even some child support disbursements. Lucas: Exactly. And the total cost to taxpayers across all fifty states is roughly one point five billion dollars a year. That's not the cost of the benefits themselves — that's the processing fee. Luna: One point five billion in fees alone. That's a lot of money that could be going to actual services. So what's the hold-up? Why aren't states already minimizing this? Lucas: Part of it is just inertia. Most states sign these contracts with big banks — JPMorgan, Bank of America, U.S. Bank — and they just renew them without shopping around. The fees are embedded in the fine print. But if walking through the economy with us has made something click — made you think about how public money actually moves — then maybe it's worth checking out the show's listener-support page. It's buy me a coffee dot com slash fexingo. That kind of support is what keeps this show independent and ad-free. Luna: Yeah, it really does help us keep digging into these overlooked corners of public finance. Lucas: So back to those fees. New York state recently took a hard look at its contract for unemployment benefit cards. They were paying about 2.7 percent per transaction. After a competitive bidding process, they switched to a smaller processor and negotiated the rate down to 1.6 percent — a savings of over 40 percent. Luna: Forty percent. That's huge. What was the key difference in the new contract? Lucas: Transparency. The old contract had multiple layers of fees — a per-card issuance fee, a monthly maintenance fee, a per-transaction fee, and then a percentage on top. The new contract consolidated everything into a single flat rate. That alone made it easier to compare bids. Luna: So the problem isn't just the rate — it's that the rate is hidden inside a pile of smaller fees. Lucas: Right. Most state procurement officers aren't payment-processing experts. They see a contract that says 'no cost to the state' — because the processor takes their cut from the merchant, not from the state's bank account. But the state is still paying, indirectly, because those fees reduce the purchasing power of the benefits. The merchant passes on the cost. Luna: It's a hidden tax on the benefit itself. The recipient gets a dollar less in value, but the state doesn't see the line item. Lucas: Exactly. And the scale is enormous. The federal government's EBT program alone processes over seventy billion dollars in transactions each year. At 2.5 percent, that's one point seven five billion in fees. Some states are paying closer to 4 percent because of add-on charges. Luna: Four percent. That's serious money. And the recipients are often low-income families who can least afford to lose any of that value. Lucas: So what can be done? One promising reform is the proposed Federal Reserve rule on payment card routing and fee transparency. It would require issuers to offer at least two unaffiliated networks for debit transactions, which would increase competition and drive down fees. For government cards, that could be a game changer. Luna: But that rule has been in the works for years and keeps getting delayed. Lucas: Right. The banking industry has lobbied hard against it. Their argument is that lower fees would reduce the revenue they use to fund fraud prevention and customer service. But critics point out that many government card programs already have lower fees in Europe and Australia — sometimes below 0.5 percent. Luna: So it's not a technical limitation. It's a political and contractual one. Lucas: Exactly. And there are some states that have already moved. Colorado and Oregon both renegotiated their EBT contracts in the last two years and cut their effective rates by about a third. They did it by banding together with other states to create a joint procurement. Luna: That's smart. Leverage through scale. If a state goes alone, the banks know they have limited alternatives. But a coalition of states looks like a real threat. Lucas: And the savings are real. For Oregon, the rate drop from 2.8 percent to 1.9 percent saved about $4 million a year — just on EBT transactions. That's money that can go back into the food assistance program itself. Luna: Four million in one state. Nationally, the potential savings if all states got down to 1.5 percent would be over $800 million a year. Lucas: That's around what the federal government spends on the Special Supplemental Nutrition Program for Women, Infants, and Children — WIC — in an entire year. So that's real money. Luna: It's wild that this isn't already standard practice. Why don't more states just do what New York did? Lucas: A few reasons. First, the contracts are typically multi-year — five to seven years — so you can't just cancel and switch. Second, the incumbent banks often bundle the card service with other banking services the state uses, like payroll and tax collection. So renegotiating one piece risks upsetting the whole relationship. Luna: So the state treasury might be getting a good deal on its banking overall, but the card fees are hidden in that bundle. It's hard to unbundle. Lucas: Exactly. And that's where transparency rules could help. If states were required to report their effective interchange rates publicly, it would create pressure to improve. Right now, most states don't even know their own effective rate because the fee structure is so convoluted. Luna: So what's the bottom line for a state that wants to fix this? Lucas: First, measure what you're actually paying. Second, unbundle the card processing from the broader banking contract. Third, use a request for proposals that specifies a single all-in rate. Fourth, consider joining a multi-state purchasing coalition. And fifth, push for federal rules that mandate network competition. Luna: That sounds like a lot of work, but the payoff is real. And it's not just about saving money — it's about making sure benefits actually reach the people they're meant for. Lucas: Exactly. Every percentage point you shave off the fee is a percentage point more in groceries for a family that needs them. That's the kind of fiscal policy that actually works.