A government report is circulating in Washington that makes a strong case for adopting an advanced technology for payment cards.
The report, by the congressional Office of Technology Assessment, recommends a close look at smart-card systems and a prominent federal role in testing them as a replacement for current methods of distributing welfare, food stamp, Social Security, and other government benefits.
Some of the people who wrote and contributed to the report, "Making Government Work: Electronic Delivery of Federal Services," are hoping it will promote a national mandate for modernizing those costly and inefficient payment systems.
"There is certainly a great deal of enthusiasm for EBT [electronic benefits transfer] within the government, and especially at the OTA," said Sean Kennedy, president of the Electronic Funds Transfer Association, which runs a "special interest group" for members in this area. "What I read was pretty close to an endorsement," which is in contrast to the dry policy analyses that the congressional research arm is historically known for.
Trial Runs Look Positive
Mr. Kennedy, speaking more about the report's general support for EBT than about its technology leanings, said he was especially heartened by the conclusion that "EBT applications seem to be working" after a handful of trials at the state level.
The report termed electronic benefits transfer "a feasible alternative to paper-based systems ... Congress and the President need to act quickly on EBT, however, if opportunities for integrating services and capturing economies of scale are to be realized."
The OTA also said research and testing are needed on technological alternatives. That would create an opening for smart cards, which could affect the banking industry's continuing debate on how fast, if at all, to alter its current dependence the aging magnetic-stripe technology for credit and debit cards.
Here too, Congress is in a position to set in motion "a scaled-up, multiple-program, and regionally based EBT feasibility test" of several competing technologies.
"If properly designed and evaluated, the test would determine the total cost to the federal government, states, and the private sector of developing implementing, and operating a national EBT system," the technology office said.
But with Congress in recess, momentum can't build until next year. Sen. John Glenn, D-Ohio, who as chairman of the Senate Governmental Affairs Committee requested the OTA report, postponed hearings on it last month because of the flurry of activity surrounding the North American Free Trade Agreement and the ethics investigation of Sen. Bob Packwood of Oregon.
With the distractions out of the way, "my hope is that we will be able to hit the ground running" in January, said Emilio Gonzalez, an OTA analyst who had a strong hand in the report's sections on electronic benefits transfer.
While the 188-page document identifies several federal computer and communications opportunities, the recommendations on aid and entitlement programs could have a direct impact on the banking industry and its automated teller machine networks.
In turn, the cooperation necessary among federal agencies, between Washington and the states, and among private-sector and community groups to build EBT systems could point the way for delivering other government services and information electronically.
The OTA acknowledged that privacy protection and "access issues" - preventing a gap between "information technology haves and have-nots" - must be addressed before these systems are in place.
Bill in the Works
Hopes for card- and payment-related changes ride on a bill already introduced by Sen. Patrick Leahy, D-Vt. It reflects the Office of Technology Assessment's views on electronic benefits transfer and calls for federal coordination of feasibility testing.
On Dec. 3, Sen. Joseph Lieberman, D-Conn., presided at a sparsely attended hearing where OTA officials summarized their general findings that information technologies offer "almost limitless opportunities for electronic delivery of federal government services," but that Washington lacks the strategy to accomplish what is possible.
Mr. Gonzalez said the level of senatorial interest is encouraging. He noted that Sen. Glenn heads a key committee, and Sen. Leahy and Sen. Lieberman are subcommittee chairmen - of Judiciary's law and technology subcommittee and Governmental Affairs' regulation and information panel, respectively. Thus they presumably have the standing to move legislation.
Fraud Reduction Angle
And Sen. Leahy's bill, S. 1646, has a fiscally appealing title - the Food Stamp Fraud Reduction Act. That title gets at technology's ability to reduce fraud, theft, and misdirection of nutritional benefits, but covers only part of what the bill might do.
The testing could encompass many programs, including Aid to Families with Dependent Children, unemployment and workers' compensation, and various government medical and retirement payments.
Specifically on technology, the OTA report expresses fear of an emerging "Tower of Babel" in the current state-by-state trials of benefits transfer through electronic banking networks.
The report lists 37 states that are at least exploring electronic benefits transfer systems. Only Maryland has established such a system statewide, and its "Independence Card" program for welfare, food stamp, general assistance, and child support recipients is regarded as a working model of federal-state coordination.
Isolated Programs
In six other states, programs are operating but mostly in confined geographical areas, such as an electronic food stamp system in Reading, Pa., dating back to 1984, and a card-based system in Ramsey County, Minn., that began with welfare in 1987 and subsequently incorporated food stamps.
Despite the years of experience and the favorable conclusions of follow-up studies, EBT made limited progress in the 1980s. The Reagan and Bush administrations supported the experimentation but provided precious little funding, preferring to let solutions bubble up from the states with a heavy reliance on private-sector involvement and assistance.
The OTA report, on top of the recently published recommendations of Vice President Gore's "reinventing government" task force, indicates the federal government is prepared to be more forceful where cost-benefits can be quantified.
The preponderance of EBT tests to date have used the standard magnetic-stripe encoding system on cards, and on-line connections to data bases to ensure that cardholders have sufficient funds to withdraw cash or make retail purchases.
On-line System Avoided
Smart cards have been tried in Wyoming, delivering benefits to participants in the Women, Infants, and Children nutritional program, known as WIC; and in a Dayton, Ohio, food stamp pilot. With sufficient information capacity in their computer chips, smart cards do not require on-line communications with a central data base.
The OTA suggested putting three options to the test - on-line systems using the standard magnetic-stripe cards, off-line systems with advanced memory cards, and a hybrid of the two.
Intrigued by the potential reduction in off-line communications costs, the technology office seems to lean toward the hybrid approach as less expensive than the current standard, and one that can serve as a gradual transition toward smart cards.
"At present, there are no federal plans to conduct a feasibility test of a hybrid system," the report said pointedly. "Congress could, if necessary, reprogram the funding of the Department of Health and Human Services and [the Agriculture Department's] Food and Nutrition Service to ensure that both agencies include hybrid technology in further EBT testing."
Mr. Gonzalez of OTA said Mr. Leahy's proposed legislation "raises questions about whether there should be a complete commitment to on-line systems. It talks about largescale, regional, multistate trials, leveraging the regional networks that are out there, and getting economies of scale."
"I'd hate to see mistakes made at the federal level," Mr. Gonzalez added in an interview. "We have to be cautious and make sure we test all the technologies and fully evaluate them in a cost-benefit sense."
The OTA report estimates the expenses of systems with 30 million cards issued to 45 million participants in the major federal aid programs. It puts the annual transaction cost of a hybrid stripe-chip system at $806 million, about $200 million less than a magnetic-only card system.
The Ultimate Saving
Those savings would recoup the higher costs of implementing a hybrid system within a couple of years, and they would point EBT in the direction of the ultimate saving - a completely noncash, primarily off-line system that would cost only $116 million, but that would be too expensive and impractical to implement at once.
Taking such a position, the congressional research agency is unusually assertive. Most of its reports thoroughly delineate options available to Congress, but do not necessarily have an impact on ultimate policy.
Technology, though, is riding a wave of enthusiasm in the capital, which the OTA report seems to take as a given. Many observers attribute the pro-technology climate to President Clinton's stated preferences and Vice President Gore's "reinventing government" project.
The latter recommended a concerted nationwide push toward electronic benefits transfer, though in more general terms than does the OTA report.
Executive Branch Timetable
Partly as a result of the Gore effort, the executive branch's Office of Management is coordinating a multiagency task force that aims to have EBT in all 50 states by 1996, based on plans to be in place by next March.
Some smart-card supporters worry that their technology will not be given its due because planners will see the magnetic stripe as the quickest available fix.
The OTA report "is not the first to say the magnetic stripe is not the best solution long term, so why don't we just do the right thing now?" said Paul F.P. Coenen, president of Electronic Strategy Associates of Cumming, Ga., who was consulted by the OTA staff. Mr. Coenen said his firm's evaluation of off-line, smart-card-based EBT in 1987 drew much the same conclusion.
But the consultant fears that arguments for the magnetic stripe - based on its low cost, wide availability, and existing infrastructure of terminals - will cloud discussions of chip cards' longer-term benefits.
Terminals in Place
Stripe advocates point out, for example, that well over 100,000 stripe-reading point of sale terminals are in place. But Mr. Coenen says less than half of them are in food-stamp-accepting outlets like supermarkets, making the infrastructure argument less persuasive.
"The [more advanced] technology is here, the cards are here, and the cost of [chip-reading] terminals is literally a few bucks more that what we have now," Mr. Coenen said.
"We say the chip is coming, so let's do it right, and start moving now. If it costs a little extra money on day one, so be it. Every year after the first year will save us - the taxpayers - a lot of money." How Smart Cards Could Save Money Implementation costs are But they would be recoupedhigher for and electronic from savings in operationsbenefits program... (Implementation cost, in (Annual operating cost, inmillions) millions) Magnetic stripe $160 Magnetic stripe $1,008Terminal deployment $120 On-line debit transactions $288Cards 15 Cash transactions 720Training 25 Smart card or $520 Hybrid system $806hybrid systemTerminal deployment $120 On-line debit transactions $36Cards $105 Off-line debit transactions 50Point of sale conversion 45 Cash transactions 720ATM retrofit 225Training 25 Cashless smart $116 card system On-line debit transactions $36 Off-line debit transactions 80 Source: Office of Technology Assessment
