Well into the 21st century, the federal government still lacks the capacity to deliver aid to the poorest and most vulnerable Americans in a crisis. To anyone who has followed the Federal Emergency Management Agency’s struggles to distribute relief in the aftermath of natural disasters, this fact has been obvious since Hurricane Katrina. But COVID-19 puts it in even starker relief. As many as 12 million eligible Americans did not receive a stimulus payment in 2020 — most of whom did not file taxes because of their low income — and there is no reason to believe that the latest round of payments has improved on this dismal figure.
What is needed is a universal system of public distribution that operates through electronic payments into bank accounts. Unfortunately, more than 6 percent of U.S. households — comprising 14 million adults — are currently unbanked, and these figures are 17 percent and 14 percent, respectively, for Black and Hispanic households.
The challenge of achieving both universal benefit distribution and universal bank accounts may seem daunting, yet the Treasury Department has already developed a solution to both problems. The Treasury’s little-known Direct Express debit card holds the key to attaining both universal benefit distribution and universal bank accounts in America.
The Direct Express card was born of Congress’s desire to reduce paper waste. In 1996, Congress required the Treasury to make all payments, except tax refunds, electronically by 1999. But by 2001, the Treasury was still disbursing nearly a quarter of federal benefit payments by paper checks. The Treasury’s biggest obstacle in instituting electronic payments was the substantial number of federal beneficiaries who were unbanked. In 2008, an estimated 3.9 million federal beneficiaries did not have bank accounts.
In response, the Treasury developed the Direct Express card to serve Social Security recipients and other federal beneficiaries who were unbanked. The design of the card is simple. Federal benefit payments are automatically loaded onto the card. The Direct Express card can then be used like a debit card at any store that takes Mastercard, including online vendors. It can also be used to withdraw money from an ATM or purchase money orders at the post office. However, a Direct Express cardholder cannot deposit additional funds onto their card.
The Direct Express card has been a resounding success. By 2020, more than 99 percent of federal beneficiaries received their payments electronically, and millions of formerly unbanked beneficiaries now access financial services through the Direct Express card.
With just two modifications, the Direct Express card can solve the problem of both universal benefit distribution and universal banking in America. First, the Direct Express card should be made freely available to all Americans through both post office locations and participating bank locations. Second, the Direct Express card should offer, at little to no cost, the financial services that are most used by the unbanked.
Providing these additional financial services will be critical to the card’s success. Unlike federal beneficiaries, who require the Direct Express card to access their benefits, the unbanked are unlikely to obtain a debit card that provides no immediate benefit to them, even if it is free. The possibility of a future stimulus or disaster payment may be too remote to matter. However, the financial services most used by the unbanked are check cashing and bill payment, so the Direct Express card should offer both of these valuable services.
In particular, the Direct Express card should allow cardholders to make deposits into a Federal Deposit Insurance Corporation-insured account and allow a limited number of free check deposits per month through a participating ATM and bank network. For payments, the card should allow a limited number of free money orders or cashier’s checks per month at all post office locations and participating bank locations. The Direct Express card should also permit electronic payment of utilities, including recurring payments, and it should enable balances and payments to be viewed through a mobile interface. Finally, to the extent banks might fear competition from the Direct Express card, there could be a cap on the funds that could be held on a Direct Express card so wealthier individuals would still patronize banks.
By aggressively promoting a modified version of the Direct Express card, the Treasury could push the unbanked percentage below 1 percent, a share that would be comparable to countries such as Germany and Australia. Moreover, every Direct Express card account would be automatically eligible to receive emergency payments in the event of an economic, public health, natural or other disaster. The Direct Express card would have the additional benefit of saving millions of unbanked households from the high fees that they currently pay for alternative financial services.
Through the Direct Express card, the Treasury has already conducted a remarkable proof of concept for a system of universal public distribution, a system for which we are in desperate need. Congress need only implement it.
Prasad Krishnamurthy is professor of law at U.C. Berkeley School of Law, where he teaches and writes in the area of financial regulation and contracts.