WASHINGTON - The government urged a federal judge Friday to affirm a rule that could preserve the banking industry's lock on electronic benefit transfer contracts.
In a motion for summary judgment, the U.S. attorney's office told U.S. District Court Judge Emmet G. Sullivan that a series of federal laws allow only banks to disburse funds on behalf of the federal government.
Nonbanks, then, cannot run EBT systems that disburse federal funds and should not be permitted to bid for them, the government said.
Transactive Corp., which wants to bid to run a benefits transfer system for six southern states, said in its own motion for summary judgment that Justice's explanation doesn't work. It said nearly all of the contract is for data processing services, an activity that should be open to competition.
The government hopes to dispense most of its benefit programs through electronic transfer, including Social Security and veterans benefits.
Banks could lose their grip on the emerging market if the Justice Department doesn't prevail, said Thomas J. Greco, associate general counsel at the American Bankers Association.
"This is another attempt by nonbanks to get into businesses that have traditionally been the province of the banking industry," Mr. Greco said.
The central issue is whether nonbanks should be permitted to dispense public monies, he said. "That is a role that requires a financial institution, rather than just anyone who is able to provide the service," he said.
Banks have capital requirements and are highly regulated, he said. The lack of such control over nonbanks raises safety and soundness concerns, he said.
"You know what you get when you send money through electronic systems run by banks," he said. "You don't necessarily know what you are getting when you send money through a system run by Transactive."
The future of nonbank providers of electronic benefits transfer also is at stake, the company told the judge.
"It is not an exaggeration to say (the EBT bid) is a life-or-death matter for Transactive," it wrote. "By limiting the bidding to financial institutions, Treasury is saying that Transactive is ineligible to participate as a prime contractor in its principle, indeed only, business activity."
Lawyers for Transactive did not return calls for comment.
The U.S. government dispenses $1 trillion annually through the Treasury Department's Financial Management Service, which frequently solicits bids from banks to electronically collect and disburse funds.
The department restricts bidding on contracts for electronic benefits transfer to banks that register as financial. Transactive sought this summer to permanently block this fall's planned bidding for the southe'rn states' contract. But Judge Sullivan refused to stop the bid, saying Transactive didn't show it would be irreparably harmed if planning for the bid continued.
Each side now can respond to the others' briefs. The judge has indicated that he hopes to rule this fall, before bids are due for the contract.
