Citibank Flexing Its Muscles in EBT Market

Amid protests, lawsuits, and changes in welfare as we know it, Citibank is persevering in its quest to wire the nation-and the world-for electronic benefits transfer.

With 27 states committed to its system of delivering welfare benefits electronically, the bank is clearly clobbering the competition.

Under the leadership of Marc MacKenzie, executive director of global cash management services for Citicorp, the benefits transfer effort has grown in this decade from a fledgling operation into a full-fledged business unit, Chicago-based Citibank EBT Services.

"We're really focused on two things-bringing up quality programs and winning new business," said Mr. MacKenzie, 46. "We have a very busy next 18 months."

Going international, Mr. MacKenzie and his team recently won an EBT contract in Toronto which will explore the latest in biometric technology- including iris scanning and fingerprint recognition-to reduce fraud.

Eastern Europe may be the next frontier, Mr. MacKenzie said.

In a business of slim margins in which providers get paid monthly per account, volume is the name of the game.

"It pays to be a major player," said Gary Glickman, president of Phoenix Planning and Evaluation Ltd., a Rockville, Md.-based consulting firm involved in many government payment programs. "The biggest investment is in developing the system," he said. Economies of scale amortize the cost.

Citicorp's dominance in the nascent industry of moving billions of government dollars electronically may prove that the early bird catches the worm.

"Back in the late '80s, Citibank looked at EBT as a market that would provide opportunities," Mr. MacKenzie said.

"Citibank recognized where EBT would be going and made an investment early on," said Viann Hardy, vice president of Lockheed Martin IMS, another EBT contractor and Citibank partner on many bids.

"They have to be complimented for that," said Ms. Hardy, who works for the EBT services unit of the Teaneck, N.J.-based Lockheed unit.

According to the Department of Agriculture, the federal government spent $1.6 billion for food stamps in March 1997 alone-a figure that makes some taxpayer groups bristle. Of the volume, 16.5% is being distributed through EBT. By 2002, 90% of benefits will be delivered electronically, a spokeswoman said.

For years, states and lawmakers have been trying to cut the costs of helping the poor. EBT-involving plastic cards, point of sale terminals, and automated tellers rather than paper checks and food stamps-got its biggest boost from Vice President Gore's project to reinvent government.

Mr. Gore touted electronic delivery of state and federal payments as a means to reduce costs and fraud and to ease distribution. A 1996 law requires all federal payments, except tax refunds, to be made electronically by 1999.

Mr. MacKenzie, who joined Citicorp 10 years ago, managed a variety of payment products for global cash management. He capitalized on the big bank's infrastructure to build a business similar to other electronic banking ventures but is highly specialized.

"Banks aren't used to dealing with government bureaucracies," Ms. Hardy said. "The problem with EBT is you don't get your money back for six years. You need a lot of cash up front."

Developing the system, distributing terminals, training employees, printing cards, and more must be done before a state pays a dime to the contractor, said Ms. Hardy. Only upon successful rollout does the payback commence.

Although the biggest contracts can be worth many millions over the life of the deal, setbacks, fines for service lapses, and unforeseen costs such as legal battles can reduce profits.

Most contractors go in with partners, sharing the burdens and the rewards. Many have been driven out of the business or frightened away.

NationsBank Corp. and First Union Corp. have bid on projects but remain minor players. BankAmerica Corp. won two counties in California as a subcontractor to Deluxe Data but is unlikely to bid outside its home state. First Security Corp., a pioneer of EBT in New Mexico, pulled out after legal challenges overturned successful bids.

Though the process is grueling, banks view the business as synergistic. EBT will bring millions of unbanked consumers into the fold, increasing transaction volumes.

By 1991, Citibank had won programs in New York, Texas, and Argentina, but "it wasn't until '95 that business rocketed," Mr. MacKenzie said.

Over the past two years, Citibank won three multistate contracts-the Southern Alliance, Northeast Coalition, and Western States EBT Alliance-for a total of 21 states. The Dakotas, Ohio, South Carolina, Oklahoma, and Pennsylvania round out its U.S. clientele.

A pilot program in Texas for Social Security benefits, running since 1991, is part of a federal EBT test. Recently, Washington, D.C., chose the bank-along with prime contractor Lockheed Martin-to provide EBT services.

The most recent EBT procurements in New Jersey, Virginia, and Michigan, have attracted only two contestants: Citicorp and Transactive Corp., the bank's biggest rival. (See sidebar on facing page).

Though California's San Bernardino and San Diego counties fell to Bank of America and to Citibank's sometime partner, Deluxe Data, there will be other contracts to bid in that state. Citibank vows it will be there.

Though looming large in the EBT world, Citibank is not on easy street.

Welfare reform legislation has turned a growth industry into a shrinking one. As of February, the government doled out $16.5 billion annually in cash assistance to 11.2 million recipients. A Department of Health and Human Services spokesman said that nearly 3 million recipients have left the rolls since 1993, adding, "I expect the caseload will continue to decline."

Additionally, contracts are contested, and litigation causes costly delays.

Pleasing the client is another tough job. South Carolina went statewide with Citibank's system in December 1995. The system distributes $25 million in food stamps to 143,000 recipients monthly.

Paul Brawley, the state's EBT project manager, called Citibank's performance "adequate."

He pointed to "system problems and other things that have not fared very well for us."

He said the system occasionally debits the wrong account for transactions.

Citibank responds to individual incidents, but "there has been some resistance to making the system operate more efficiently." The state pays Citibank $1.69 per case per month.

The bank's contract with the state expires in 2002, when a new procurement process will begin. Though Mr. Brawley said he "assumes someone could do the services as well or better," he noted, "there's not a lot of contractors out there."

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