Citigroup Inc.'s agreement to arrange for an extra 149 surcharge-free automated teller machines in poor New York City neighborhoods illustrates some of the difficulties of electronic benefits transfer.

Too few of Citibank's 680 ATM sites are in areas where most recipients live, and the machines do not dispense $5 bills. Also, cash-dispensing contracts with merchants have hit some potholes.

Last week Citicorp Electronic Financial Services pledged to arrange for the free ATMs in low-income areas of four New York boroughs within six months, and to have the machines dispense $5 and $10 bills. The access is to be provided by installing ATMs or contracting with owners of existing machines.

The Citigroup subsidiary, the nation's leading vendor of electronic benefits transfer, has contracts to provide the service in more than half the states. In New York City, 167,000 families get cash welfare assistance averaging $291 a month.

Citi's program was begun in late 1999, and problems soon surfaced.

The state attorney general's office said that a six-month investigation found recipients routinely paying surcharges of as much as $5 to get their benefits. By contrast, check cashing stores imposed no fee for cashing benefits checks.

The original contract required "a certain amount of nonsurcharging ATM locations for families that are participating under the program, and Citicorp failed to meet their contractual requirements," said Juanita Scarlett, a spokeswoman for the attorney general's office. "Any lawsuit was averted because Citicorp [Electronic Financial Services] immediately agreed to fix the inadequacies of the system," she said.

The original pact required Citigroup to solicit contracts with merchants to let recipients use their EBT cards to withdraw up to $100 at a time surcharge-free from their point of sale terminals.

But Citigroup spokesman Keith Anderson said that some small grocery stores had too little cash on hand, and that some - in violation of their contracts - required recipients to make a purchase.

Ms. Scarlett said Citi will have to spend millions for the new machines. But Mr. Anderson said there are "too many variables to determine the costs."

"Some of it will be hardware acquisitions, and some will be contractual agreements with existing ATM owners. It's too soon to put a price tag on it," he said.

Citi will also "do additional communications, providing all recipients with an explanation of the EBT system and providing cards showing where all the ATMs are, in multiple languages and clear signage," Mr. Anderson said.

Eliot L. Spitzer, the New York attorney general, called last week's agreement "a major step toward ensuring an equitable system of distributing cash benefits to the poor."

"New Yorkers whose lives depend on these funds should never have to pay surcharges to receive their benefits, and they should have access to those benefits in their own communities," he said.

But Mr. Anderson said the contract with New York lets Citi impose an 85-cent surcharge after four free ATM transactions a month.

Robert A. Bucceri, a marketing consultant for the Electronic Funds Transfer Association in Herndon, Va., and chairman of its EBT Industry Council, said New York is not the only place where officials have been frustrated in their efforts to give benefits recipients maximum access to their government dollars.

"The access problem has always been around," Mr. Bucceri said. "The distribution of access points in neighborhoods that don't have sufficient ATMs is the physical access issue.

The other issue is free transactions, he said. That could be solved "if there was more money put into these programs." A major stumbling block, he said, is the federal requirement that EBT programs be cost-neutral.

"The government will not pay any more for this system than they paid to distribute these benefits in a paper form," Mr. Bucceri said. "That creates a problem because they're building a system with limited dollars."

Mr. Bucceri said 43 states have an EBT program, though they are at varying levels of deployment. He said about 80% of food stamp recipients are now on EBT.

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