Partners (Fall 1996)

The Benefits of
Electronic Benefits

by Rich Oliver

Each year Federal and state governments disburse over $500 billion dollars in benefit payments to a wide variety of eligible recipients, primarily using paper checks. These programs target a diverse portion of our population, from the elderly to the impoverished, and though generally successful, are marked by unresolved problems in the area of high costs and fraud. Though many recurring Federal payments, such as social security and railroad retirement, have been converted to electronic direct deposit over the years, the majority have not, partly because nearly 15% of the recipients do not have bank accounts into which funds can be deposited. Possible electronic alternatives to address the "unbanked" population are commonly referred to as Electronic Benefits Transfer, or EBT.

Of particular interest are programs such as food stamps and Aid to Families with Dependent Children, whose recipients are largely located in urban areas. Theft, fraud, and a burgeoning underground market in food stamps have all contributed to the high costs of these programs, and general dissatisfaction exists as to whether program goals are being accomplished.

Rich Oliver is a Senior Vice President with the Federal Reserve Bank of Atlanta. He is Staff Director for the Federal Reserve System's Management Committee for Financial Services. In this role, Mr. Oliver is responsible for helping to coordinate integrated financial management, strategic planning, and business development for the Federal Reserve's payments services, nationwide.

From this foundation has come a prescription for improvement, formulated from advances in technology and federal and state efforts to reduce the administrative costs of entitlement programs. Perhaps the most visible of these efforts has been the Debt Collection Improvement Act of 1996, which mandates that virtually all recipients of federal payment programs receive their payments electronically by January 1, 1999. This national legislation will undoubtedly spur similar responses from local governments who see the opportunity to ride the coattails of federal programs designed to solve some of the problems associated with implementing electronic alternatives.

Interestingly, much of the early initiative for EBT has come from state governments who find themselves administering federal benefit programs. With their costs rising, many have instituted pilot programs directed at identifying and resolving issues surrounding mandated electronic alternatives. Many of these pilots have met with success and, working closely with the federal government, alliances have been formed with other states that agree to common means of administering programs. One of the key elements in such programs is the decision regarding which banks will support the initiative by providing the technological infrastructure necessary to disburse benefits to the unbanked segment of the population.

At the heart of the technical solution is the use of special non- demand deposit accounts at servicing financial institutions and their linkage to existing point-of-sale and ATM networks. A special restricted use account for EBT funds appears to be a satisfactory approach for the account holding institution wary of offering traditional demand deposit accounts to EBT recipients. There is, of course, a significant hurdle to overcome in the issuance of cards, training of the target population in card usage, and the implementation of necessary card-based security procedures, including the use of PINs. Needless to say, not every bank is interested in the program and is willing to offer the resources needed to make it work.

For that reason, the federal government has let contracts to a small number of large multi-state banks that have the geographic coverage and the resources to operate such a program. Within the Southeast, the states of Georgia, Florida, Alabama, Tennessee, North Carolina, Arkansas, and Missouri have joined hands to form the Southeastern Alliance of States, and Citibank has been awarded a federal contract to be the government designated institution, or GDI, for this alliance.

This implies that Citibank will open and maintain special accounts for the nonbanked EBT recipients and provide access to those accounts. It also opens the door to the use of these accounts at Citibank for state programs within the alliance, thereby eliminating the possibility that multiple program recipients would have to maintain accounts at several institutions.

Though the startup costs and implementation mechanics of EBT programs appear formidable, the long-run promise for cost savings by governments and improved security for recipients are very attractive. The U.S. Treasury estimates that a fully costed paper based payment runs about $0.43 while the electronic alternative may cost as little as $0.02. Even in the early stages of a pilot project in Minnesota nine years ago, the economics were readily apparent. The Treasury estimates an annual savings of over $141 million if all federal payments were made electronically. State savings could balloon this number significantly.

Most EBT programs result in benefits being paid directly to the GDI by a governmental authority with instructions to credit the appropriate restricted use "subaccounts" of the payees. Beneficiaries would then draw down the balances in a lump sum or over time from EBT designated ATMs or POS terminals.

In the case of food stamp programs, however, the operation would vary because actual funds movement would not occur until goods were purchased at the retail store. In essence, the GDI would receive instructions to make a certain amount available to the consumer in his/her account. When the payee completes a purchase of authorized goods at a local store, the eligible amount would be decremented from the restricted use account, and the GDI would be notified of the total amount of EBT "sales." The GDI would create a next day credit to the merchant's bank for the merchant and would notify the Treasury of required reimbursement to the GDI on the same day.

While the debit card approach will likely be the most common in early EBT program pilots, there is already considerable interest in the use of smart cards. The smart card brings with it internal storage capacity that could be used to implement increased security features, medical and program information, and data about qualified food items, even to the extent of prescriptive nutrition data. Purchases could actually be checked against this data for eligibility.

On the surface, benefit programs and electronic banking would appear to be a marriage made in heaven, but a wide range of issues remain to be worked out at both state and federal levels. At the top of the list is the legal infrastructure for these programs, to include the relative rights and responsibilities of the GDI and the beneficiary. Consumer protection for electronic payments is largely provided through Regulation E today, but a number of issues have arisen concerning notification and statement features of the law.

Access to an ATM or POS device at locations convenient to the recipient is another issue that could prove challenging for even the most advanced interstate bank. On another front, there are even some potential issues in the CRA area regarding the treatment of EBT funds as CRA eligible for reporting and compliance purposes.

In summary, the face of federal and state benefit programs is changing dramatically through the introduction of electronics. Spurred on by the promise of reduced costs, the federal government is mandating the use of electronic payments for government programs and states, interested in the same benefits, are approaching EBT efforts with considerable enthusiasm. Nevertheless, a wide ranging number of legal and operational issues remain to be resolved that will temper the growth of these programs in the short term. In the long term, though, it is clear that the die has been cast and a plastic card in every pocket (or pocketbook) will have replaced a car in every garage as the future reality.

 
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