Recommendations and Actions
Convenient, Secure Funds Receipt at the Press of a Button
Each year, tens of millions of citizens receive government services, either directly from the federal government or indirectly through state and local governments or third parties. The number of recipients of government benefits is large--and is projected to grow.
---In the U.S. Department of Agriculture (USDA) Food Stamp Program,enrollment averaged 25.4 million persons per month in 1992 and had increased to 27.4 million persons by March 1993.
---Approximately 31.4 million low-income people receive monthly authorization for medical assistance through Medicaid.
---Monthly disability insurance benefits are drawn by more than 4.3 millionformer workers and their dependents.
---The Social Security Administration is expected to distribute more than $450billion annually to 44.3 million beneficiaries by 2000.
Provision of these benefits relies primarily on paper-based systems--such as checks, vouchers, or coupons--that are not always customer-friendly, are inefficient and expensive to operate, and are subject to fraud and abuse.
The USDA Food Stamp Program provides an excellent example. It is perhaps the most paper-intensive of all federal benefits programs. Over 3 billion food stamps are printed yearly and distributed monthly in the form of coupon booklets to over 10 million households. Each month, 210,000 authorized food retailers receive the coupons in exchange for eligible food items. The retailers carry stacks of food stamps to 10,000 participating financial institutions, which credit the store accounts for their value. The banks send the redeemed food stamps to a Federal Reserve Bank which again counts the coupons, credits the banks' account, bills the U.S. Treasury for the value of the coupons, and destroys them. Food stamps cost federal and state governments approximately $400 million per year in administrative expenses to print, ship, store, distribute, reconcile, and destroy. The paper aspect of food stamps also creates management control vulnerabilities and ample opportunities for fraud and abuse.
The Food Stamp Program, together with similar inefficient, outmoded, paper-based systems, can be replaced by proven, cost- effective technology. Electronic benefit transfer (EBT) is already successfully, and cost-effectively, used by the federal government. EBT adopts commercial electronic payment practices to the delivery of government assistance services, enabling benefits to be transferred electronically. Presently, direct federal payment programs such as Social Security, Supplemental Security Income, federal pensions, and veterans benefits are a mixture of electronic direct deposit and paper check issuance.
The savings entailed by converting to EBT are significant. For example, the roughly 450 million paper check payments made per year cost taxpayers up to six times more to deliver than those electronically deposited. Making the transition to electronic transactions, which cost 6 cents per transaction compared to 36 cents per physical paper transaction, would significantly reduce benefits delivery cost.
Recent pilot projects to replace paper-based benefits systems with EBT also confirm that electronic benefit delivery can reduce costs. The Secretary of USDA reported that usingEBT for government issuance of food stamps saved 24 percent in operating costs in pilot projects in New Mexico and 3 percent in Minnesota. Retailers also benefit: the study showed that cost to retailers dropped by an average of $3.98 per $1,000 in food stamp product sales in New Mexico, and by $9.09 in Minnesota. EBT issuance of food stamps also benefits banks that participated in the pilot; their cost fell by $3.17 and $5.48 per $1,000 of benefits redeemed in New Mexico and Minnesota, respectively. The estimated loss due to fraud related to food stamp benefits dropped by 75 percent in New Mexico and 81 percent in Minnesota.
Need for Change
A major expansion of electronic delivery of federal benefits has not been possible in the past for several reasons, including
---lack of banking service accessibility;
---lack of availability of a low-cost alternative to receiving and cashing a government check;
---legislative restrictions limiting flexibility to select a particular method of payment; and
---people's natural resistance to change, e.g., trusting electronic direct deposit.
These reasons are no longer impediments to nationwide electronic benefit delivery. EBT can provide basic bank-like services in neighborhoods where no physical banks exist. Paper check processing has become more expensive than electronic direct deposit. Congress and the public are more receptive to alternative delivery methods. This receptivity is evidenced by recent congressional action permitting EBT as an operational alternative to issuing food coupons and by the overwhelming recipient preference of EBT over food coupons in all EBT demonstration sites.
Compatibility with commercial electronic transaction networks is a critical requirement for retail merchants and financial institutions. EBT could be processed concurrently with commercial electronic transactions by adopting the specific standards and rules promoted by the American Bankers Association and used by the major commercial direct debit point-of-sale and automated teller machine (ATM) networks. This compatibility would allow government transactions to be processed along with existing commercial financial transactions, exploiting previously defined nationally and internationally accepted standards. Industry's support is vital to successful implementation of EBT, especially for federal-state administered programs such as Food Stamps; Special Supplemental Food Program forWomen, Infants, and Children (WIC); Aid to Families With Dependent Children (AFDC); and child support.
The most effective implementation of EBT would be nationwide delivery of multiple, integrated benefits using the existing commercial infrastructure--e.g., electronic funds transfer network, commercial banking, credit/debit card authorization and settlement/interchange networks, and the Federal Reserve's Automated Clearing House system. Benefits that could be delivered over this network include food stamps, veterans benefits, student aid, medical assistance, housing programs including assistance payments to families and individuals, unemployment insurance, Social Security, Supplemental Security Income, AFDC assistance, child support, and WIC assistance.
The nationwide EBT system would use direct deposit of benefits and plastic access cards to replace food stamp coupons, AFDC checks, WIC vouchers, Medicaid authorization cards,state general assistance checks, housing assistance checks, etc. This approach would dramatically improve recipient services, combat fraud and abuse, and save millions in yearly operating costs for federal and state governments.
Federal payments would be deposited directly into recipients' bank accounts. For recipients without bank accounts, or those who prefer not to involve their banks, a federally sponsored electronic account accessible by an EBT card could be established. For recipients without a bank account who are at or below the poverty level, a free electronic service (e.g., a fixed number of free ATM or point-of-sale transactions per month) could be provided. Funding for this service could come from savings achieved by the federal government through conversion to direct deposit.
For public assistance programs jointly administered by federal and state governments, EBT could dramatically simplify the delivery of separate program benefits to eligible recipients. Ultimately, a single government services plastic benefits card could be issued instead of separate cards for each program. By using one comprehensive EBT infrastructure, federal and state agencies can share both start-up and ongoing operating costs associated with the delivery of government benefits to the public. As a result, all stakeholders should experience lower operating costs and provide measurably improved customer service.
Although much benefit is gained by leveraging the existing infrastructure, there are several liability and policy issues to be considered.
---The Federal Reserve Board in February 1993 proposed making Regulation Eof the Electronic Funds Transfer Act applicable to EBT. Regulation E governs electronic transaction liability in the private sector; it would make federal and state governments liable for the replacement of recipient benefits reported lost or stolen, without regard to recipient responsibilities. The cost of this regulation could effectively deter or even halt EBT expansion.
---To avoid the development of incompatible systems and to realize substantial operating cost reductions through volume (economies-of- scale) pricing, EBT efforts will need to be coordinated nationally while these systems are still in their infancy.
1. Design an integrated EBT implementation plan. (2)
An existing interagency team, the Electronic Benefit Transfer Task Force, chaired by OMB, is defining the roles, responsibilities, and changes required to implement EBT nationwide. This task force should periodically report on its progress to the GITS Working Group and the Vice President and should complete the implementation plan by June 1994.
The most effective implementation of EBT is nationwide delivery of multiple, integrated benefits, which leverages the existing commercial infrastructure. Ongoing benefits delivery improvement efforts should be accelerated. These efforts include implementing electronic delivery of food stamps by USDA's Food and Nutrition Service and direct benefit delivery by the Department of the Treasury's Financial Management Service, the Social Security Administration, the Office of Personnel Management, and the Railroad Retirement Board.
The initiative should press for (1) integrating a package of benefit programs for electronic payment, including Food Stamps, Social Security benefits, and AFDC; and (2) sequencing their implementation to ensure that each new benefit program added builds on prior successes. The initiative should use government and local EBT experiences to pilot and implement integrated benefits delivery nationwide.
The implementation plan should include recommendations on various resource issues, such as cross-agency administrative cost pooling, funding strategies, organization, and staff support; and should establish a calendar with key milestones for progress measurement and review.
2. Legislation should be proposed to facilitate nationwide implementation of EBT. (3)
OMB should direct the Electronic Benefit Transfer Task Force to perform the following policy and legislatively oriented tasks. The team should draft a report of its activities by July 1994.
---Review existing legislation and regulations for each program that may affect nationwide implementation of EBT and draft appropriate changes. For example, one key issue concerns the applicability of Regulation E to EBT. Examine the comments submitted in response to the Regulation E proposal making it applicable to EBT, and determine a governmentwide position on recipient liability in EBT processing.
---Adopt a uniform EBT services pricing structure and attendant funding agreements. Identify standard categories and construct an EBT processing pricing structure to include capture and financial settlement of transactions by and among processing centers and networks, including industry and federal and state operations. Within the pricing structure, address cross-program cost effectiveness. This should maximize the benefits of economies of scale, leverage the commercial direct debit infrastructure, and ensure that cost-effective criteria are used to facilitate and expedite the migration to EBT.
---Define a settlement process that is the financial reconciliation of all debit and credit transactions on a daily basis. High-volume/same- day settlement processing is required to support EBT. This processing closely aligns with and can leverage the financial services industry's current settlement exchange system. The Treasury's Financial Management Service and the Richmond Federal Reserve Bank are in the process of assessing implementation approaches.
---Develop integrated EBT program and operating rules. For example, recipient responsibilities presently vary among different benefit programs. Obtain agreement across programs on how to combine program requirements into a uniform set of EBT rules and responsibilities. Review and modify ongoing efforts to adapt industry's electronic transfer operating procedures and rules. Coordinate with private sector entities to define the government EBT system: this includes technical considerations such as standards and type of equipment deployed, security and privacy protection, and operating rules (e.g., roles and responsibilities of all parties, liabilities, indemnifications, and settlement timing).
---Define benefits delivery options. The presumed method of payment for all new enrollees in direct federal programs would be direct deposit or EBT service. While total conversion from paper checks to electronic payments is the goal, it probably is best to start with a highly publicized voluntary direct deposit program and phase in EBT service over a 3-year period. However, a voluntary dual paper-based and EBT system is not the preferred method for the federal-state administered programs, especially for the Food Stamp Program. An objective shared by the Food and Nutrition Service, food retailers, and financial institutions is to eliminate paper coupons, not create a dual-delivery system. A dual system would be too costly to manage, hinder the interstate flow of transactions, cripple efforts to obtain economies- of- scale pricing, and defeat efforts to combat fraud and abuse in the trafficking of coupons. Consumer and recipient advocacy groups will need reassurance that strong recipient preference exists for EBT and that adequate privacy safeguards are in place.
Cross References to Other NPR Accompanying Reports:
Improving Financial Management, FM04: Increase the Use of Technology to Streamline Financial Services.
Department of Agriculture, USDA07: Deliver Food Stamp Benefits Via Electronic enefits Transfer to Improve Service to Customers While Remaining Cost Effective.
1. See Burke, Vee, Welfare (Washington, D.C.; Library of Congress, Congressional Research Service [CRS], January 6, 1993), p. 1; DeParle, Jason, "Food Stamp Users Up Sharply in Sign of Weak Recovery," The New York Times (March 2, 1993), p. A1; and "27.4 Million Receiving Food Stamps--Record High Reported for March Enrollments," Washington Post (May 29, 1993), p. A18.
2. Ford, Melvina, Medicaid: FY 1994 Budget, (Washington, D.C.: CRS, June 30, 1993), p. ii.
3. Gould, Stephen B., "Computing and Telecommunications in the Federal Government," CRS Review (July-August 1990), p. 4.
4. Conversation with Joe Leo, Food and Drug Administration, July 29, 1993.
5. See U.S. Department of the Treasury, Financial Management Service, EFT Cost Savings for FY1992 (undated). (Working paper.)
6. U.S. Department of Agriculture, Food and Nutrition Service, Summary of The Impacts of State-Initiated EBT Demonstrations on the Food Stamp Program (Washington, D.C., July 1993), pp. 1-2.
7. U. S. Department of Agriculture, Office of Public Affairs, "Espy Encourages Electronic Issuance Of Food Stamps by All States, " news release No. 0588.93, Washington, D.C., July 19, 1993, p. 1.
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