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S&A STUDY FINDS SIZABLE EBT MARKET,

 ATLANTA, March 8 /PRNewswire/ -- During 1992, Speer & Associates, Inc. (S&A) completed a study of recent developments in Electronic Benefits Transfer (EBT).
 EBT encompasses the delivery of government benefits, through electronic funds transfer (EFT) rather than through a paper-based medium. Recently, it has been hailed as a major cost savings opportunity for governments -- federal and state. The objectives of S&A's study included:
 -- Developing a profile of current EBT programs
 -- Understanding the dynamics of EBT
 -- Sizing the actual business opportunities for EBT arising from the
 evolution of EFT
 Interestingly, S&A found that while the federal government has been the driving force behind the development of Electronic Benefits Transfer, the individual states stand to gain the greatest benefits from its implementation. The federal government predominantly administers cash entitlement programs. Additionally, only 13 percent of all federal benefit recipients are unbanked. Hence, most of the existing cash payments could be made through direct deposit. S&A estimates that there are approximately 412 million benefit checks currently being issued that could be directly deposited into the recipients' accounts. With check issuance costs at $.30 per item, and EFT transactions at only $.04 per item, the federal government could save an extraordinary $107 million per year with this approach. To add to the appeal of EBT, the costs of reducing fraud and theft and the associated administrative expenses would also be significantly reduced.
 According to S&A, the EBT programs currently in place for noncash entitlement payments are administered by the individual states which use ATMs and POS terminals to help recipients to access benefit funds. While direct deposit is the preferred method of distributing benefit funds for cash payments, it cannot be used effectively to deliver the benefits from noncash programs. In fact, direct deposit would defeat the purpose of the program if done on a cash basis. For example, food stamp programs are designed to allow low- to moderate-income individuals to obtain a limited number of necessary food items. Recipients cannot use the script to purchase items such as alcohol or tobacco products. Given these constraints, S&A finds a POS environment is an effective delivery solution for these programs that POS will ensure compliance and prevent fraud. In addition, the POS environment will address the needs of benefit recipients who do not use the banks.
 While ATMs are prevalent throughout most of the U.S., POS environments are not. This makes the delivery of benefits for EBT programs much more difficult in those parts of the country where POS environments are limited. One solution is for the government to install POS terminals, but EBT is significantly more cost effective when existing ATMs and POS terminals are used. Hence, the federal government has stated that it will not pay for new terminals to be installed in future test programs. This policy puts the burden of terminalization on the merchant, who has been slow to see the need to implement POS for non-benefit purposes.
 Given this situation, S&A believes the government should focus on establishing new EBT pilots in areas already offering commercial POS:
 -- Initial program setup costs will be less for the government.
 -- Many merchants will already have POS terminals easily adaptable
 to EBT.
 -- Experienced networks will already be in place to handle the
 transactions.
 -- Most of the participants will already be educated as to how EFT
 works.
 -- Most of the merchant terminalization issues will become moot.
 In contrast, the retailer's decision to install POS terminals should not be contingent solely on the basis of government involvement. Most retailers have installed POS terminals out of competitive necessity to better serve customers. In addition, by utilizing online transactions that guarantee payment at the point-of-sale and enable faster collection of funds, the overall financial operation of their stores has been improved.
 Merchant participation in EBT should be made as effortless as possible according to the S&A study. The current food stamp program rules dictate to government agencies that all merchants in a pilot area must be invited to participate. Likewise, it must not cost them any more to participate in an EBT program than it did to participate in the paper-based program. Merchants who already have POS terminals need the ability to use their current processor for EBT transactions as well.
 S&A found that merchants have two major concerns relative to consumer perceptions and the mechanics of the transaction. First, they express concern that EBT will redistribute market share as a function of the fact that some stores are offering the service and some are not. Second, the merchants feel strongly that having EBT in place should not interfere in any way with the normal shopping habits of recipients. For example, they are against any signage which would direct recipients to special checkout lines. Merchants do not want the burden of policing the programs to be placed on the checkout clerks, either through identifying the recipient through photo identification cards, or by having to determine what items the individual may or may not buy depending on the program benefits they are receiving. To address this issue, benefit programs using EBT may be restricted to merchants equipped with universal product code scanning. Furthermore, they may have to provide software which can differentiate those items which are permitted to be purchased under the program when the customer offers a benefit access card as payment.
 The Food and Nutrition Service (FNS) has made progress in the effort to establish a set of common rules and operating regulations for food stamp EBT programs. National standards are still needed, however, for all types of EBT programs. The work by FNS and the Electronic Funds Transfer Association (EFTA) will be of great assistance in establishing those standards. These rules will deal with the many facets of EBT including, but not limited to, the following issues:
 -- Merchant relations
 -- Response times
 -- Down time
 -- Aspects of liability
 -- Training of merchant personnel and recipients
 -- Mandatory vs. voluntary participation
 -- Online vs. offline mechanics
 -- Transaction fee
 -- Contractor duties
 -- Cost appointment among participants
 The Federal Reserve Board has excluded EBT from coverage under Regulation E because it does not wish to impede the development of pilot EBT programs across the country. However, many factors argue for coverage. The arguments for Regulation E coverage include:
 -- Regulation E was meant to have a broad scope.
 -- Direct deposit is covered so benefits received by any other
 electronic means, such as EBT, should also be covered.
 -- Governmental bodies are not exempt from Regulation E; hence,
 Regulation E should apply to EBT whether disbursements are
 payroll checks or entitlements, or whether state agencies or the
 federal government disburse the funds.
 -- Since EBT often piggybacks on ATM and POS programs which are
 covered by Regulation E, logically EBT should be covered as well.
 One approach would be to establish special rules for EBT within the Regulation E framework, removing legal uncertainties about the status of EBT systems and recipients' rights, while allowing continued development of EBT systems.
 The government has been the owner of the transaction account in all EBT pilot programs to date, but financial institutions prefer the use of recipient-owned accounts if Regulation E issues are to be fairly resolved. Banks argue this would work better in bringing recipients into mainstream society, which is one of the government's goals. It would also enable the cheaper direct deposit method to be used to distribute benefit funds when appropriate. The banks hypothesize that they would then have the opportunity to establish additional, more profitable, relationships with the previously unbanked recipients.
 EBT is most cost effective when the program serves a large number of recipients and combines many different federal and state benefit programs onto a single access card to achieve economies of scale. Mandatory recipient participation is preferred because the initial setup costs can then be spread out among many recipients allowing the costs of the EBT program to remain competitive with the paper-based method. This allows the paper-based system to be dismantled once all recipients are converted to EBT thereby avoiding the high costs involved with operating two systems.
 Currently, transaction fees can only be charged to a recipient if the program is voluntary. S&A believes that reasonable recipient transaction fees should be allowed in mandatory programs after a certain number of free transactions per month is reached. This would allow the contractor or processor to more clearly define its potential transaction costs. Moreover, this pricing scheme fairly compensates the providers of ATM and POS terminals and is a way of charging the recipient a small amount for the numerous benefits he receives from EBT.
 According to S&A's study, the most efficient EBT programs have distributed the tasks involved in running the program to the participants most qualified to perform those tasks. A government agency is best suited to dealing with all recipient-related matters and overseeing the entire operation of the program. Networks are best suited to be responsible for all transaction interchanging and contractors should focus on processing transactions. Banks are most qualified to settle funds movement through the federal reserve system. Banks will also provide the use of their ATM and POS terminals for benefit access. Merchant relations can be handled by either the contractor or, in some cases, a bank. In the final analysis, it should make good business sense for each participant to be involved in the part of the EBT program for which they are best qualified.
 Cooperation from all parties involved will be needed in the preliminary stages of the joint effort to build an efficient and cost- effective EBT program. This is best accomplished by marketing the program to all participants early in the developmental stages. Involvement of key individuals and organizations is essential to forming a good working partnership between the public and private sectors. Federal, state and local governments must work as a team with retailers, recipients, community groups, EFT networks, contractors and financial institutions to make EBT successful. There is the potential for tremendous savings in a national EBT program with direct deposit used to distribute benefits.
 In S&A's opinion, the widespread use of EBT in the U.S. is strongly reliant on the overall growth of commercial POS, and specifically to the rate at which merchants equip themselves with POS terminals. While the capability for POS exists anywhere in the country where a regional ATM network is in place, POS has experienced a slow, evolutionary growth pattern rather than a revolutionary increase in usage over the past 10 years. The main reason is that consumers are not demanding POS from merchants in areas where it is not widely available. In areas that have extensive POS environments, the ability to use it has become a point of differentiation for consumers and, therefore, merchants have had to respond to remain competitive. In areas without POS or POS on a small scale, the prevailing issues are the same as they were 10 years ago, that is, who is going to pay for it. The merchants do not see sufficient benefit in adding another payment mechanism to manage when none of the others are going to obviated. The financial institutions and EFT networks do not want to pay for it as they argue that the retailer is the primary beneficiary of the placement of POS terminals.
 With the recent development of national POS networks, namely VISA's Interlink network and MasterCard's Maestro network, the future for POS and, therefore, EBT is getting brighter. As these networks are put in place and the consumer begins to use them, the merchant may feel the need to respond by terminalizing their operations in an effort to remain competitive in the marketplace. If so, S&A believes EBT on a national level could be in place by the 21st century.
 -0- 3/8/93
 /CONTACT: Chuck Bruney of Speer & Associates, 404-396-2528/


CO: Speer & Associates ST: Georgia IN: FIN SU:

BR-BN -- AT011 -- 4197 03/08/93 16:09 EST
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Date:Mar 8, 1993
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