Citibank, staking out a leadership role in the emerging field of electronic benefits transfer, won a key endorsement on Tuesday from the Treasury Department.
The department recommended that a group of eight southeastern states use Citibank in establishing electronic systems for transfering welfare payments and other public benefits.
If each of the states in the group - known as the Southeastern Alliance - signs a deal with Citibank, the bank could gain $400 million in revenues over seven years, according to a Treasury Department spokeswoman.
The Treasury is advising coalitions of states on rolling out electronic benefits transfer, or EBT. The Southeastern Alliance had said it would accept the Treasury's recommendation.
The department estimates that agreements with the southeastern states could generate 50 million transactions per month for Citibank. The bank would collect fees for processing the transactions.
The Citicorp unit already manages similar programs in seven states: South Carolina, Pennsylvania, North Dakota, South Dakota, Ohio, New York, and Texas.
"We believe we are the leader in the EBT business," said Colin J. Klipin, head of Citicorp's global cash management business. "We have a long track record of successful implementations, and we have identified EBT as a core area of strategic importance for the company."
The announcement is the biggest ever in electronic benefits transfer, which allows for the delivery of state and federal benefits through electronic means like automated teller machines and point of sale terminals.
Banks are aggressively pursuing contracts in the business. By electronically processing payments that were previously made in check form, banks and other electronic benefits transfer providers collect fees from government agencies. Banks with a big investment in ATMs are also looking for a way to extend the utility of the ubiquitous units, while collecting fees.
These contracts have two big revenue pieces; one is from processing and the other is from fees charged to the state for the training and customer service offered to benefits recipients, explained Liam Carmody, president of Carmody & Bloom, a Ridgewood, N.J.-based consulting company.
Once electronic benefits transfer is done nationally, the transactions generated by the states in the Southeastern Alliance - Alabama, Arkansas, Florida, Georgia, Kentucky, Missouri, North Carolina, and Tennessee - could account for 20% of the business.
The federal government makes 970 million annual payments for entitlements like Social Security, veterans' compensation, supplemental security income, and railroad retirement and disability annuities. States, which administer food stamps and Aid to Families with Dependent Children, the main welfare program, add greatly to that volume.
In fact, some benefits transfer experts predict after nationwide rollout of EBT, transaction volume could reach about 250 million a month.
According to the terms of the Treasury Department endorsement, each of the Southeastern Alliance states is now free to negotiate a contract with Citibank. Treasury officials say this will allow each state to customize a program.
A department spokeswoman said that while Citibank is the prime contractor, three other organizations have been named as subcontractors: Deluxe Data Systems, Lockheed Information Services Co., and First Union Corp. The magnitude of the deal drove the alliance among the four organizations.
"We looked at the tremendous task of installing and operating a project of this size and decided that combining ... capabilities was the only way to address the challenges of the Southern Alliance," said Tom McLaughlin, vice president of government services for Deluxe Data.
Consultants were initially surprised by the involvement of First Union Corp., but said the Charlotte, N.C.-based bank's penetration in the eight southeastern states may have influenced the Treasury to award the deal to the Citibank alliance.
Citibank and Deluxe noted that they have also teamed up to bid on the Northeast Alliance of States EBT project, which covers EBT programs in Connecticut, Maine, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont.
The winner of that contract is scheduled to be announced in November, and rollout of the programs is expected to start next spring and summer, the same schedule predicted by the Southeastern Alliance.
Other likely bidders for the Northeast Alliance contract include NationsBank Corp. (see related story, above), Mellon, and Mercantile. None of these banks, however, would confirm whether they bid for either contract.