Lifeline for Millions of Americans Becomes Hot Potato for Banks

The US government has begun phasing out paper checks for unbanked Americans who receive federal benefits, adding to the ranks of millions who rely on Direct Express prepaid cards. The problem: that program is a mess.

Comerica Inc., which issued the cards for nearly two decades, was removed as the bank administering the program amid a lawsuit from the government claiming it had failed recipients, including accusations it hung up almost 25 million times on people calling with issues. Bank of New York Mellon Corp. was supposed to take over, but ran into delays. Then the government’s first backup ...