Examining Comerica Bank's Turmoil:  Direct Express Treasury Contract to Slip Away?

Comerica Bank, in the midst of financial and regulatory turbulence, announced last week it may lose its contract with the U.S. Treasury to provide the Direct Express card. Earlier this year, we published news of the OCC's enforcement action against Comerica. That action detailed a long list of remediation requirements, including implementing a Third-Party Risk Management Program to assess and manage third-party risks effectively. In June, Comerica Bank announced a proposed $1.2 million class-action settlement in part related to allegations that Comerica did not appropriately oversee its third-party vendors selected to help administer the Direct Express program.  

The Direct Express Contract

Since 2008, Comerica has held the contract to administer the Direct Express card that provides debt cards to federal benefit recipients who do not have access to a traditional bank account. The card offers a secure, convenient way for these individuals to receive their benefits, reducing the need for paper checks and providing immediate access to funds. As of June 30, 2024, approximately 4.5 million federal benefit recipients rely on the Direct Express card.

The Comerica Bank and Conduent Class Action Lawsuit

The class action lawsuit was filed in 2019 against Comerica and Conduent, its third-party vendor providing call center support. Direct Express participants alleged funds were stolen from accounts, and the companies refused to issue refunds. Participants also reported a range of issues, including delays when attempting to report fraud, a lack of transparency with the claims process, and a lack of help from customer service representatives. Comerica Bank has agreed to the proposed $1.2 million settlement to resolve the lawsuit.

The Impact of the Potential Direct Express Contract Loss

The potential loss of this contract has significant financial implications for Comerica. Despite exceeding quarterly earnings expectations, Comerica's profits fell year-over-year, primarily due to higher deposit costs that offset the benefits of increased interest rates. Losing the Direct Express contract could further impact the bank's financial performance, as highlighted by the 10.6% drop in Comerica's stock price following the announcement.  

Lessons Learned

The ongoing problems for Comerica Bank underscore the critical importance of managing third-party risks and the high costs of failing to manage them appropriately:  

1. Assess your third-party risk program to ensure full compliance with regulatory requirements, identifying gaps and remediating deficiencies. Proactive assessments help guard against regulatory enforcement actions.
2. Ensure your third-party contracts detail the services to be provided, the process for ongoing monitoring, and the parties' obligations. Well-written contracts ensure a clear understanding of obligations and the process for proactively resolving issues.
3. Regularly assess third-party systems to ensure they continue to support compliance with technical and operational requirements. Maintaining this proactive approach can prevent system failures and their adverse impact on customers.
4. Foster a culture of collaboration with third parties to enhance service delivery, encourage feedback from internal and external customers, and support continuous improvement.

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