After KeyCorp stopped providing prepaid cards to unemployment benefit recipients in Illinois, the company’s fee income from cards and payment services tumbled during the first quarter.
The line item in Key’s quarterly financial statements fell 23.8% year over year. The decline was even steeper in Key’s commercial banking unit, which houses contracts with Illinois and other states. In the commercial bank, noninterest income from cards and payments fell 57.7% year over year.
And in anticipation of an even larger reduction in prepaid card revenue tied to state-supported programs, Key revised its outlook for full-year 2022 noninterest income, saying it will now be down by mid-single-digits, not low-single-digits as projected earlier this year.
The recent drop-off in noninterest income from cards and payments was not unexpected. The first quarter was the first three-month reporting segment since KeyBank, a unit of the $181.2 billion-asset parent company, stopped offering prepaid cards to deliver unemployment insurance benefits to Illinois residents.
Cleveland-based Key is one of the banks that have decided to pull back on partnerships to administer government benefits programs amid elevated fraud in those programs, American Banker Magazine reported this month in its
Like Key, Bank of America has been rethinking its role as a payments vendor for government benefits. Last year, the Charlotte, North Carolina, company opted not to renew a contract with the state of Maryland to provide prepaid cards for jobless claims.
Incidents of fraud involving prepaid benefits cards surged in the early stages of the COVID-19 pandemic, when a significant uptick in jobless benefits claims combined with often antiquated infrastructure and technology led to more instances of cheating. Costs for banks rose as a result.
In Ohio alone, the Department of Job and Family Services paid more than $475 million in jobless claims to criminals, and overpaid another $3.3 billion between March 2020 and February 2021, according to an
Key was scheduled to stop providing prepaid cards in Illinois on Dec. 27, according to a press release last year from the Illinois Department of Employment Security.
The department said at the time that recipients of jobless claims would have to choose between receiving paper checks or direct deposits, since Key would no longer be providing debit cards for jobless claims.
On Thursday, a Key spokesperson declined to comment on “specific client contracts,” including the relationships that it maintains with states to administer jobless claims. Key continues to have “numerous state contracts,” and it values them, the spokesperson said.
As of early March, Key had contracts in Alaska, Connecticut, Indiana, New York, Rhode Island, Washington and West Virginia, a company spokesperson told American Banker earlier this year.
During the first quarter, Key reported net income of $420 million, down 28.9% from the same quarter last year. Earnings per share were 45 cents, four cents less than the average estimate of analysts compiled by FactSet Research Systems.
Net interest income totaled $1 billion through March 31, up 0.8% year over year. Meanwhile, noninterest income was $676 million, down 8.4% from the year-ago period, in part because of a result of a reduction in “other income” related to market-related adjustments, the company said.
A 55.3% year-over-year decrease in consumer mortgage income was also a factor in the fee-income decline. Consumer mortgage fees were driven down by higher balance-sheet retention and lower gain-on-sale margins, the company said.
Noninterest expenses totaled $1.1 billion, about flat year over year. Like some of its peers, Key added to its loan-loss reserves as a result of increased economic uncertainty related to inflation and the war in Ukraine, as well as in response to loan growth. Key recorded a quarterly provision of $83 million.
Key executives touted the company’s loan growth Thursday, pointing to increases in lending segments on both the consumer and commercial sides. Average loans were up 3% for the quarter, helped by $820 million in originations stemming from Key’s
Key plans to expand Laurel Road to nurses starting May 6, which is National Nurses Day.
“I think that's a business you'll see us be able to continue to grow,” CEO Chris Gorman told analysts during the quarterly earnings call.
Excluding planned runoff of Paycheck Protection Program loans and the
For Key, a silver lining of the reduction in prepaid card fees is that noninterest expenses should fall correspondingly, according to company executives. Key continues to expect that its total noninterest expenses will rise in the low-single-digit range this year.
