According to some great investigative journalism from the Center for Public Integrity, it appears that the Treasury Department decided to give Comerica Bank $32.5 million when the bank found that it could not make good on its hoped-for cash flows from accounts at Direct Express.
CPI's Dan Wagner traced the story from the inception of the contract in 2008. After an initial pilot with Chase,
Treasury awarded the Direct Express contract to Comerica to issue the Direct Express prepaid debit card. The card now serves more than four million Americans, allowing them to receive their Social Security checks electronically.
EDITOR's NOTE: This is not an April Fool's post. Here is a link to my April Fool's post.
Most of the data comes from a report issued by the Department of the Treasury's Office of the Inspector General.
When Comerica came back and pled for a rewrite, Treasury decided to re-write the terms of the deal - no questions asked. Originally, Treasury set up the relationship with the expectation that it would be cost-free on an ongoing basis. Comerica would get the stream of interchange that flows from millions of customers.
But Treasury amended the 2008 contract in 2011 and agreed to pay a $5 enrollment fee to Comerica for each new recipient as well as another $20 million to pay for the cost of getting the infrastructure up and rolling.
Comerica's original bid made some big promises:
- It said that its cardholder fees would be as low as possible.
- The bank agreed to contribute dollars towards the cost of marketing.
- It offered a network with more than 50,000 free ATMs.
- It said that it would incorporate a robust customer service program which offered customers the chance to communicate via a variety of access points, including email, text, and IVR phone.
- The accounts would offer bill payment.
Although the Direct Express web site currently claims to offer bill pay, the IG's report says that Comerica had not implemented that function as of October 2013.
The IG said that Treasury took those statements at face value. In fact, while Treasury did attempt to make an internal calculation of the cash flows generated by such a plan. They later conceded that they made up all of the numbers. Indeed, Treasury could not pin down how it came to those assumptions.
But Treasury included some caveats when the contract was signed back in 2008: Treasury would not be held to a minimum number of sign-ups and would not be responsible if their recipients demonstrated a transaction pattern that did not maximize revenues.
“[Fiscal Service] does not guarantee the number of cardholders who will enroll in the program, the dollar amount that will be loaded onto the debit cards, any set quantity or types of transactions that cardholders will complete, any minimum volume of business, or level of compensation to the financial agent, and shall not adjust compensation on the basis that volume level did not meet expectations.”
Generally issuers never receive a bonus for a new sign-up. In fact, it is often the norm that issuers pay a fee to incur internal costs in order to acquire customers. But in this case, Comerica was receiving dollars in order to get more business. You would think that more business would help to realize more economies of scale. Certainly, it would help an independent company to reduce its infrastructure costs on a cost accounting basis. But no luck here - Comerica never found a way to run its business as it had hoped. But rather than re-entrench, it opted to ask for a handout.
Comerica Pleads Hardship
Comerica came back to Treasury after it said that it could not wring a profit from all of those cards. It turned out that a fair number of people were withdrawing their payments and then using that cash to make purchases, rather than swiping throughout the month. This non-swipe pattern was particularly prevalent among the non-voluntary sign-ups that occurred in the two years leading up to the mandated termination of paper check payments. During that time, Direct Express accounts surged from 1.5 million to more than 4 million. In all, one in two Direct Express cardholders was withdrawing 100 percent of their benefit check as soon as it cleared their account.
Note that this statistic seriously undermines the notion that people want to be banked.
To make matters even worse, it turns out that Treasury's generosity did more than cover the losses claimed by Comerica. With the new payment, Comerica did not just recoup its expenses. In fact, one-quarter of the bonus payment became pure profit for the bank.