A controversy over electronic benefits transfer -- the delivery of welfare, food stamps, and other government payments through electronic banking devices -- has created some strange bedfellows.

Consumer and civil rights groups are siding with a frequent adversary, the Federal Reserve Board. They support a Fed proposal to subject the government agencies in electronic-benefits-transfer systems to the same consumer protection rules that apply to banks' automated-teller-machine and point-of-sale programs.

Meanwhile, the activist groups' traditional allies in state and local governments, Congress, and even the White House are attacking the Fed. They say the high costs of compliance will prevent governments and taxpayers from realizing the considerable benefits of electronic delivery systems.

Battle in Comment Letters

The battle lines were drawn in comment letters on the Fed's draft of a consumer protection rule for electronic benefits transfer.

"We welcome the opportunity to applaud the board's decision to rely on principles of social equity and good government in proposing to bring EBT within the coverage of Regulations E," wrote a coalition that included the Consumer Federation of America, U.S. Public Interest Research Group, Association of Community Organizations for Reform Now, or Acorn, and Consumers Union.

Among those questioning the Fed's proposal are Sen. Robert Dole, R-Kan., Rep. Bruce Vento, D-Minn., Assistant Treasury Secretary Gerald Murphy, and Alice M. Rivlin, deputy director of the Office of Management and Budget.

Protests from Task Force

The Fed proposal has also drawn fire from a government task force that counts the Fed itself as a member. This group has been one of the most vocal critics of the regulatory plan, encouraging organizations around the country to send protest letters to the central bank.

Any persisting stalemate could halt the progress of systems that have been touted as a boon to government efficiency.

Electronic benefits transfer -- which can include welfare, food stamps, unemployment and workers' compensation insurance, and Supplemental Security Income -- has been implemented in six states, but at least 20 others are in some stage of considering it.

Until now, the programs have been exempt from Reg E, the liability and disclosure rules that apply to banks.

In January, the Fed proposed bringing the EBT programs under Reg E, with only a few exceptions. In a sign of potentially heated conflict, the Fed governors overruled a staff proposal to continue broad exemptions for government EBT programs.

EBT administrators contend that they could not continue if they must meet Reg E requirements -- limiting cardholder liability to $50 if a lost or stolen card is reported within two days.

A Citibank study, commissioned by the Treasury Department, has estimated that the Fed's plan would cost government agencies between $120.2 million and $826.8 million a year.

Critics also say government agencies and financial institutions are different enough that they should have different rules. Banks can screen customers, refuse services, and insure against losses, while governments cannot, they argue.

"Financial institutions have successfully managed their risk and losses under Regulation E by means which are largely unavailable to public assistance agencies," wrote Gerald Murphy, fiscal assistant secretary of the Treasury Department.

Fed supporters say that a continued exemption for government agencies would create two-tiered regulation of ATM transactions -- one for bank customers and the other for welfare recipients.

"We commend the board for proposing the morally and socially responsible approach to this issue," wrote Ruth Durrett, chair of the Rhode Island Community Reinvestment Association.

Bankers see the irony of the government protesting the burden of its own regulations. But most of the industry has chosen to stay out of the great debate between policymakers and public advocates.

Bankers' Concerns

The neutrality could change as some in the banking industry begin wondering about the proposal's broader implications.

"Community bankers are extremely concerned about the potential costs, direct and indirect, that their institutions may incur to provide unbanked recipients access to EBT program benefits," wrote Kenneth A. Guenther, executive vice president of the Independent Bankers Association of America.

While Mr. Guenther praised the Fed's proposal overall, he said community bankers worry that government agencies will eventually try to shift the costs of EBT to the ATM-owning banks.

Other bankers echoed this concern and urged the Fed to more clearly delineate their responsibilities.

Many urged the Fed to reconsider Reg E altogether, a move Fed governors have already indicated is under way.

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