As if electronic benefits transfer systems haven't encountered enough obstacles, a transaction processing company has thrown a lawsuit in their path.

Transactive Corp., which is under contract to operate the EBT system in Texas, has sued the U.S. Treasury Department over what it alleges is an unfair procedure for seeking bids nationwide.

A temporary restraining order has put the attempt at federal coordination on hold, but most EBT supporters do not view it as fatal to their cause. "For nationwide rollout of EBT, (the suit) probably won't make a difference," said Kurt Helwig, director of government relations for the Electronic Funds Transfer Association, Herndon, Va.

"Reg E is the biggie," Mr. Helwig said, referring to the debit card rules that many state officials have cited as a deterrent to using plastic cards and electronic terminals in place of paper-based delivery of food stamps and other benefits.

Also slowing progress are disputes over who will bear the costs of equipment and training - things on which retailers are especially wary.

Regulation E, embodying consumer protections mandated by the Electronic Funds Transfer Act of 1978, holds banks responsible for losses of more than $50 from automated teller machine or debit card fraud. The Federal Reserve Board wants states with electronic benefits programs to bear the same responsibility as banks but has agreed to defer imposing the rules until 1997.

"The potential liability to the states under Reg E is unquantifiable," said Mr. Helwig.

However, he said, the welfare reform bill recently passed by the U.S. House of Representatives contains welcome EBT provisions, due in big part to an amendment offered by Rep. Tom A. Coburn, R-Okla.

"Congressman Coburn's initiatives address EFT industry concerns regarding legal and regulatory barriers such as Regulation E and cost- neutrality mandates that have inhibited the development of national EBT," said Mr. Helwig. "Additionally, the amendment provides greater flexibility to states as they develop their own EBT programs and enhances a state's ability to reduce waste, fraud, and abuse from the food stamp program."

The Electronic Funds Transfer Association is now working with the Senate on its version of welfare reform.

Meanwhile, Sen. Joseph Lieberman, D-Conn., has introduced a bill that would exempt EBT programs from Regulation E liability.

While Mr. Helwig's group supports the Lieberman bill, it is putting much of its lobbying effort into welfare reform.

"We believe welfare reform is on a fast track because of the Republican- controlled Senate," he said, "and we believe that is the best vehicle to address our Reg E concerns."

Mr. Helwig also is closely monitoring the Transactive Corp. lawsuit.

The subsidiary of lottery processor Gtech Corp. took aim in its suit at a move by the Treasury last year to ensure that financial institutions would play the central role in EBT system development. Hoping to accelerate EBT after several years of limited implementation, the Treasury replaced its traditional bid solicitations with what it called invitations for expressions of interest, or IEI.

The Treasury had been assigned responsibility for handling bidding for federal EBT projects or, when asked to do so, for helping state projects procure EBT-related services.

In March, the Treasury released an IEI for seven southeastern states, known as the Southern Alliance of States. Potential bidders were o notify the agency of their interest by April 6, and the winner was to be picked by Oct. 17. Treasury officials predicted that pilots would be operating in all seven states by March 1996.

The Treasury also announced its intention to release another IEI, to collect names of organizations for other state and federal EBT projects. The IEI rules call for financial institutions to be the principal contractors.

Now, all such plans are on hold.

Last month, Austin, Tex.-based Transactive sued in federal court, alleging that the IEI process is "unlawful, unauthorized, arbitrary, and capricious."

Judge Emmet G. Sullivan of U.S. District Court for the District of Columbia issued a temporary restraining order, which has since been extended until May 5. The Treasury has suspended the deadlines for the southern IEI and discontinued all work on the issue until the legal questions are settled.

Transactive has requested a permanent injunction against IEIs. The two parties will meet again in court May 1.

In prepared statements, each side said it expects to prevail.

Sources said that, while it's hard to predict the outcome of any legal battle, Transactive seems to have a good chance.

"Our major problem with the IEI process is that it excludes us," said Mary Fero, a Transactive Corp. spokeswoman. "We would like to bid in an open and competitive process."

The lawsuit contends that a nonbank processing company is as capable of managing EBT programs as any bank. The processor, which won its Texas contract over several bank and nonbank bidders, claimed that a bank or other depository institution is exclusively entitled to only one function enumerated in the IEI: settlement account maintenance.

Transactive argued that, to procure this service for its Texas system, it simply contracted with a bank.

"There are two ways to view this whole thing: as days lost or as days gained," said a U.S. government official. "Every day we extend the deadline gives the bidders the chance to make better bids. There may well be a rainbow after this storm because we might get better bids than we would have."

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