Banks Must Shape Benefits Transfer System
The government is engaged in a high-level effort to provide government benefits using existing teller machines and point-of-sale technology and support systems.
For the government, providing benefits electronically reduces the waste and fraud associated with check distribution, saves hundreds of millions of dollars, and will afford recipients -- from mothers on welfare to retired people on Social Security to veterans -- their funds on a more reliable, secure, convenient, and timely basis.
In several pilot programs around the country, the general experience has been that recipients are warming to electronic benefits transfer, known as EBT, and retailers are glad to receive prompt guaranteed payment. The only major sector in EBT that has not stepped up to the plate is banks, savings and loans, and credit unions.
Industry Must Have Role
For the financial industry to derive as much benefit as other players, it must take benefits transfer very seriously and be sure to play a role in determining the ultimate form EBT takes.
Step one for the financial industry is to establish a position. This has been accomplished through a recently released white paper on electronic benefits transfer prepared by the Consumer Bankers Association.
The white paper recommends that government view EBT as an evolutionary use of the payment infrastructure that banks have established with retailers, networks, and customers.
The paper also says resolving the cost and liability issues would probably do the most to ensure the financial industry's participation.
Presenting Their View
Step two is for the financial institutions to demonstrate the will to take that position to government, recipient groups, and retailers, in order to help shape the transfer system.
Though EBT may be a low priority for the financial industry today, the government will make it a higher priority sooner than we think. And, as we have seen with point-of-sale, financial institutions are likelier to respond to retailer and consumer demand than to anticipate it.
Financial institutions face a danger that government will require them to participate in benefits transfer through regulatory means that will not necessarily be on the financial industry's terms. For example, the Federal Reserve is revising Regulation E to cover EBT, and talk is beginning to circulate that the Community Reinvestment Act may be revised to incorporate lifeline banking, which could easily cover electronic transfers.
Legitimate reasons exist for financial institutions to be skeptical about benefits transfer; however, EBT is not another government idea soon to die on the vine. Electronic benefits transfer is a reality, and the financial industry must not only ensure that its concerns are understood by government but that resolution of those concerns is made an integral part of the development of EBT.
Chief among those concerns is that financial institutions will be required to install additional ATMs or point-of-sale machines in areas that have a very high density of recipients but few services available.
Some of these areas might be prone to crime and fraud. That problem raises two critical questions:
* Who covers the cost?
* Who undertakes the safety-and-security liability for consumers operating in those areas?
Just as thorny an issue is who owns the electronic account. If government does, then the recipient who is unbanked will remain so. If the recipient does, then the issue takes a dive into the complex waters of banking the unbanked.
My conversations with government and legislative officials lead me to believe that financial institutions will receive little sympathy for their concerns about the unbanked filling their branch lobbies. Therefore, the industry should strive to make account ownership an opportunity to gain customers as well as leverage on other issues such as cost and liability.
Account ownership also raises the logistical issue of card issuance. It is one thing to talk about a handful of pilot programs with the thousands of cards in all. It is quite another challenge to discuss the logistics of providing 25 million to 40 million cards.
An often overlooked cost of electronic benefits transfer is recruiting and educating recipients on how to use their cards properly. Several of the pilot programs in place now were very vague about who was responsible for recipient recruitment and who was to bear the cost and resource burdens of training recipients.
In many cases, the responsibility has fallen to the networks. In the future, the expenses will need to be shared in proportion to cost savings at each link in the EBT chain, and at present it looks as if government will save the most.
It is also important to put on the table right away the issue of transaction costs.
A cost is incurred when a cardholder uses an ATM maintained by somebody who did not issue the card. A cost is incurred when a cardholder uses a point-of-sale terminal. Those costs are going to have to be borne by some participant, and not solely the financial institutions. Just because the transactions are electronic does not mean they are free; networks and financial institutions bear a real cost for these functions.
In general, the issues of cost and liability are linked. If financial institutions or networks are to assume the liability of providing an adequate number of terminals in necessary locations, servicing recipient-owned accounts, and training recipients, then they should be compensated accordingly.
It is no longer a question of whether financial institutions should participate; it is a matter of when and under what conditions. Institutions are already indirectly involved in EBT through their ownership of and participation in electronic funds transfer networks. The existing networks, such as mine, can serve as a natural electronic railroad as well as an ally in seeing that financial industry concerns are addressed.
For government, financial institutions, retailers, recipient groups, and shared networks, the time has come to address the benefits and incentives of expanding EBT from pilot programs to an accepted method of benefits delivery and payment.
Mr. Ronald V. Congemi is president of Star System Inc., San Diego, a regional electronic funds transfer network.
