Skip navigation

HANDY SWIPES

As an increasing number of states begin rolling out electronic benefits transfer programs, there is growing concern among supermarket retailers about how the system will work and who's going to pay for it.Some retailers also see stumbling blocks to a national EBT system arising, including conflicting regulations from state to state, incompatible technologies and systems, new transaction fees and equipment

As an increasing number of states begin rolling out electronic benefits transfer programs, there is growing concern among supermarket retailers about how the system will work and who's going to pay for it.

Some retailers also see stumbling blocks to a national EBT system arising, including conflicting regulations from state to state, incompatible technologies and systems, new transaction fees and equipment upgrades stores may have to make and pay for themselves.

Despite the unresolved issues, retailers are virtually unanimous in their support of the move from paper-based to electronic distribution of government benefits, such as food stamps. They credit EBT for reducing fraud, helping checkers work more efficiently and, in some cases, boosting sales.

Their hope, however, is that EBT systems eventually become more uniform from state to state.

As of last month, five states already were operating some form of EBT system statewide; 10 were in limited tests; and another 27 had begun setting up an EBT infrastructure, according to a report by the Food Marketing Institute, Washington. Among the group of 27 states, 21 belong to one of three EBT regional coalitions working on compatible programs.

These moves represent just the first step in what could become a mammoth national EBT system.

At least a dozen federal and state programs, including Aid to Families with Dependent Children and other cash benefit programs, could use EBT to replace paper-delivery benefit systems. Benefits totaling upward of $111 billion are distributed annually under these programs, and by switching from paper to an electronic system, it is estimated that $195 million will be saved annually by government agencies involved.

With so much at stake, there are a number of constituencies involved in setting up and administering the programs. Retailers, for their part, want assurance that costs will not be shifted to them and that a uniform set of EBT operating rules be adopted so the systems are interoperable from state to state.

"We are working very hard to at least have systems that are compatible across state boundaries," said Tim Hammonds, president of the FMI. "To the degree that the systems are not compatible, we are going to have unhappy customers and extra expense for the retailers."

Ohio perhaps is the prime example of one state moving ahead with EBT despite its incompatibility with neighboring states. Ohio is currently testing in the Dayton market EBT-using smart cards, which can store more data and are processed off-line. Meanwhile, border states are launching EBT programs using magnetic-strip cards, the cards now universally used for credit- and debit-card transactions.

Wyoming also is testing a smart-card system for EBT in seven counties for food stamps and Women, Infants and Children benefits.

Many retailers in Ohio, including Cincinnati-based Kroger Co., have raised the compatibility issue with the state, but have yet to alter the plan to eventually roll out EBT smart cards statewide.

For Kroger, which operates in 19 states and invests millions of dollars annually in technology, compatibility is a significant concern.

"Our basic position has been that we don't oppose smart cards and we don't oppose EBT," said Paul Bernish, Kroger's spokesman. "The state of Ohio is essentially using the retailing community as a test market for technology that's not in the marketplace yet."

Kroger is also concerned that other states, particularly those setting up individual EBT programs rather than forming alliances, are setting different specifications for point-of-sale equipment and authorized vendors, Bernish said.

"As a general rule, the way EBT takes place in a state depends to a great degree on what kind of contract the state agency signs with the vendor and to what degree they include retailers in the planning," he added. "So you have the potential for a great deal of technological diversity in an EBT system that should be seamless and uniform."

Another concern of supermarkets, according to Hammonds, is that some banks and other financial institutions are looking at EBT as a revenue opportunity.

"Clearly, the banks and financial institutions seem to see this as an opportunity to invent new fees and transaction charges that they hadn't been able to get at before," he said.

"We keep reminding the federal government that the enabling legislation for food stamps says very clearly retailers are not to be charged for handling food stamps," Hammonds added, noting that the U.S. Department of Agriculture's position is that electronic food stamps are different from paper food stamps.

On the positive side for retailers, food stamps delivered electronically should help reduce fraud, smooth out the "first of the month rush" to redeem benefits and speed up reimbursement for retailers. EBT may also provide a boost to food sales as more of the benefits are used legitimately, rather than being sold on the street.

"As you lose the ability to sell the paper coupons on the street, then more of the dollars intended for food actually get spent for food," Hammonds said. "That clearly helps to mitigate some of the [food stamp] benefit reductions under way."

In Wisconsin, which is among the states preparing to roll out EBT for food stamps over the next two years, new fees to handle EBT transactions are a hot topic among retailers. The Wisconsin Grocers Association has put together a task force to resolve the issue with the state.

"Our biggest concern is what it's going to cost us to handle food stamps electronically compared to what it costs the retailers under the old system," said Mark Uebelher, director of store systems for Copps Corp., Stevens Point, Wis., and a member of the state grocers' task force.

He said the contract the state is negotiating with EBT administrators currently provides processing equipment for only a limited number of checkout lanes and does not establish a transaction fee for the retailers.

To equip every checkout with the new technology, so that food stamp recipients would not be forced to use designated lanes, the retailer would have to pick up most of the tab.

"We're at a point where our task force has put it in writing and made it very clear that we're not happy with what's happening and we would like to see some changes made before it's rolled out," Uebelher said.

"Whether these changes actually get made will be up to what happens in the next year."

Uebelher said he believes a major portion of the savings generated by EBT, including printing, mailing and handling charges, will accrue to state and federal governments, while retailers have to pick up new costs.

"That's where the controversy is now between our task force and the state," he added. "None of the savings has been allocated to the retailer."

The largest coalition of states working on compatible EBT standards, the Southern Alliance of States, has been trying to get its program off the ground since last fall, and now expects two of the eight member states -- Alabama and Missouri -- to pilot the system for food stamps and welfare cash on a limited basis in May.

Retailers in Alabama and Missouri will have the option of accepting state-supplied EBT processing equipment or shop commercially for their own equipment and third-party processing service, which will also allow the stores to provide cash-back benefits.

"A retailer has to weigh the potential revenue streams and they have to shop wisely in the commercial world," said Melba Price, chairwoman of the SAS and associate director for policy coordination at the Missouri Department of Welfare. "And they can still make the decision to go with the state equipment. They are totally in the driver's seat."

Price said she believes retailers' EBT costs could be offset by lower handling expenses than those for paper food stamps and, in the case of Missouri, the opportunity to collect fees from the state for handling cash-back benefits. Missouri will pay retailers 30 cents for each cash-back transaction.

Overall, the SAS, the first group to develop a joint federal-state prototype EBT system, will cover 9.5 million people with aggregate annual benefits of $13.8 billion. The group estimates EBT will achieve annual savings of $27.2 million, with about $22 million going to the federal government and the balance to the states.

Other states in the SAS include Georgia, North Carolina, Kentucky, Tennessee, Arkansas and Florida. Three of those states have signed a contract with Citibank, New York, the prime contractor for the SAS, and could begin issuing cards by summer, Price said. Kentucky, North Carolina and Tennessee have yet to settle on terms with Citibank.

Wyoming is one state where the switch to EBT appears to be moving smoothly despite the decision to test smart cards instead of the nearly unanimous adoption of magnetic-strip cards. Wyoming is testing EBT for WIC benefits in seven counties and both WIC and food stamp benefits in two of those seven. The test will continue through 1997, at which time the state must make a decision about expanding it to the balance of the counties.

Mac McDowell, who operates a single Jack & Jill store in Wheatland, Wyo., and who also serves as chairman of the Rocky Mountain Food Dealers Association, said he's generally pleased with the EBT smart-card program and predicted a statewide rollout within two years, if certain retailer issues can be resolved.

Stored Value Systems, Louisville, Ky., supplies the smart cards in Wyoming, while Data Card, Minneapolis, has the contract for the terminals.

"With any new program there are some glitches, but I really like the WIC portion," said McDowell, who noted that one of the problems supermarkets have with processing Women, Infants and Children benefits is the question of whether certain items a recipient wants to purchase are authorized.

With a recipient's WIC status on a smart card, however, purchases can be scanned and verified against an in-store database.

"I like taking checkers in the store off the hook on what is 'WIC-able' and what is not," McDowell said. "Frankly, we found out we weren't doing as good a job as we had hoped" on WIC authorizations.

Another advantage of the smart card, McDowell noted, is that it requires only once-a-day communication with an outside host computer. A Data Card inquiry terminal and at least one terminal at a checklane in each store are supplied by the state.

"We're not held hostage for the transaction or gateway fees and all these issues because we only communicate in batch form once a day," he said. "All of the intelligence actually resides on the card."

However, McDowell also noted that the state agreed to provide EBT equipment only for the pilot projects and state funding for a statewide rollout remains in question.

Another issue is how retailers will be compensated for handling AFDC transactions, which are cash-back programs, once the state adds that benefit to the EBT program.

Still, McDowell said he believes smart cards "make a lot of sense, particularly in a rural area like ours where not every small store has a phone line that they can dedicate to an on-line system. Our communications are done after store hours, computer to computer. We just use our regular phone line so there is no additional phone cost to us."

New Jersey has been testing EBT for food stamps and AFDC in three counties -- Camden, Hudson and Essex -- since 1994 and is preparing to expand the program statewide in the near future. New Jersey's EBT program uses magnetic-strip cards.

"It's working marvelously," said Thom Shortt, director of retail services for Twin County Grocers, a cooperative wholesaler based in Edison, N.J., and chairman of the state's EBT advisory committee.

"The whole program is great. The merchants love it."

Shortt said retailers in New Jersey have three options for implementing EBT: use state-supplied processing equipment, develop software in-house in conjunction with the state contractor or contract with a third party for authorization. Twin County chose to develop an integrated solution in conjunction with the state contractor and its POS vendors.

"Prior to EBT, we were accepting electronic [debit and credit] payment at the front end," Shortt explained. "I did not want to add another piece of hardware to accept EBT, so we developed the capability within the existing platform to accept EBT transactions just like they were another electronic payment."

The cost, however, was a "bit higher" than expected, although over the long term it will be a better process, he noted. Shortt said Twin County's stores absorbed the costs for the program, but noted that the state is making allowances for stores that own their equipment and arrange for their own processing.