The electronic delivery of social service benefits has turned out to be a money-losing business, and frustration over the federally mandated program is mounting among merchants, payment processors, and state governments.

The fragile economics of electronic benefits transfer, or EBT, resonated throughout the annual conference on the subject that the Electronic Funds Transfer Association sponsored last week in Washington.

Until the mid-1990s, banks and other payment companies competed vigorously for state contracts to administer electronic benefits programs. Today, many of those companies have dropped out of the business or minimized their involvement.

One that quit is Transactive Corp., which lost money on its Texas contract. The Gtech Corp. subsidiary once was Citigroup's principal challenger in the field. Citigroup tried to acquire Transactive's EBT business last year but was rebuffed on antitrust grounds. Citibank EBT Services has contracts in more than 30 states.

Other providers complain about Congress' "cost-neutrality" provision, which says that the government will not pay any more for recipients to use electronic cards than it did for them to use paper coupons.

"We took a look at" Illinois' solicitation of bids, and "we ran, not walked, from the opportunity to be the EBT vendor," said James Hayes, executive vice president and general counsel of Cash Station Inc., the Chicago-based automated teller machine network. Cost-neutrality shifted so much risk to vendors "that there was absolutely no interest on our part to take on the economic risk."

"Cost-neutrality is the original sin of EBT," said Robert Bucceri, president of Chaddsford Planning Associates, a consulting firm in West Chester, Pa. "We've all been trying to play catch-up because of it."

About 70% of food stamps are now distributed electronically, and the balance will have to be converted from paper by October 2002. In keeping with federal desires, some states have also switched or are switching to electronic distribution of other benefits, including welfare and the Women, Infants, and Children, or WIC, nutrition program.

As states continue to build EBT programs -- rebidding contracts that are up for renewal, or studying new ways to use EBT cards -- participants increasingly find the programs unprofitable and fraught with headaches. The cost savings expected from paperless systems never materialized.

As for merchants, federal law entitles them to free EBT equipment and processing from state governments. But many retailers have found it impractical to keep separate terminals at the point of sale. Some have spent their own money to integrate EBT with their systems for credit and debit cards.

Elizabeth Kriskovich Tansing, manager of state government relations for the Food Marketing Institute, the largest supermarket trade group, said retailers have typically borne the cost of introducing new forms of electronic payment. States should compensate retailers for accepting EBT, she said. Indiana, Iowa, Wisconsin, Minnesota, and Louisiana are paying -- or planning to pay -- each retailer 4 to 15 cents per EBT transaction, she said.

Ms. Tansing said, "Do you really think it's fair that retailers should have to subsidize a federal program?"

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