Electronic Transfer of Government Benefits
Wood, John C., Smith, Dolores S., Federal Reserve Bulletin
In 1990, the federal government paid recipients more than $400 billion in social security and other government benefits, and state-administered programs paid another $95 billion or so. Almost 60 percent of the federal payments and nearly all the state funds were disbursed by paper check. To increase the efficiency and minimize the cost of disbursing funds, and to improve the service to benefit recipients, agencies at the federal and state levels are working to move toward electronic delivery of these payments. The Social Security Administration and the Department of the Treasury, for example, have launched a major effort to increase the direct deposit of social security payments to recipients' bank accounts.
A problem arises when an individual has no deposit account at a financial institution: Benefits cannot then be disbursed by direct deposit of funds. Government agencies are exploring an alternative method called electronic benefit transfer (EBT) for delivering cash benefits, particularly to low-income recipients. In the EBT systems now in place, recipients use automated teller machines (ATMs), point-of-sale (POS) terminals, and other electronic devices to withdraw their benefits. The recipient generally gains access to the funds by using a combination of a plastic card with a magnetic stripe and a personal identification number. The electronic terminals that disburse benefits are attended in some cases, unattended in others. Some facilities are part of an existing commercial ATM or POS network. Other facilities are specially dedicated terminals in a stand-alone system-that is, a system that operates for the sole benefit of these recipients.
Government interest in EBT is not limited to those agencies that disburse cash benefits. The U.S. Department of Agriculture (USDA), which administers the food stamp program at the federal level through its Food and Nutrition Service, has been a pioneer in testing the use of EBT to replace the issuance of food stamp coupons. Electronic delivery of food stamp benefits enables eligible recipients, using electronic POS terminals at participating grocery stores, to shop with an EBT card instead of with coupons. The Congress recently authorized USDA to offer state agencies EBT systems as an alternative method for delivering food stamp benefits. Until now, states have been required by federal law to issue paper coupons unless they obtain special approval for EBT demonstration projects.
An EBT system offers opportunities for improving the delivery service to recipients, maximizing the efficiency of operations at state agencies, and minimizing costs for all parties. It also brings major challenges: Building these systems to work efficiently and cost effectively for all the parties involved will take cooperative efforts-among government agencies at the federal and state levels, financial institutions, regional networks of ATMs and POS terminals, members of the retail food industry, others in the private sector, and benefit recipients. This article gives an overview of the developing interest in EBT among these various parties. It describes some of the pilot programs that have tested the practicality of electronic delivery and reviews issues-including those related to the Electronic Fund Transfer Act and the Federal Reserve Board's Regulation E-that the implementation of EBT programs raises.
Most government benefits today are paid by checks mailed to recipients. The check-based system can pose difficulties, however. Because checks can be lost in the mail or stolen, some recipients may never receive their checks and may need to have them replaced. Delays in mail delivery may make the benefits late. Those recipients who have no deposit accounts may have difficulty or may incur high costs in converting the checks into spendable funds. And recipients who must take the entire benefit payment at once run risks in carrying around several hundred dollars or more. …