Public Aid Goes Paperless

  The first large-scale use by government of private electronic funds transfer systems is being touted as so successful that personal identification number-based debit cards soon will permanently replace all paper Food Stamps.
  The federal government plans to phase out Food Stamps altogether this summer and rename the program. In the early 1990s, government entitlement programs were delivered via paper Food Stamps and cash-assistance checks. But now, in the case of Food Stamps, with PIN-based electronic benefits transfer debit cards on the verge of replacing all coupons, there is no longer any need for paper.
  "It's has been a very important achievement," says Lizbeth Silbermann, a director of state and federal relationships at the U.S. Department of Agriculture's Food & Nutrition Service, which oversees federal food-assistance funds. Silbermann says the agency this summer will host a large ceremony marking the end of paper Food Stamps.
  As of June 15, California will be the last state to convert all Food Stamps to PIN-based debit cards. At that time, the federal government also is expected to launch a program encouraging millions of eligible families not getting food assistance to apply for the EBT cards, says Robert Bucceri, an EBT consultant for the Herndon, Va.-based Electronic Funds Transfer Association. Bucceri says an estimated 38% of eligible families are not receiving food assistance.
  A variety of debit card industry players are benefiting from the conversion to EBT cards. These include state contractors, transaction processors, EFT networks and automated teller machine deployers. As of February, there were 21.3 million recipients receiving food assistance. There also were 9.6 million households participating, up from 7.5 million two years ago. Each household is issued at least one EBT card, which is used to pay for food purchases at participating merchants.
  In most states, EBT cards also are used to access cash-assistance funds at ATMs or at the point of sale. Some states are testing both magnetic-stripe and smart card-based systems for their Women, Infants and Children nutrition programs, while other states are using EBT cards to reimburse providers of subsidized child-care programs. Texas and New Mexico plan to go live with a chip card-based WIC/EBT pilot this month. And the USDA recently awarded a "proof of concept" contract for mag-stripe EBT cards to be used for the Washington state WIC program.
  Tom McLaughlin, a senior director for J.P. Morgan Chase & Co. EFS, says about 80% of Chase's contracted states, including California, also place cash-assistance benefits, called Temporary Assistance for Needy Families, on EBT cards. New York-based Chase purchased Citicorp EFS last year and is the largest EBT contractor, with contracts in 35 states.
  More and more financial institutions are waiving surcharges to attract EBT cardholders, a large percentage of whom are unbanked, to their ATMs, according to McLaughlin. EBT programs also have encouraged merchants who did not accept payment cards to deploy thousands of POS terminals.
  The federal government is mandated to cover the cost of POS terminals that are only used to accept EBT cards. There are 70,000 retailers in J.P. Morgan EFS states with these proprietary EBT machines, says McLaughlin.
  Most EBT participants, though, buy or lease their own payment terminals so that they can also accept branded debit and credit cards.
  Tough Market
  Ironically, EBT contractors at times have struggled to make a profit on the aid programs, as EFT processors and shared networks seemed to gain the most benefits. Citicorp, for example, lost millions on EBT contracts throughout the 1990s, and most competitors during the time dropped out of the bidding process or went out of business.
  These firms did not anticipate that welfare-reform laws and the robust economy in the 1990s would cut the number of Food Stamp and cash-assistance households by more than half through 1999. Typical EBT contracts pay main contractors a monthly per-household rate, not a per-transaction rate.
  With the prospect of fewer bidders, many states increased their per-household rates in contract negotiations, while contractors cut costs. To further reduce costs, for example, the Food & Nutrition Service recently agreed to require contractors to service a call center only seven hours a day, seven days a week, instead of 24 hours every day.
  First Data Corp. has become perhaps the largest beneficiary of EBT programs. The Greenwood Village, Colo.-based transaction processor recently purchased Concord EFS Inc., which had a contract with Chase to process EBT transactions. And First Data's Star network switches more EBT transactions than any other EFT network.
  Networks receive per-transaction switch fees from state contractors. The fees typically are lower than what networks charge commercial users.