Academic journal article Federal Reserve Bulletin

Statements to Congress

Academic journal article Federal Reserve Bulletin

Statements to Congress

Article excerpt

Statement by Griffith L. Garwood, Director, Division of Consumer and Community Affairs, Board of Governors of the Federal Reserve System, before the Subcommittee on Financial Institutions and Consumer Credit of the Committee on Banking and Financial Services, US. House of Representatives, June 19, 1996

The Board of Governors of the Federal Reserve System appreciates this opportunity to comment on issues concerning the coverage of electronic benefit transfer (EBT) programs under the Electronic Fund Transfer Act (EFTA) and the Board's Regulation E. Under amendments to Regulation E adopted by the Board in February 1994, EBT programs are subject to modified Regulation E requirements scheduled to take effect on a mandatory basis on March 1, 1997.

This hearing will examine the potential impact of applying Regulation E to these programs, particularly the potential costs of compliance with the rules that limit a recipient's liability for unauthorized transfers. I will discuss coverage of EBT programs under the EFTA, which the Board is responsible for implementing; address the states' concern that the costs of complying with Regulation E could impede the development of EBT programs; and make some comments about legislative proposals.

Government agencies have developed EBT programs in which recipients use plastic cards and personal identification numbers (PINs) to access food stamp benefits at point-of-sale (POS) terminals in food stores and cash benefits at either automated teller machines (ATMs) or at POS terminals. The Board supports the nationwide effort to provide public benefits--such as social security, food stamps, and Aid to Families with Dependent Children--to citizens electronically.

The electronic transfer of benefits offers numerous advantages over paper-based delivery systems, both for recipients and for program agencies. For recipients, these advantages include faster access to benefits, greater convenience in terms of times and locations for obtaining benefits, improved security because funds may be accessed as needed, lower costs because recipients avoid check-cashing fees, and greater privacy and dignity. For agencies, EBT programs offer a single, integrated system that can more efficiently deliver benefits for both state and federal programs by reducing the cost of benefit delivery, facilitating the management of program funds, and helping to reduce fraud.

As EBT programs developed in the early 1990s, the Board considered whether, and in what manner, Regulation E ought to apply. The objective was to provide legal certainty so that agencies could make informed decisions about developing or expanding programs. The EFTA, enacted in 1978, provides the basic framework that establishes the rights and responsibilities of participants in electronic payment systems. The Congress directed the Board to prescribe regulations implementing the law and to demonstrate--to the extent practicable--that the consumer protection of the regulation outweighs the compliance costs necessary to provide this protection.

Transfers covered by the act and Regulation E include transfers initiated through ATMs, point-of-sale terminals, telephone bill-payment systems, or home banking programs. The act and regulation restrict the unsolicited issuance of ATM cards and other access devices. They provide for disclosure of the terms and conditions of an EFT service, limitations on consumer liability for unauthorized transfers, error resolution, and documentation of transfers through terminal receipts and periodic statements.

Under the EFTA, the Board has a broad mandate to determine coverage when electronic services are offered by entities other than traditional financial institutions. Section 904(d) of the act provides that if EFT services are made available to consumers by a person other than a financial institution holding a consumer's account, the Board shall ensure that the act's provisions are made applicable to such persons and services. …

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