The country's slow but ongoing move from a paper-based government-issued benefits system to one using electronic benefits transfer has many retailers grumbling about issues ranging from limited interstate interoperability to the lack of dispute-resolution mechanisms for over- or undercharges.
"When there is a glitch, and there have been system errors, there is a potential for significant retailer liability, and it's one we didn't have in the paper world," said Jacki Snyder, product manager of electronic payment systems at Supervalu, Minneapolis. Snyder is a member of the Electronic Payment Systems committee formed by the Food Marketing Institute, Washington, earlier this year.
"EBT has driven up retailers' costs," said Mike Wheeler, senior vice president and treasurer at Hy-Vee, West Des Moines, Iowa, and a member of the EPS committee. "It has meant more processing costs at the store and much more back-room time to figure out and collect what we have coming."
Retailers' discontent with EBT is likely to become even more evident when EBT expands from food-stamp programs to Women, Infants and Children benefits, sources told SN. While food-stamp programs provide recipients with a monthly dollar amount that can be spent to buy virtually any food item, WIC provides benefits in the form of specific product categories. Rather than deducting $20 from an account, for example, a WIC program would have to "deduct" a loaf of bread, a dozen eggs and a gallon of milk.
"Whether WIC uses a magnetic-strip-card or a smart-card system, it means there will be a need for additional hardware," said Jerry Schwartz, vice president of operations and technology at A&P, Montvale, N.J. "WIC means adding new product codes -- it doesn't use Universal Product Codes, so retailers will have to build cross-references.
"As retailers build more and more store codes, they have to replace hardware because there's only so much memory," said Schwartz, who also serves on the FMI's EPS committee.
One alternative for WIC would involve the use of smart cards, which would require retailers to invest in terminals capable of reading the microprocessor chips contained within the cards. The advantage to using smart cards for WIC is that the transaction would be "off-line." For example, the recipient's benefit information would be contained on the card itself rather than in a database accessed by a magnetic-strip card.
"WIC lends itself to a smart-card system," said Steve Bubp, systems engineer at Kmart Corp., Troy, Mich., and another member of the FMI's EPS committee. The committee would favor "some standardized smart-card approach, once we do the development for one state, that would be usable and spreadable across all 50 states."
EBT smart-card tests have so far been limited to Ohio and Wyoming. For the relatively few retailers that have been affected by these programs, "Although there are some aspects of smart cards they don't necessarily like, they'd rather deal with them than go back to paper," said Bubp.
In addition to the cost of adding point-of-sale hardware capable of reading smart cards, this method of providing benefits raises some concerns about fraud. "The security in a chip card doesn't exist," said a source familiar with EBT issues. "The fraud issue is to authenticate that the person [presenting the smart card] is who they say they are."
Prospects for a unified national program for WIC, or any other EBT program, are dim in the current regulatory climate. "The government would like WIC to be a national program, but they won't mandate it," said Schwartz.
"The federal government had issued a mandate that all benefits be electronic by 1999," said Supervalu's Snyder. "Then they basically issued a statement that anyone could get a waiver if they had a good reason."
Snyder said she believes the federal government has little incentive to address interoperability issues, because benefits it provides directly, such as Social Security, are likely to bypass current EBT distribution methods.
"A lot of merchants thought federal benefits would be issued on the same plastic card as state benefits," she said. "Now it seems that these will be done through direct deposit in low-cost bank accounts for the 'unbanked' population. The need for interoperability isn't quite as serious with benefits taking that path," Snyder explained.
The result of this lack of direction has been a system where a state-issued EBT card works in one state but not necessarily in another.
To combat this problem, several multistate alliances have been formed that use a common set of rules for accepting EBT. These rules are administered by the National Automated Clearing House Association, Herndon, Va., and they provide a measure of de facto interoperability in approximately 20 states in the South, the Northeast and the West.
"Interoperability is still an open issue, but A&P can take cards from states that use the same EBT contractor," said Schwartz.
Interoperability is even more complicated because as many as 12 states have closed EBT contracts, said Kmart's Bubp. In these states, "there's no provision for an exchange of transactions across borders. In effect, it puts fences up around the state," he said.
While the interoperability issue is confusing, few in the industry know whether it is actually costing retailers money in terms of lost sales or customer inconvenience. However, a pilot program set to begin next March is designed to "identify cost issues, and determine exactly how many interoperability issues there really are," said Snyder.
"Nobody really knows how many 'out-of-state' transactions there are," said Schwartz. However many there are, they are likely to increase as EBT programs spread to new states.
The country's move to an EBT system has coincided with a dramatic increase in credit- and debit-card acceptance at supermarkets. Many retailers would like to take advantage of the hardware and communication systems used for these payments in accepting EBT.
"Most states have made the error of not using existing electronic funds transfer systems [for EBT]," said Hy-Vee's Wheeler. "For example, why shouldn't checks to pay welfare benefits be cleared through existing EFT systems?"
"EBT was to have been developed along the infrastructure of current payment systems, such as on-line credit and debit," said Bubp. "This commercial infrastructure of payments works very well."
Among other advantages, credit and debit systems have well-developed mechanisms for dispute resolution. With EBT, however, "there is no good, clear-cut path for discrepancies to be dealt with," he added.
"When EBT systems work, they're great," said Schwartz. "When they don't, the options are to overcharge customers and their benefits disappear. Or if the retailer is overcharged, they can't get it [funds] back."
"Everybody should be protected in this arena and made whole, and people aren't now," he noted.
In addition, Snyder warned that there are limits to incorporating EBT into existing credit and debit payment systems. "EBT is a different transaction than a credit card," she said. If a credit card is not accepted at a supermarket's POS, most customers can substitute cash or a different card. However, "with EBT, the customer usually doesn't have another payment method."
Retailers who lack their own credit/debit infrastructure and who accept state-provided EBT terminals "have two pieces of [POS] equipment, so there are complications there," she added.
Most supermarkets that Supervalu deals with, however, do use their own POS equipment to handle EBT. "They would only get one terminal from the state, and it's cumbersome to direct recipients to just one lane," said Snyder.
Even retailers using their own equipment are faced with "routing costs and potentially longer checkout times," she noted. "There are other costs associated with the systems being down, which requires the retailer to use paper vouchers. With credit, for example, the retailer can go off-line to store and forward the transaction, but that's risky with EBT."