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Electronic transfer of government benefits.

In 1990, the federal government paid recipients more than $400 billion in social security and other government benefits, and state-administered programs paid another $95 billion or so. Almost 60 percent of the federal payments and nearly all the state funds were disbursed by paper check. To increase the efficiency and minimize the cost of disbursing funds, and to improve the service to benefit recipients, agencies at the federal and state levels are working to move toward electronic delivery of these payments. The Social Security Administration and the Department of the Treasury, for example, have launched a major effort to increase the direct deposit of social security payments to recipients' bank accounts.

A problem arises when an individual has no deposit account at a financial institution: Benefits cannot then be disbursed by direct deposit of funds. Government agencies are exploring an alternative method called electronic benefit transfer (EBT) for delivering cash benefits, particularly to low-income recipients. In the EBT systems now in place, recipients use automated teller machines (ATMs), point-of-sale (POS) terminals, and other electronic devices to withdraw their benefits. The recipient generally gains access to the funds by using a combination of a plastic card with a magnetic stripe and a personal identification number. The electronic terminals that disburse benefits are attended in some cases, unattended in others. Some facilities are part of an existing commercial ATM or POS network. Other facilities are specially dedicated terminals in a stand-alone system-that is, a system that operates for the sole benefit of these recipients.

Government interest in EBT is not limited to those agencies that disburse cash benefits. The U.S. Department of Agriculture (USDA), which administers the food stamp program at the federal level through its Food and Nutrition Service, has been a pioneer in testing the use of EBT to replace the issuance of food stamp coupons. Electronic delivery of food stamp benefits enables eligible recipients, using electronic POS terminals at participating grocery stores, to shop with an EBT card instead of with coupons. The Congress recently authorized USDA to offer state agencies EBT systems as an alternative method for delivering food stamp benefits. Until now, states have been required by federal law to issue paper coupons unless they obtain special approval for EBT demonstration projects.

An EBT system offers opportunities for improving the delivery service to recipients, maximizing the efficiency of operations at state agencies, and minimizing costs for all parties. It also brings major challenges: Building these systems to work efficiently and cost effectively for all the parties involved will take cooperative efforts-among government agencies at the federal and state levels, financial institutions, regional networks of ATMs and POS terminals, members of the retail food industry, others in the private sector, and benefit recipients. This article gives an overview of the developing interest in EBT among these various parties. It describes some of the pilot programs that have tested the practicality of electronic delivery and reviews issues-including those related to the Electronic Fund Transfer Act and the Federal Reserve Board's Regulation E-that the implementation of EBT programs raises.

BACKGROUND

Most government benefits today are paid by checks mailed to recipients. The check-based system can pose difficulties, however. Because checks can be lost in the mail or stolen, some recipients may never receive their checks and may need to have them replaced. Delays in mail delivery may make the benefits late. Those recipients who have no deposit accounts may have difficulty or may incur high costs in converting the checks into spendable funds. And recipients who must take the entire benefit payment at once run risks in carrying around several hundred dollars or more.

In some benefit programs, such as social security and U.S. government pensions, a large proportion of recipients receive the funds through direct deposit to their account at a financial institution, a system that is well established and generally works smoothly for them. Those recipients who have no bank account, however, do not have the option of direct deposit.

Account Holding and Check Cashing

According to Census Bureau data, the proportion of households not having deposit accounts is considerably higher among recipients of government benefit programs than among the general population. In 1985, 39 percent of families receiving state and local government benefit payments had no bank accounts, compared with about 17 percent of all U.S. families. A similar trend holds for federal benefit programs: Among recipients of supplemental security income payments, for example, 50 percent had no bank accounts (table 1).

Low-income consumers are in general the least likely to hold deposit accounts: As table 2 shows, 26 percent of households in the lowest income quintile in 1986 had no checking or savings account, compared with less than 0.5 percent of households in the two highest quintiles. Many of these low-income households receive government benefit payments.

Some of the reasons that low-income consumers give for not holding deposit accounts are the cost, the lack of sufficient funds to open an account or to make having one worthwhile, difficulty in monitoring the account balance, preference for dealing with cash and money orders rather than checks, mistrust of financial institutions, and inconvenient bank hours or locations.

Consumers without an account can receive government payments in check form, cash the check, and conduct their financial affairs using cash and money orders. They may have problems, however, in places where depository institutions will not cash checks for noncustomers. Surveys show varying results on the willingness of depository institutions to cash checks for noncustomers. A report by the General Accounting Office (GAO) to the Congress indicated that in 1985 some 86 percent of banks and 55 percent of thrifts cashed U.S. Treasury checks for noncustomers. The GAO noted that other studies had yielded differing figures: The Independent Bankers Association of America (IBAA) had surveyed 1,767 banks, one quarter

Its membership, in 1984 and found that 68 percent of responding institutions cashed government checks free of charge for noncustomers. In contrast, the Association of Community Organizations for Reform Now in a 1986 study of 344 institutions reported 12 percent were willing, and the Consumer Federation of America (CFA) in a 1988 survey of 191 institutions found 29 percent.

Differences in the results of these studies may have resulted partly from the way the surveys were conducted. The GAO study was limited to the cashing of U.S. Treasury checks. That some institutions may be more willing to cash federal checks than to cash state or local government checks could have contributed to the high percentage of institutions in the GAO study. Moreover, of the four surveys, the GAO survey was the only one based on sampling techniques that could be projected nationwide. Institutions in the CFA survey were located mainly in urban areas; those in the IBAA survey, mostly in small towns or rural communities where banks appear more willing to cash checks for noncustomers than are their counterparts in metropolitan areas.

Cashing checks for a fee at nonbank locations, such as check-cashing centers or various retail outlets, is an alternative for these recipients. According to the National Check Cashers Association, a trade group, about 3,000 check-cashing centers were in operation in 1988, mostly in urban areas. Check-cashing fees are regulated in only a few states, including Illinois, New York, and New Jersey. Even in these states, the fees allowed may seem high to low-income recipients of government benefits. Cashing a $500 social security check, for example, can cost up to $7.50 in New Jersey, where cashing out-of-state checks (including checks drawn on the U.S. Treasury) is subject to a 1.5 percent charge. A 1987 survey of sixty check-cashing centers in twenty major cities by the CFA reported a median charge to cash a $500 government check of 1.5 percent ($7.50) and an average charge of 1.69 percent ($8.47).

Legislative Proposals

Concern that existing systems may inadequately meet the financial services needs of benefit recipients (or of low-income consumers in general) has led to proposed legislation intended to remedy the situation. Bills introduced in recent sessions of the Congress call for depository institutions to offer government check-cashing services and basic banking accounts. (Basic banking often refers to an account that has low fees and minimum balance requirements and that allows the writing of a limited number of checks.) In the current session, Chairman Henry Gonzalez of the House Committee on Banking, Finance and Urban Affairs has introduced an omnibus bill for the reform and restructuring of the banking industry that includes provisions for basic banking and government check cashing. H.R. 6 calls for banks to offer basic accounts with limited fees, a minimum balance of no more than $25, a maximum balance of $1,000 (to limit the use of the accounts to low-income consumers), and at least ten withdrawals per month. The bill also calls for institutions to cash government checks of 1,500 or less for a fee of no more than $2.00 for individuals who register with the bank.

Senator Howard Metzenbaum has also introduced legislation. S.415 is similar to the basic banking provisions of H.R. 6; the minimum balance that banks can set for maintenance of the account, however, cannot exceed $1.00. S.414 generally parallels the government check-cashing provisions of H.R.6, except that the permissible fee for check cashing, rather than being set at $2.00, is limited to an amount to be determined by the Federal Reserve Board based on cost studies. Financial institutions generally have opposed such legislation, arguing that it would subject them to increased risk from fraud and costs not adequately covered by revenues. They also have said that such legislation is unnecessary because many institutions already offer basic banking and government check-cashing services on a voluntary basis.

Some states-including Connecticut, Illinois, Massachusetts, Minnesota, Pennsylvania, and Rhode Island-have enacted basic banking or check-cashing laws. Most of these laws are more limited than the legislation before the Congress, and some apply only to individuals in certain age groups. In Massachusetts, for example, banks may not impose fees, other than for the dishonor of a check for insufficient funds, on a checking or savings account held by anyone 65 years of age or older or 18 years or younger. In Minnesota and Pennsylvania, basic banking laws come into play only when an institution engages in or is applying for interstate operations.

Though the pending federal legislation addresses some needs of government benefit recipients-primarily those revolving around fees and minimum balances for accounts-it does not resolve other problems that recipients are perceived to have with the present paper-based payment system.

SUPPORT FOR EBT

Interest in and support for examining EBT as a delivery alternative to paper-based systems is building in both the public and private sectors. The Department of the Treasury, which serves as the federal government's money manager, has taken a lead in promoting the development of systems for electronic benefit transfers as a complement to the agency's activities on the direct-deposit front.

One of the Treasury's goals for EBT is to help ensure that cost-effective electronic technologies are used in ways that best meet the needs of both the recipients and the providers. For the past two years, the Treasury has regularly convened task forces with representation from government agencies, financial institutions, the retail food industry, and consumer groups. Through these efforts, the Treasury is seeking to ensure the coordination of EBT among the multitude of federal agencies engaged in benefits delivery and to facilitate effective liaison with the private sector.

In support of the Treasury's interagency coordination, the Office of Management and Budget (OMB) recently established a steering committee of top-level officials to develop the government's plan for implementing EBT. OMB has identified EBT as a management objective, its goal being to improve the quality and reduce the costs of benefit payment services. The agency projects that annual savings of up to $250 million are possible.

Among the federal program agencies that administer benefits delivery to recipients, two are at the forefront of EBT development: USDA's Food and Nutrition Service, with its food stamp program, and the Family Support Administration (part of the Department of Health and Human Services), which oversees the delivery of Aid to Families with Dependent Children (AFDC) benefits. The agencies have funded, separately and jointly, pilot projects to test EBT in different environments, utilizing various electronic technologies and systems. They serve as the conduit for federal dollars to state government agencies, which will also be major players in the development of EBT given their role as the local administrators of food stamp, AFDC, and other public assistance programs.

A major impetus for the development and growth of food stamp EBT programs, in particular, will come from the recent enactment of the Food, Agriculture, Conservation, and Trade Act of 1990 (Pub. L. 101-624), which amends the Food Stamp Act. Until now, federal law has required that benefits under the food stamp program be issued in paper form. To engage in EBT, state agencies have had to obtain a special waiver from USDA for demonstration projects. With USDA's approval, states will be able to establish EBT programs for food stamp benefits on a permanent basis, instead of only as pilot projects like those instituted thus far.

The 1990 amendments direct USDA to issue regulations establishing standards for cost-effectiveness; protection of recipients (to ensure "privacy, ease of use, and access to and service in retail food stores"); terms of participation by retailers and financial institutions; and the security, reliability, and processing speed of the system. The regulations are to ensure that the operational cost of an EBT system, including the pro rata cost of capital expenditures and other startup costs, does not exceed the cost of the paper-based food stamp system.

Another new federal law may provide added incentive for greater use of electronics for governmental fund transfers. The Cash Management Improvement Act of 1990 (Pub. L. 101-453) directs the Treasury to issue regulations that will ensure equity between federal and state agencies in the transfer of funds. The act will require the payment of interest if funds are drawn in advance of the state's need or are held longer than necessary. If a state agency draws federal funds on the same day that benefit checks are mailed, for example, the state may have to pay interest to the federal government from that day until the day the checks are paid. If the agency instead transfers benefit funds electronically on the same day it draws the federal funds, the state can avoid interest payments. The regulations must be in place by October 1992.

In the private sector, various groups are directly affected by the implementation of EBT. For financial institutions and regional networks, EBT can bring added transactions at ATMs not operating at full capacity and thus generate revenues from fees. In EBT programs that replace food stamp coupons with electronic delivery, depository institutions will no longer have to be involved in the redemption of coupons. There will also be reduced need for check-cashing services and, thus, less risk of loss from fraud. The American Bankers Association has sponsored two annual conferences on EBT, drawing attendees from state and federal agencies and the private sector. The Consumer Bankers Association recently prepared an issues paper to familiarize its members with the implications of EBT and to encourage their participation in its development.

Food retailers that currently deal with paper food stamps may be able to improve efficiency through the use of electronic substitutes. The Food Marketing Institute, which represents about 1,600 food retailers and wholesalers (including almost every major supermarket chain), has had a committee on electronic fund transfers since the early 1980s to keep up to date on the use of debit cards in POS transactions at checkout lanes. The institute encourages the involvement of grocer representatives while EBT projects are being planned, so that their concerns about POS installations may be adequately addressed. The group has voiced strong support for the concept of EBT and for its implementation at the most rapid practical pace.

Others in the private sector, too, are taking a direct role in the evolution of EBT. In 1990, the Electronic Funds Transfer Association, a group representing the various industries involved in electronic funds transfer, established an interindustry task force to target the creation of operational standards for implementing EBT and to resolve other issues while systems are still being developed and tested. Representatives on the task force include financial institutions, retailers, data-processing vendors, ATM and POS regional networks, and others interested in addressing the many issues raised by EBT. Staff members from the Treasury Department, the Federal Reserve Board, the Food and Nutrition Service, the Family Support Administration, and other agencies join in task force discussions to facilitate the exchange of ideas and information between the private and public sectors. The association also recently hosted its first annual conference on EBT.

Added support for EBT has come from the Federal Reserve's Consumer Advisory Council, particularly members of its Committee on Depository and Delivery Systems. The council's thirty members represent consumer and community-based organizations, financial institutions, colleges and universities, and state government. At its meeting in June 1990, the council unanimously adopted a resolution urging the Federal Reserve Board to take a leadership role in encouraging the development of EBT.

EARLY EBT Projects: TESTING THE SYSTEM

Programs at the federal and state levels have tested the practicality of EBT. Such programs in parts of New York, Pennsylvania, and Minnesota have become fully operational and permanent after going through a demonstration or pilot phase. For these programs, the focus now is on expansion to other counties or even to the entire state. In Maryland, New Mexico, Texas, and other states, EBT projects are still in their formative stages.

In general, an EBT system functions much like a commercial system for electronic fund transfers. An eligible recipient receives a plastic magnetic-striped card and a personal identification number (PIN). The card may also carry a photograph of the recipient and a signature panel. To access the benefits, a recipient goes to a terminal that may be dedicated to the system or may be part of an existing ATM or POS network. The recipient inserts the card into a device that reads the magnetic stripe or, in the case of an attended terminal, presents the card to a clerk who sweeps the card through the stripe reader. The recipient's identity is usually verified by the PIN, and the terminal communicates with an authorization center to ascertain that the recipient is eligible for benefits, that the card has not been reported lost or stolen, and that benefits are available. In an attended terminal system, the recipient may sign a voucher printed by the terminal to permit a clerk to compare signatures. If everything is in order, the recipient receives the benefits through a cash disbursement or, in the case of food stamp benefits, by authorization for a food purchase.

Programs may use either government accounts or accounts in recipients' names. If government accounts are used, a settlement takes place after the close of each business day: The program agency authorizes a fund transfer from its account to a contractor financial institution, which in turn reimburses the terminal-operating institutions and retail grocers. If accounts in recipients' names are used, the program agency transfers funds monthly, by way of the automated clearing house, to the contractor financial institution so that funds are there to cover withdrawals of benefits during the cycle.

New York City: Automated Delivery of Cash and Coupons

New York City was among the first areas to have automated delivery of government benefits. Its system for handling the disbursement of AFDC benefits and food stamps, known as the Electronic Payment File Transfer System, began operations as a pilot in 1981. It received high marks from recipients in the pilot: Ninety-four percent preferred it to the check-based system. By 1986 the system was in full-scale operation, and now it serves about 500,000 households. It is limited to disbursing public assistance in cash and food stamp benefits in the form of paper coupons at attended terminals. Because of its reliance on manual disbursement, some may not consider it an EBT system in the strictest sense; but it does demonstrate a use of electronic technology to facilitate the delivery of benefits.

The New York City system uses attended terminals in approximately 425 locations, most in check-cashing centers and some in bank branches. The card issued to participants contains a photograph, a signature panel, and a magnetic stripe; a clerk disburses the benefits after verifying the identity of the holder through the magnetic stripe and by comparing the person presenting the card to the photograph and the signature on a voucher that the person signs to the signature on the card.

When the benefit is redeemed, the recipient must take the entire amount due. The recipient's benefits are debited immediately to prevent duplicate issuance. Transactions for each day are processed nightly through the automated clearing house, and funds are transferred to reimburse the redemption centers.

Participants have reacted favorably to the system.

The New York City Human Resources Administration reports reduced administrative and check-reconciliation costs, reduced incidence of lost or stolen benefits, and increased ability to prevent the issuance of benefits after a case is closed (for example, when a recipient dies or becomes ineligible). Agency savings amount to about $9 million annually. The recipients also favor the arrangement: They can obtain public assistance benefits and food stamps at the same time and place, they have no check-cashing fees to pay, and stolen checks are no longer a problem. For financial institutions that cash checks for noncustomers, the New York City delivery system means that branches can avoid the congestion caused by many people cashing government checks on the day of receipt and that the likelihood of accepting a fraudulent check is reduced.

Reading, Pennsylvania: Electronic Delivery of Food Stamp Benefits

In 1984 a demonstration project for the electronic delivery of food stamp benefits began in Reading, Pennsylvania, under the auspices of the Food and Nutrition Service of the USDA. The system used POS terminals in about 125 grocery stores, with cards and PINS issued to participants to replace the traditional paper coupons. Unlike the New York City system, the Reading program enabled recipients to pay directly for food by debiting their benefit account at the checkout counter. No limitation was placed on the number of draws permitted per month for participants. About 3,400 households were involved in the pilot.

Participating financial institutions, recipients, and food retailers generally favored the electronic system over the previous paper-based program. The evaluation report indicated that loss and theft of benefits were reduced and that costs to banks and retailers of handling food coupons were eliminated, as were costs to the government of producing, storing, and shipping the coupons.

Administrative costs, however, were much higher in the electronic system than in the paper-based system (about $27 per case per month compared with about $3 in the old system). The higher cost resulted from the special installation of the POS terminals for the pilot and from an initially small caseload. Now operated by the state, the Reading project in 1988 reported costs of about $9 per case per month.

Ramsey County, Minnesota: AFDC Benefits

Minnesota's Ramsey County, in which St. Paul is located, has an EBT system that began as a pilot project in 1987. The program is now in full-scale operation, with about 12,000 recipients. Benefits disbursed include AFDC and other categories of cash public assistance. In developing the system, the county specified that the access card should be designed so that it could eventually also accommodate other programs such as food stamp benefits, which the county expects to add sometime in 1991, and medicaid.

Recipients receive plastic cards with a magnetic stripe, photograph, and signature panel. The Ramsey County system uses ATMs that are part of three existing regional networks. The system also uses attended POS terminals. If clients cannot demonstrate at the end of the training sessions that they can use an ATM, they are restricted to using POS terminals. For both ATM and POS transactions, recipients need not withdraw the entire authorized benefit in one transaction; the county has found that recipients typically average three to four transactions per month.

Participation is mandatory for recipients, except for those who have bank accounts. The county expects to begin offering the recipients who have bank accounts the option of direct deposit of benefits.

In a 1990 evaluation of the pilot, the county reported that 89 percent of participants preferred EBT, whereas 4 percent continued to prefer checks. Advantages to recipients include earlier access to benefits, convenient locations and hours for obtaining benefits, and the flexibility of withdrawing benefits in one lump sum or in several smaller amounts. Ramsey County found that its costs for delivering benefits were lower than they had been under the check-based system.

Except for allowing the use of their ATMs for gaining access to benefits, banks have had little direct involvement in the program. Funds remain in a government account until drawn, and the program agencies and their contractors are responsible for accounting, resolving problems, detecting fraud, and auditing.

Other EBT Projects

EBT projects are also under way in several other states, including Maryland and New Mexico. Benefits being disbursed in these projects include AFDC, other types of cash public assistance, food stamps, and child support payments.

Begun in 1989 under the auspices of the Family Support Administration and USDA's Food and Nutrition Service, the Maryland pilot makes multiple benefits (AFDC, child support payments, and food stamp benefits) available. It uses existing network ATMs and specially installed POS terminals. The project involves about 5,000 recipients, who may obtain benefits in several draws over the month. About 170 food stores in Baltimore are participating. Approval has just been granted to expand the project statewide.

Another project, sponsored by the Food and Nutrition Service, began in September 1990 in Albuquerque, New Mexico. Initially it involved only food stamp benefits with AFDC to be added later. Of about 16,000 households receiving food stamps, 7,000 had voluntarily converted to EBT by January 1991; the program became mandatory in February. The program will also serve almost 6,000 households receiving AFDC payments (there is some overlap among recipients in the two programs). The Albuquerque program is noteworthy in that, beyond promoting EBT, it is also serving to advance POS in the commercial environment: The great majority of participating retail grocers have chosen to install terminals that will serve the general population of debit card customers and will even accept credit cards. The government agencies have subsidized the costs attributed to the EBT function; the retailers have paid the difference. Other possible locations for pilots include Iowa (where food stamp benefits may be added to an existing system for cash benefits), New Jersey, and South Carolina. The Food and Nutrition Service will also test the off-line delivery of food stamp benefits to about 10,000 recipients in Dayton, Ohio. The system will use information in a magnetic chip embedded in the access cards (sometimes called smart cards) rather than in a computer database at a financial institution or data-processing contractor. Thus, the terminal at which benefits are obtained need not communicate with any outside facility at the time of a transaction. With such a system, telecommunication costs decrease (although the cards are more expensive than the ordinary magnetic-striped version) and efficiency increases, as time waiting at the checkout counter for authorization may be reduced. As in other pilots, other types of benefits may be added later.

Treasury Initiatives

Besides coordinating interagency efforts, the Treasury Department has pursued several EBT initiatives of its own. The Treasury's first pilot tested the electronic payment of supplemental security income (SSI) benefits through magnetic-striped cards at ATMs and POS terminals. SSI benefits, which are payable to aged, blind, and disabled persons in financial need, total approximately $15 billion annually and go to 4.6 million recipients throughout the United States.

Carried out in Baltimore, the SSI pilot ran for twelve months, ending in October 1990. It differed from most other EBT projects to date in that participation was voluntary. About 250 recipients took part in the program. Benefits could be taken in multiple withdrawals rather than all at once. As time passed and they gained confidence in the system, participants became more likely to take advantage of this feature.

The Treasury just launched its second pilot, in Houston. As in Baltimore, participation is voluntary. Benefit funds are held in regular checking accounts, and recipients may make multiple withdrawals. The Houston project covers social security benefits as well as SSI. Almost 400 recipients participate in the program, with a control group of about 500. The control group was chosen from among persons who initially expressed an interest in participating but who ultimately did not sign up.

The primary contractor operating the pilot is a regional terminal network. Recipients can obtain benefits through any ATM or POS terminal in the network; the network itself issues the cards, and, therefore, no network interchange fees will be charged.

The evaluation of the Houston project will differ from evaluations in other pilots in that it will focus also on EBT's effects on crime. The National Institute of Justice, a cosponsor of the project with the Treasury Department and the Social Security Administration, has said that the test will consider robberies, thefts, physical assaults, and white collar crimes.

IUSSES RAISED BY EBT

The projects conducted to date suggest that EBT systems can effectively meet the needs of benefits recipients, as evidenced by the positive endorsements the systems have received in New York City, Ramsey County, and elsewhere. These delivery systems may offer other participants in EBT, as well as the recipients, clear advantages over the paper-based systems they replace. But for EBT programs to become a reality on any major scale, all of the parties with an interest in Ebt-including recipients, government program agencies, banks and other financial institutions, retailers, regional networks, service providers such as data-processing firms, and equipment vendors-must undertake cooperative efforts in EBT's evolution and implementation.

Addressing the issues in a way that will further the development of EBT calls for a common understanding of the perspectives of other participants from the private and public sectors. High on the list of the issues are cost factors, which will determine the willingness of the various parties to engage in the system, and factors related to the recipients' needs and concerns. To the extent that piggybacking on existing systems for electronic fund transfers may help make EBT economically feasible, the public and private sectors may have to shape compromises that take into account the interests of all the parties.

Cost, Operational, and Technical Issues

The economics of EBT are fundamental to its viability. Unless the overall costs of an EBT system are no higher than the costs of the paper-based system it would replace, a government agency may have difficulty justifying and funding the switch from paper to electronics despite the favorable features for benefit recipients.

One factor that may influence the cost of EBT systems is the extent to which providers can use existing terminals and networks, instead of installing equipment specially designed for EBT purposes. Some EBT projects have used private-sector regional ATM networks already in place; because such networks exist in virtually all areas of the country, this approach appears feasible as far as ATMs are concerned. Because ATMs generally do not dispense currency in dollar bills or coins, some other means are required for recipients to obtain their entire benefit payments. Generally the means have been POS terminals, which enable the retail clerk to dispense funds from the cash register.

For the disbursement of food stamp benefits, POS terminals at grocery stores are a necessity. And unlike ATMs, POS terminals are not yet in place in many areas. Where few or no POS terminals exist, they must be installed for an EBT project to function. If the program agency pays the entire cost of installing terminals-as it has in the food stamp pilots thus far-startup costs will be correspondingly higher.

For the retail food industry the placement of terminals has been an important issue: Should terminals be placed in every checkout lane in a grocery store or only in selected lanes? The industry's position has been that terminals should be installed in all lanes to provide better service and to avoid stigmatizing EBT recipients. This issue will be resolved by the new regulations that USDA is to adopt by April 1992. In a mandatory EBT program, participating food stores are to have POS terminals at all checkout lanes, if the store's food stamp sales volume is 15 percent or more of the total sales volume. For stores with less food stamp business, POS terminals must be at a sufficient number of registers to provide "service that is comparable to service provided individuals who are not members of food stamp households," as determined in the regulations.

Even where substantial numbers of ATM and POS terminals exist, piggybacking on existing EFT networks may not necessarily be easy or cost-effective. In the EBT pilots to date, the federal agencies' specifications have included on-line authorization, the use of PINS by recipients, differentiation between food stamp and cash transactions, and the printing of account balances on receipts. Meeting some of these operational requirements could pose problems for the networks if existing equipment is incapable of fulfilling the requirements. The requirement that account balances appear on the transaction receipts that the terminals provide is one such example.

Another issue concerns the way costs will be allocated among participants. So far, the program agencies have borne the costs of EBT projects, compensating financial institutions, retailers, and others for the costs occasioned by EBT. To the extent that private-sector entities derive economic benefits from participating in EBT systems, government agencies may suggest that some sharing of costs is appropriate.

Recipients, too, may benefit economically from not having to pay fees to cash checks or maintain deposit accounts for cash benefits. Another advantage to recipients is the ability to withdraw funds in several transactions: In the check-based system, they had no choice but to take the entire amount in a lump sum. Because a program agency that pays fees on a per-transaction basis may face higher costs, however, the agency may seek to limit the number of free transactions allowed. An alternative is to provide recipients with a certain number of free transactions per month and to give them the option of making additional transactions for a fee.

If startup and other fixed costs can be spread over a large transaction base, the cost per transaction can be minimized. Ideally, for this purpose, the program agency would want to have the entire recipient population in the EBT program, to avoid having to operate dual paper-based and electronic systems.

The majority of EBT programs to date have made participation mandatory; the payment of benefits by check has not been an option in these programs. Pilots for the direct payment of federal benefits, such as the SSI pilot in Baltimore, have allowed voluntary participation. The Social Security Act provides that recipients of SSI benefits may not be required to take part in "experimental, pilot, or demonstration projects" involving SSI benefits; if they do agree to participate, they may still revoke the agreement at any time.

Other issues involve technical and operating standards, including equipment reliability, the availability of backup procedures in case of electronic failure, and security measures against unauthorized access. For example, what are the liabilities if the system breaks down or some other problem occurs? If multiple programs use a common EBT system, how and to what extent can these programs be made consistent? Will the system operate on line or off line? Will PINS or some other identification technology be used?

These are among the issues being studied, from the industry side through the Electronic Funds Transfer Association's EBT task force and other groups and from the government side through the coordinated efforts of the Treasury Department, the Office of Management and Budget, and the program agencies responsible for oversight of benefits delivery. The EFTA's task force, for example, set up a subgroup to address issues associated with using existing EFT networks. Recommendations to federal and state agencies and to EFT networks, processors, and financial institutions will cover a wide range of subjects: standards for the performance and availability of systems and authorization procedures; the authorization databases to support, through one card, the multiple programs for which a recipient is eligible; the card technology to support EBT, including the security standards for PIN encryption; and technical specifications for POS terminals.

Recipient Concerns

Factors that affect costs, and that therefore interest program agencies, financial institutions, food retailers, and other organizations involved in EBT programs, also affect recipients. One example is the placement of terminals. For EBT to meet recipients' needs, the terminals for gaining access to benefits must be in the areas in which the recipients live. These areas are likely to be low-income neighborhoods, which typically have fewer ATMs and POS terminals than other communities. Access may be considered adequate, however, if terminals are available in business districts or in other areas that are adjacent to neighborhoods in which recipients live. Even with few ATMs in an area where programs are being established, access may be sufficient if POS terminals can be installed in grocery stores.

In rural areas, ATMs and POS terminals may be sparsely situated, so rural recipients may have difficulty in getting their benefits. However, bank branches, check-cashing centers, and grocery stores may also be distantly spaced in rural areas, so EBT may not impose any greater disadvantage than the present system.

The issue of accessibility also pertains to special groups such as handicapped, elderly, non-English-speaking, or illiterate recipients. Such people may have difficulty reaching or using terminals, especially ATMs. Some of these problems may be remedied by extra training or multilingual terminals or through allowing authorized representatives of recipients to pick up benefits.

The Americans with Disabilities Act of 1990 (Pub. L. 101-336) is aimed at preventing discrimination against physically or mentally disabled persons. It does not target EBT programs, but because benefit programs may have a relatively high proportion of disabled persons as recipients, issues involving the interpretation and application of the act may arise most often in EBT settings. For example, can the act be interpreted as requiring key pads at ATMs and POS terminals to be coded in Braille so that blind persons may have access? Might it require the installation of ramps for terminals to be accessible to persons in wheelchairs? The Department of Justice issued proposed regulations in February 1991 to implement the act; final rules will become effective January 1992.

A related issue is the personal safety of recipients. If the likelihood of being attacked at or near an ATM is perceived to be greater than it is for the traditional alternative such as a check-cashing center, the accessibility of benefits is somewhat compromised. In the check-based system, however, recipients without deposit accounts also face the risk of being attacked after cashing their checks. While the safety of a check-cashing center may be increased by the presence of other people such as clerical personnel, it may be decreased by the larger amount of cash carried by a recipient after cashing a benefit check.

Consumer groups have expressed concern about making EBT the only available delivery system. Although requiring recipients to obtain benefits through EBT tends to decrease costs, a mandatory system can be criticized for not affording the same freedom of choice to recipients of government benefits that is available to consumers generally. An employee of an organization that offers direct deposit of salary, for example, often can choose instead to receive a paycheck. Even after the funds are in the bank, the person may choose to withdraw them by cashing a check or using an ATM.

Another potential concern for recipients is privacy. Issues about the privacy of electronic data, including financial data, have been debated for some time; the National Commission on Electronic Fund Transfers and the Privacy Protection Study Commission, among others, have studied and reported on these questions. Electronic data systems can facilitate the collection, storage, manipulation, and retrieval of large amounts of information about individuals, and gaining access to data about individuals whose records are in the system can be easy and fast.

In practice, recipients using EBT systems may have considerably more, rather than less, privacy in their financial dealings than those using paper-based systems. Withdrawing funds by ATM, for example, may allow greater privacy than cashing a public assistance check at a bank or a retail store, especially in a small-town environment. Paying for food purchases at a POS terminal with an EBT card may afford greater privacy than counting out food stamp coupons.

REGULATION E

Among bankers particularly, a key question to any discussion of EBT systems is whether Regulation E applies. This regulation, which implements the Electronic Fund Transfer (EFT) Act (15 U.S.C. 1693 et seq.), creates the legal framework of rights and responsibilities for providers of EFT services to consumers. Among them are consumer rights to the disclosure of terms and conditions, to receipts and periodic statements, to error resolution within a certain period of time, and to limits on the consumer's liability for unauthorized transfers.

Regulation E applies to transfers that debit or credit an "account." To date, the Federal Reserve Board has not covered EBT systems in Regulation E so as not to impede the development of the various state and federal pilot programs. This result has been achieved through a narrow interpretation of the regulation, focusing on the Board's legal definition of what constitutes an account. In the official staff commentary to Regulation E, the Board has stated that no consumer asset account" exists where a government agency, rather than the consumer, has set up the account; consequently, any electronic transfer of funds from such an account-to a consumer or on the consumer's behalf-is not covered by the regulation.

Application to EBT

Whether EBT programs involve the type of account relationship-with the program agency or a financial institution-that should be covered by the EFT act is currently under review. Several factors argue for coverage:

* The Congress intended the EFT act to have broad scope. The application of the law is not limited to banks and other traditional financial institutions. The statute directs the Federal Reserve Board, in the event that EFT services are offered other than by financial institutions, to ensure that the "disclosures, protections, responsibilities, and remedies" created by the statute are made applicable. Indeed, Regulation E has long reached nonbanking entities-whether or not they hold consumers' accounts-when they engage in activities governed by the statute. The regulation prohibits magazine telemarketers, for instance, from initiating electronic debits to a checking account based on a telephone call to the consumer. To so debit an account, the telemarketer must first obtain a written authorization signed by the consumer, just like any other provider of an electronic fund transfer service.

* The regulation already covers the direct deposit of government benefits into bank accounts-social security or SSI payments, for instance. Should the treatment be different for those who receive these same benefits through an EBT system?

* The law does not exempt governmental bodies. If a government agency chooses to disburse payroll electronically through an ATM system, the transactions are covered. Should the result differ if the funds being disbursed are entitlement monies rather than salary, or because the funds are disbursed through a state agency and not the federal government?

* EBT systems often piggyback on the ATM and POS terminals and networks used for transactions that Regulation E covers. Since Regulation E covers those transactions, coverage of the EBT transfers appears logical.

Consequences of Coverage

The statute directs the Federal Reserve Board, in prescribing rules under the EFT act, to consider the costs and benefits to all parties-financial institutions, consumers, and other users of EFT. The Board must consider also the rules' effect on the availability of these services to different groups of consumers, particularly low-income consumers. To the extent practicable, the Board is also to demonstrate that the protection accorded consumers by regulations outweighs the costs of compliance imposed on consumers and financial institutions.

Among the questions to be dealt with are those revolving around who must comply and how exactly the rules would be applied. Even a preliminary analysis of the issues makes clear that, while some rules would be easy to implement in the EBT environment, others raise significant policy questions and difficult operational problems.

Issuance of Cards and PINS. Regulation E sets rules for the issuance of debit cards and PINS to consumers. In general, a card and PIN for making electronic fund transfers may be issued only upon request. In an EBT program, consumers applying to receive government benefits normally request cards and PINS willingly because these devices are required to obtain the benefits.

Disclosures. Regulation E requires the disclosure of applicable terms and conditions of EFT service. The purpose of this disclosure is to explain the features of the service and to help consumers understand their rights and responsibilities. Giving these disclosures probably poses little problem in EBT systems. Indeed, government agencies may go far beyond written disclosures in introducing recipients to the EBT program and the technology. In the EBT projects thus far, participants generally have received extensive hands-on training on electronic terminals before receiving their cards and PINS. The disclosures could easily be provided at the same time.

Documentation. Regulation E requires the giving of receipts, when transactions are made at an ATM or POS terminal, and a monthly statement. The receipt documents the transaction through such information as the date, the type and the amount of transfer, and the terminal location. The statement assembles data about all the transactions that took place during the cycle; it provides a way for spotting any errors or unauthorized transactions in account activity.

Because existing ATM and POS systems already provide receipts that comply with Regulation E, this requirement would probably impose little additional burden for EBT programs that piggyback on the commercial systems. Providing periodic statements, however, could be burdensome if statements were sent only because of the regulation, given the costs for paper, internal processing, printing, and postage.

If the transactions performed through an EBT system are relatively infrequent and are uniform in type, the recipients' need for statements may not be great. In the current check-based systems, recipients receive no statements from the program agencies except for notice of changes in the amount of the benefits. A periodic statement may prove less essential also if the terminal receipt contains information about balances or if the recipient can request the information by other means, such as from a terminal or by telephone.

The pilot EBT programs that have been conducted have generally required that the receipts show an account balance. This balance information is particularly useful if recipients can make multiple withdrawals over the month. Providing information about balances may not be a problem in programs that use facilities dedicated to EBT alone. Doing so may be less feasible in systems that piggyback on the existing ATM and POS network systems, which may not have the capacity to perform this function.

For recipients who receive payments from several different government programs, having to provide balances for each program could be a problem. An alternative, which might provide adequate documentation for the recipient, is an initial disclosure of the amount and the scheduled date of each benefit. Another alternative-to use separate cards for the different programs-goes against the objective of using a single EBT system to gain access to benefits from different agencies. Indeed, joint programs may be necessary to make the offering of EBT systems economically feasible.

Notice of Deposits Received. Without the tangible evidence that a paper check gives them, benefit recipients in EBT systems may be uncertain about whether benefits are available to them. For EFT transactions generally, Regulation E requires informing consumers that a scheduled transfer of funds has been credited to their account. Instead of sending a notice, financial institutions are allowed by the regulation to provide a telephone number that the consumer can call to obtain confirmation. EBT systems could use the same procedure. Indeed, the pilot programs have often used audio-response units that recipients can call at any time.

Liability for Loss or Theft. Application of the rules on liability to EBT systems probably represents the greatest dilemma in regard to coverage. Under the EFT act and Regulation E, a consumer is liable for at most $50 of unauthorized transfers if the consumer reports a lost or stolen card within two business days of learning of the loss or theft. In other cases, the consumer's liability can be as high as $500 or even unlimited. From the perspective of a low-income recipient, even $50 may seem too high. Moreover, under the check-based system, if a check is lost or stolen and the endorsement forged, an agency will generally issue a replacement check if the recipient meets certain conditions, such as filing a police report and making a written claim.

While these rules create some protection for consumers, the question arises of who ultimately bears the loss for amounts greater than the consumer's liability. In the typical EFT case, these losses fall on whoever issued the card that gave access to the consumer's account.

In the EBT pilots so far, the unauthorized withdrawal of benefits appears not to have been a problem. State agencies currently apply rules for negligent behavior that impose the risk of loss on the client, and these may tend to discourage claims. Benefit recipients are warned against writing the PIN on the card and against letting others know their PIN. Agencies warn recipients that the card is like cash and that they do not replace lost cash.

Under Regulation E, the result would be different. The legislative record to the act makes clear that the Congress intended liability to be assessed based strictly on how promptly the consumer reports the loss or theft of a card. Writing a PIN on the ATM card or keeping it with the card does not increase the cardholder's liability. To minimize the risk to everyone involved, recipients could be allowed to choose their own PIN. Thus, they would have no need to write down a number they might have difficulty memorizing. The ultimate resolution of this issue could strongly influence an agency's decision on whether to proceed with the adoption of an EBT program.

Error Resolution. Regulation E requires investigations of errors to be completed within fixed periods of time. In general, once the consumer alleges an error, the institution has ten business days to resolve it. If more time is needed, the institution may take up to forty-five calendar days, in total, but it must provisionally credit the consumer's account within ten business days for the amount of the alleged error while its iinvestigation continues.

It is not clear whether these rules would create problems for recipients, program agencies, and financial institutions. If benefits are not posted to an account or are posted in the wrong amount, the institution should be able to resolve the matter quickly. The institution would simply check whether in fact the correct amount was made available. If the question concerns the amount that the recipient is entitled to receive, the matter can be worked out between the recipient and the agency caseworker as is done with benefits transferred by check.

Difficulties may arise if an error cannot be resolved within ten business days. Under Regulation E the recipient's account has to be provisionally credited for the amount in question. The problem comes if a determination is later made that no error has occurred. In such a case, the institution is entitled to reclaim the amount previously credited. Under the laws that generally govern entitlement programs, however, an agency may not be allowed to collect the full amount of an overpayment from the installment next due. The percentage of the total benefit that can be recovered month to month is limited.

Mandatory Use of EFT. The EFT act provides that a consumer may not be required to establish an account "with a particular financial institution" for receiving electronic fund transfers as condition of employment or of receipt of a government benefit. The act does not prohibit program agencies from making EBT the exclusive means of disbursing payments.

Even if a particular institution is designated as the holder of the accounts for an EBT program, the situation may be different from that which the statutory provision was intended to remedy-that a consumer who banks with a certain institution not be required to open an account at another institution to accommodate an employer or a government agency. The provision may also have been intended to enable the consumer to shop for the most economical and convenient EFT services, which again may not coincide with the arrangements made by the employer or agency. Neither of these concerns may be relevant to an EBT system that is offered to those without an account.

Next Steps for Resolving Issues

These are some of the regulatory issues that are being considered as the Federal Reserve Board explores the possible coverage of EBT systems by Regulation E. One approach that could be taken involves establishing special rules for EBT programs within the existing framework of Regulation E. Such rules could remove legal uncertainty about the status of EBT systems and recipients' rights while allowing continued innovation in the electronic delivery of government benefits.

To ensure that adequate attention is given to the potential impact of Regulation E on EBT systems, the Board is consulting with federal and state agencies, financial institutions and other private-sector participants in EBT systems, members of the Federal Reserve's Consumer Advisory Council, and consumer advocacy groups. Any regulatory proposal that may result from this study will be published for comment and provide members of the public the opportunity to give their views.

CONCLUSION

EBT systems offer federal and state government agencies the strong potential to enhance the delivery of benefits to recipients, particularly those who do not have bank accounts. These alternatives to paper-based systems also may enable agencies to restructure their operations in ways that can reduce their costs. In carrying out pilot projects, sponsoring agencies have tested different approaches and have worked with a variety of participants from the private sector. The experiences gained from these early efforts will be invaluable to the achievement of EBT systems that meet the needs of all parties.

Many policy and operational issues have been identified in the test projects. They must be addressed, by the agencies and others involved in the process, before EBT can become a nationwide reality. Special attention will have to be given to whether or how EBT service can piggyback on existing ATM and POS terminal networks, in areas where extensive terminal networks are already in place. Groups in the public and private sectors are working together to find the most efficient and cost-effective means of offering EBT services and to ensure that developing systems meet the needs of recipients and other parties. Such cooperation at the early stages of development is important to help achieve, to the extent possible, compatibility among procedures and standards.

It is encouraging to note that, in virtually all EBT projects to date, an overwhelming majority of recipients expressed a preference for EBT over the traditional paper-based system. Indeed, the potential advantages of EBT to all parties increase the likelihood that EBT can in time become an accepted method of delivery for a substantial portion of the nation's government benefit payments.

REFERENCES

City of New York. Electronic Payment File Transfer (EPFT): Pilot System Evaluation. New York: CNY, 1982.

Durkin, Thomas A., and Gregory E. Elliehausen. 1977 Consumer Credit Survey. Washington: Board of Governors of the Federal Reserve System, 1978.

Kirlin, John A., and others. The Feasibility of a Nationwide Electronic Benefit Transfer System for the Food Stamp Program. Report for the U.S. Department of Agriculture, Food and Nutrition Service. Cambridge, Mass.: Abt Associates, Inc., 1990. ______________________. The Impacts of the State-operated Electronic Benefit Transfer System in Reading, Pennsylvania. Report for the U.S. Department of Agriculture, Food and Nutrition Service. Cambridge, Mass.: Abt Associates, Inc., 1990.

National Commission on Electronic Fund Transfers. EFT in the United States. Washington: NCEFT, 1977.

Ramsey County Community Human Services Department, Office of Research and Evaluation. Ramsey County Electronic Benefit System: Final Evaluation Report. St. Paul, Minn.: RCCHSD, 1988.

Scott, Charlotte H. "Low-income Banking Needs and Services," Journal of Retail Banking, vol. 10 (Fall 1988), pp. 32-40.

University of Michigan, Survey Research Center. Survey of Consumer Attitudes. Ann Arbor, Michigan: UM, June 1986.

U.S. Department of Labor, Office of Inspector General, President's Council on Integrity and Efficiency. Applications of Computer Card Technology. Washington: Government Printing Office, 1989.

U.S. Department of the Treasury, Financial Management Service. From Paper to Plastic: The Electronic Benefit Transfer Revolution. Washington: Department of the Treasury, 1990.

U.S. General Accounting Office. Government Check-cashing Issues. Washington: GAO, 1988.

U.S. Office of Technology Assessment. Electronic Delivery of Public Assistance Benefits: Technology Options and Policy Issues. Washington: Government Printing Office, 1988. __________________. Selected Electronic Funds Transfer Issues: Privacy, Security, and Equity. Washington: Government Printing Office, 1982. TABLE 1 OMITTED
 2. Percentage of households holding no deposit
accounts, by income quintile, 1977 and 1986 (1)
Quintile 1977 1986
Lowest 28 26
Second 10 9
Third 4 5
Fourth 2 *
Highest * *
All 9 10
 1. * Less than 0.5 percent.
 SOURCES. Thomas A. Durkin and Gregory E. Elliehausen, 1977 Consumer
Credit Survey; June 1986 Survey of Consumer Attitudes, Survey
Research Center, University of Michigan.
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Author:Smith, Dolores S.
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Date:Apr 1, 1991
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