(Bloomberg) — The U.S. government has begun phasing out paper checks for unbanked Americans who receive federal benefits, adding to the ranks of millions who rely on Direct Express prepaid cards. The problem: that program is a mess.
Comerica, which issued the cards for nearly two decades, was removed as the bank administering the program amid a lawsuit from the government claiming it had failed recipients, including accusations it hung up almost 25 million times on people calling with issues. Bank of New York Mellon was supposed to take over, but ran into delays. Then the government’s first backup turned down the offer.
Now, its next choice — Fifth Third Bancorp — will try its hand at turning around a program vital to roughly 3.5 million Social Security recipients, veterans and other Americans. The pitfalls are plentiful, while the profits, at least based on Comerica’s experience, are minimal. And in the latest twist, Fifth Third is now buying Comerica.
“This is the Direct Express card that typically is used by some of the most humble and poorest of recipients, including people with disabilities, a lot of people on Social Security Insurance,” said former Maryland Gov. Martin O’Malley, who served as Social Security Administration commissioner under President Joe Biden. “Those citizens were very, very poorly served.”
Americans who receive payments through Direct Express have long seen “Comerica Bank” on their cards, and may know nothing of the turmoil behind the scenes.
BNY originally expected its card provider — financial-technology firm Mobility Capital Finance, also known as MoCaFi — to start issuing cards to new enrollees starting this month. In June, BNY notified the Treasury Department’s Bureau of the Fiscal Service that more time was needed, according to people with knowledge of the matter. The bureau rejected the delayed timeline and decided to change banks instead.
“Due to readiness challenges involving one of the providers, Fiscal Service made the decision to discontinue the agreement,” BNY spokeswoman Anneliese Diedrichs said in a statement.
Representatives for the Treasury Department didn’t respond to requests for comment.
With BNY out, Treasury officials decided against holding another round of bidding and offered the contract to last year’s runner-up, said the people, who asked not to be identified because the information isn’t public. That bank, Flagstar Financial, passed, the people said, and the next in line, Fifth Third, agreed to take the contract over. Fifth Third plans to use Fiserv’s Money Network service as its card provider, a partnership included in its original bid.
A Flagstar representative declined to comment. A Fiserv spokeswoman said her company is proud to be part of Fifth Third’s contract.
The quick change put Fifth Third on a tight timeline to catch up. On Jan. 1, Fifth Third plans to start issuing cards to new enrollees — an estimated 40,000 people a month, said Bridgit Chayt, the bank’s head of commercial payments and treasury management. About six months later, it expects to start sending Fifth Third cards to existing beneficiaries who now have Comerica cards. Those timelines may still change, she said.
Comerica complaints
The Treasury Department has long touted Direct Express as being cheaper and less prone to fraud than paper checks, saving the US government as much as $150 million annually. But customers have complained for years about the current card provider, Comerica, over customer-service failings and unexpected ATM fees. Right before Biden’s term ended, the Consumer Financial Protection Bureau sued Comerica, claiming it was “systematically failing” millions of Americans.
Comerica intentionally ended phone calls before the cardholder could speak to a representative, and callers sometimes had to wait on hold for several hours, according to the CFPB’s December lawsuit. One cardholder, a Texas senior without internet access at home, said funds were stolen from a prepaid card for months and the customer-service agent was “extremely rude and unhelpful.”
In April, the CFPB dropped its suit as the Trump administration gutted the bureau.
Comerica Chief Executive Officer Curt Farmer said in an interview Monday — the day Fifth Third announced its agreement to buy Comerica for $10.9 billion in stock — that while the deal is unrelated to Direct Express, it will be helpful in the months going forward.
“This will allow us to move and make that transition more quickly to Fifth Third,” he said.
Jesse Van Tol, president of the National Community Reinvestment Coalition, a nonprofit that pressures banks to do more business in underserved communities, often by fighting bank mergers, praised Fifth Third’s CEO.
“Tim Spence has an interest in financial inclusion that is uncommon for a bank CEO,” Van Tol said in an interview. “I would hope that the bank brings that perspective strongly to bear on how they run the Direct Express program.”
MoCaFi’s Cards
In last year’s bidding process for a Comerica replacement, BNY’s submission included plans for MoCaFi to issue the cards. The New York-based fintech was founded almost a decade ago by Wole Coaxum, a former JPMorgan Chase & Co. banker. BNY invested in MoCaFi’s $23.5 million Series B fundraising round in 2023.
“MoCaFi’s mission is to ensure that everyone has access to high-quality, low-cost financial services — regardless of who they are or where they live,” Coaxum said in an emailed statement. “We’re proud of our consistent track record of success in working with government entities across the country, including New York City, City and County of Los Angeles, Olmsted County, Birmingham, Boston and St. Louis.”
With MoCaFi unready to issue cards by October and the government rejecting BNY’s troubleshooting efforts, Comerica continues to run the program for now. Chayt said Fifth Third was still negotiating with the Bureau of the Fiscal Service on the exact terms of the contract, including how much her company will be paid.
Banks are lured to Direct Express for the associated deposits and to earn fees from processing payments that flow in and out of the cards — and to build a relationship with the government for possible future contracts. Comerica attributed $3.7 billion of its non-interest-bearing deposits — roughly 16% — to Direct Express as of midyear.
Last year, Comerica collected $121 million of fee income from the program, on top of $137 million in 2023. Still, expenses for managing the program were roughly equal to the revenue, meaning the bank has basically broken even on it in the past two years.
Chayt said Fifth Third’s leaders are well aware of the importance of the “lifeline payments” provided by Direct Express, with recipients relying on the money to cover food, housing, health care and other basic necessities.
“They do require an additional level of care,” she said. “It is not easy. If it were, everyone would want to do it.”
— With assistance from Sally Bakewell and Paige Smith.
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