California’s inflation-relief debit card fiasco: Here’s what went wrong | Opinion

California Franchise Tax Board

By now pretty much everyone is aware of the debacle surrounding the California Middle Class Tax Refund debit card payments.

The Franchise Tax Board contracted with a New York bank and Money Network, a Wisconsin-based servicer, to issue some tax refunds via prepaid debit cards issued by a New York bank.

Here’s the basic list of what California taxpayers got:

  • Cards that a lot of recipients threw away because the mailers and the card activation instructions looked like a typical consumer fraud scam. Interestingly, the same thing happened with cards issued by Money Network in Massachusetts in 2020. (If you lost or destroyed your California debit card, call 800-240-0223 and dial 3 when you hear the menu prompts.)

  • Numerous cards drained by fraudsters.

  • Cards issued in the name of only one joint tax filer. This was probably the husband most of the time. Aside from the obvious gender equity problem there, what happens when the first joint filer to whom the card was issued has died, or there has been a separation or dissolution since 2020.

  • The New York bank’s federal privacy disclosure notice states that the bank may share customers’ information with other financial companies for joint marketing, with no opt-out right. For that matter, it’s unclear how the Franchise Tax Board thinks it had authority to release California taxpayers’ information to the New York bank in the first place.

  • In many cases, very high fees to get the taxpayer’s money off the cards and into the taxpayer’s California bank account: $7 + 3.5% of the transferred amount!

  • Well-documented horrible customer service from New York Community Bank for Californians who called or wrote in.

  • All of those low-cost core deposits and fee income went to a New York bank to be spent in New York instead of to a California bank to be spent in California.

  • All of the small amounts that won’t be spent just because it’ll be too much trouble when the balance is below $20. Presumably, those amounts will just go back to the state, and thus be a net deduction from the amount of the refund.

  • A card agreement that includes a jury trial waiver that is unlawful in California. It also contains an arbitration clause of exactly the type that the California courts and Legislature abhor. Couldn’t the Franchise Tax Board have bargained that away to protect Californians?

  • A card agreement that the New York bank can amend at any time, without the taxpayer having the right to close the account and get a full payment of the amount on the card if they don’t agree with the change.

So, how did this happen?

Quite simply, because our California government officials didn’t understand or care about keeping California taxpayers’ money in California.

Their requirements for banks interested in offering the program were so onerous that no California bank bid on it.

So, instead of working with the California industry to reach an accommodation, the Franchise Tax Board just outsourced the contract to a New York bank that had no intention of following California law at all. Thus, all of these problems are directly caused by our California government staffers’ lack of familiarity with the consumer finance legal and business ecosystem (well, with economics generally, but that’s too big for this discussion), and the failure of California government staffers to work with the California consumer finance industry to get this done.

What is to be done?

The state needs to commit to educating its employees to understand the economic environment in which they work.

The state needs to stop treating its regulated businesses as adversaries and to start viewing those businesses as partners in building a better life for everyone in the Golden State.

Paul Soter has been a California lawyer for 43 years, representing businesses in the financial technology and consumer financial services sector.