Integrated Electronic Benefits Transfer

Implement Nationwide, Integrated Electronic Benefit Transfer

Convenient, Secure Funds Receipt at the Press of a Button

Each year, tens of millions of citizens receive government services,
either directly from the federal government or indirectly through state
and local governments or third parties.  The number of recipients of
government benefits is large--and is projected to grow.  ---In the U.S.
Department of Agriculture (USDA) Food Stamp Program,enrollment averaged
25.4 million persons per month in 1992 and had increased to 27.4 million
persons by March 1993.[1]

---Approximately 31.4 million low-income people receive monthly
authorization for medical assistance through Medicaid.[2]

---Monthly disability insurance benefits are drawn by more than 4.3
millionformer workers and their dependents.

---The Social Security Administration is expected to distribute more
than $450billion annually to 44.3 million beneficiaries by 2000.[3]

Provision of these benefits relies primarily on paper-based
systems--such as checks, vouchers, or coupons--that are not always
customer-friendly, are inefficient and expensive to operate, and are
subject to fraud and abuse.

The USDA Food Stamp Program provides an excellent example.  It is
perhaps the most paper-intensive of all federal benefits programs. Over
3 billion food stamps are printed yearly and distributed monthly in the
form of coupon booklets to over 10 million households. Each month,
210,000 authorized food retailers receive the coupons in exchange for
eligible food items. The retailers carry stacks of food stamps to 10,000
participating financial institutions, which credit the store accounts
for their value. The banks send the redeemed food stamps to a Federal
Reserve Bank which again counts the coupons, credits the banks' account,
bills the U.S. Treasury for the value of the coupons, and destroys them.
Food stamps cost federal and state governments approximately $400
million per year in administrative expenses to print, ship, store,
distribute, reconcile, and destroy.[4] The paper aspect of food stamps
also creates management control vulnerabilities and ample opportunities
for fraud and abuse.

The Food Stamp Program, together with similar inefficient, outmoded,
paper-based systems, can be replaced by proven, cost-effective
technology. Electronic benefit transfer (EBT) is already successfully,
and cost-effectively, used by the federal government. EBT adopts
commercial electronic payment practices to the delivery of government
assistance services, enabling benefits to be transferred electronically.
Presently, direct federal payment programs such as Social Security,
Supplemental Security Income, federal pensions, and veterans benefits
are a mixture of electronic direct deposit and paper check issuance.

The savings entailed by converting to EBT are significant.  For example,
the roughly 450 million paper check payments made per year cost
taxpayers up to six times more to deliver than those electronically
deposited. Making the transition to electronic transactions, which cost
6 cents per transaction compared to 36 cents per physical paper
transaction, would significantly reduce benefits delivery cost.[5]

Recent pilot projects to replace paper-based benefits systems with EBT
also confirm that electronic benefit delivery can reduce costs. The
Secretary of USDA reported that usingEBT for government issuance of food
stamps saved 24 percent in operating costs in pilot projects in New
Mexico and 3 percent in Minnesota. Retailers also benefit: the study
showed that cost to retailers dropped by an average of $3.98 per $1,000
in food stamp product sales in New Mexico, and by $9.09 in Minnesota.
EBT issuance of food stamps also benefits banks that participated in the
pilot; their cost fell by $3.17 and $5.48 per $1,000 of benefits
redeemed in New Mexico and Minnesota, respectively.[6] The estimated
loss due to fraud related to food stamp benefits dropped by 75 percent
in New Mexico and 81 percent in Minnesota.[7]

Need for Change

A major expansion of electronic delivery of federal benefits has not
been possible in the past for several reasons, including

---lack of banking service accessibility;

---lack of availability of a low-cost alternative to receiving and
cashing a government check;

---legislative restrictions limiting flexibility to select a particular
method of payment; and

---people's natural resistance to change, e.g., trusting electronic
direct deposit.

These reasons are no longer impediments to nationwide electronic benefit
delivery. EBT can provide basic bank-like services in neighborhoods
where no physical banks exist. Paper check processing has become more
expensive than electronic direct deposit. Congress and the public are
more receptive to alternative delivery methods. This receptivity is
evidenced by recent congressional action permitting EBT as an
operational alternative to issuing food coupons and by the overwhelming
recipient preference of EBT over food coupons in all EBT demonstration
sites.

Compatibility with commercial electronic transaction networks is a
critical requirement for retail merchants and financial institutions.
EBT could be processed concurrently with commercial electronic
transactions by adopting the specific standards and rules promoted by
the American Bankers Association and used by the major commercial direct
debit point-of-sale and automated teller machine (ATM) networks. This
compatibility would allow government transactions to be processed along
with existing commercial financial transactions, exploiting previously
defined nationally and internationally accepted standards.  Industry's
support is vital to successful implementation of EBT, especially for
federal-state administered programs such as Food Stamps; Special
Supplemental Food Program forWomen, Infants, and Children (WIC); Aid to
Families With Dependent Children (AFDC); and child support.

The most effective implementation of EBT would be nationwide delivery of
multiple, integrated benefits using the existing commercial
infrastructure--e.g., electronic funds transfer network, commercial
banking, credit/debit card authorization and settlement/interchange
networks, and the Federal Reserve's Automated Clearing House system.
Benefits that could be delivered over this network include food stamps,
veterans benefits, student aid, medical assistance, housing programs
including assistance payments to families and individuals, unemployment
insurance, Social Security, Supplemental Security Income, AFDC
assistance, child support, and WIC assistance.

The nationwide EBT system would use direct deposit of benefits and
plastic access cards to replace food stamp coupons, AFDC checks, WIC
vouchers, Medicaid authorization cards,state general assistance checks,
housing assistance checks, etc. This approach would dramatically improve
recipient services, combat fraud and abuse, and save millions in yearly
operating costs for federal and state governments.

Federal payments would be deposited directly into recipients' bank
accounts. For recipients without bank accounts, or those who prefer not
to involve their banks, a federally sponsored electronic account
accessible by an EBT card could be established. For recipients without a
bank account who are at or below the poverty level, a free electronic
service (e.g., a fixed number of free ATM or point-of-sale transactions
per month) could be provided. Funding for this service could come from
savings achieved by the federal government through conversion to direct
deposit.

For public assistance programs jointly administered by federal and state
governments, EBT could dramatically simplify the delivery of separate
program benefits to eligible recipients. Ultimately, a single government
services plastic benefits card could be issued instead of separate cards
for each program. By using one comprehensive EBT infrastructure, federal
and state agencies can share both start-up and ongoing operating costs
associated with the delivery of government benefits to the public. As a
result, all stakeholders should experience lower operating costs and
provide measurably improved customer service.

Although much benefit is gained by leveraging the existing
infrastructure, there are several liability and policy issues to be
considered.

---The Federal Reserve Board in February 1993 proposed making
Regulation Eof the Electronic Funds Transfer Act applicable to EBT.
Regulation E governs electronic transaction liability in the private
sector; it would make federal and state governments liable for the
replacement of recipient benefits reported lost or stolen, without
regard to recipient responsibilities. The cost of this regulation could
effectively deter or even halt EBT expansion.

---To avoid the development of incompatible systems and to realize
substantial operating cost reductions through volume (economies-of-
scale) pricing, EBT efforts will need to be coordinated nationally while
these systems are still in their infancy.

Cross References to Other NPR Accompanying Reports:

Improving Financial Management, FM04: Increase the Use of Technology to
Streamline Financial Services.

Department of Agriculture, USDA07: Deliver Food Stamp Benefits Via
Electronic enefits Transfer to Improve Service to Customers While
Remaining Cost Effective.

Endnotes

1. See Burke, Vee, Welfare (Washington, D.C.; Library of Congress,
Congressional Research Service [CRS], January 6, 1993), p. 1; DeParle,
Jason, "Food Stamp Users Up Sharply in Sign of Weak Recovery," The New
York Times (March 2, 1993), p.  A1; and "27.4 Million Receiving Food
Stamps--Record High Reported for March Enrollments," Washington Post
(May 29, 1993), p. A18.

2. Ford, Melvina, Medicaid: FY 1994 Budget, (Washington, D.C.:  CRS,
June 30, 1993), p. ii.

3. Gould, Stephen B., "Computing and Telecommunications in the Federal
Government," CRS Review (July-August 1990), p. 4.

4. Conversation with Joe Leo, Food and Drug Administration, July 29,
1993.

5. See U.S. Department of the Treasury, Financial Management Service,
EFT Cost Savings for FY1992 (undated). (Working paper.)

6. U.S. Department of Agriculture, Food and Nutrition Service, Summary
of The Impacts of State-Initiated EBT Demonstrations on the Food Stamp
Program (Washington, D.C., July 1993), pp. 1-2.

7. U. S. Department of Agriculture, Office of Public Affairs, "Espy
Encourages Electronic Issuance Of Food Stamps by All States, " news
release No. 0588.93, Washington, D.C., July 19, 1993, p. 1.