Electronic Payments
Many Programs Electronically Disburse Federal Benefits, and More Outreach Could Increase Use
Gao ID: GAO-08-645 June 23, 2008
Traditionally, federal agencies made benefit payments by paper check, but they faced increased pressure to reduce costs and increase the convenience, security, and timeliness of payment delivery. In response to a 1996 congressional mandate, the U.S. Department of Agriculture's Food Stamp Program implemented Electronic Benefit Transfer (EBT) to distribute food stamps. According to agency evaluations, EBT has reduced program costs and fraud and offered recipients a quick, secure way to receive payment. These results spurred interest in using electronic payment methods for other benefit programs. GAO was asked to report on (1) the extent to which federal benefit programs are using electronic payments, and factors agencies consider for their use and (2) options for increasing the use of electronic payments, particularly the Department of the Treasury's (Treasury) actions to that end. GAO surveyed federal benefit programs identified from two federal databases; reviewed documents, reports, and studies on electronic payments; and interviewed federal and state agency, industry, and consumer representatives.
Most federal benefit programs GAO surveyed (34 of 42) reported using 1 or more electronic payment methods, and the majority of those programs also indicated that most of their recipients received their benefits electronically. Less than half (18 of 42) of the programs surveyed provided data that would allow GAO to determine the percentage of payments made electronically, in part because state agencies disburse payments for many programs. For the 5 largest, by dollar value, programs that provided data, about 54 to 100 percent of payments were made electronically (see figure below). Agencies consider various factors, including financial burden to recipients, program and recipient characteristics, program costs, and fraud and security risks, when making a decision to use an electronic payment method for the delivery of benefits. Various options exist for agencies to increase electronic distribution of federal benefits, including (1) mandating that recipients receive benefits electronically, (2) making electronic payment the default option upon enrollment, (3) promoting electronic payments through public outreach, (4) piloting electronic distribution programs, and (5) using electronic payment cards in new ways. Treasury has introduced key initiatives in its efforts to support and increase the use of electronic payments, particularly programs for which Treasury disburses payments, such as Social Security benefits. However, Treasury does not disburse payments for all federal benefit programs. In 2006 and 2007, Treasury met with federal Chief Financial Officers (CFO) to discuss Treasury's cash management initiatives, such as increasing electronic payments. Treasury also discussed electronic payments with program staff from larger agencies for which Treasury disburses payments. However, Treasury has no plans to conduct these meetings regularly with CFO agencies and other smaller agencies. Treasury's role as the federal government's leader for payments and its experience with electronic payment methods suggest that it could provide valuable information and assistance to smaller agencies with less experience or expertise. Regularly scheduled outreach efforts to other agencies could provide opportunities for Treasury to increase the use of electronic payments.
Recommendations
Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
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GAO-08-645, Electronic Payments: Many Programs Electronically Disburse Federal Benefits, and More Outreach Could Increase Use
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Report to the Ranking Member, Committee on Oversight and Government
Reform, House of Representatives:
United States Government Accountability Office:
GAO:
June 2008:
Electronic Payments:
Many Programs Electronically Disburse Federal Benefits, and More
Outreach Could Increase Use:
Electronic Payments:
GAO-08-645:
GAO Highlights:
Highlights of GAO-08-645, a report to the Ranking Member, Committee on
Oversight and Government Reform, House of Representatives.
Why GAO Did This Study:
Traditionally, federal agencies made benefit payments by paper check,
but they faced increased pressure to reduce costs and increase the
convenience, security, and timeliness of payment delivery. In response
to a 1996 congressional mandate, the U.S. Department of Agriculture‘s
Food Stamp Program implemented Electronic Benefit Transfer (EBT) to
distribute food stamps. According to agency evaluations, EBT has
reduced program costs and fraud and offered recipients a quick, secure
way to receive payment. These results spurred interest in using
electronic payment methods for other benefit programs. GAO was asked to
report on (1) the extent to which federal benefit programs are using
electronic payments, and factors agencies consider for their use and
(2) options for increasing the use of electronic payments, particularly
the Department of the Treasury‘s (Treasury) actions to that end. GAO
surveyed federal benefit programs identified from two federal
databases; reviewed documents, reports, and studies on electronic
payments; and interviewed federal and state agency, industry, and
consumer representatives.
What GAO Found:
Most federal benefit programs GAO surveyed (34 of 42) reported using 1
or more electronic payment methods, and the majority of those programs
also indicated that most of their recipients received their benefits
electronically. Less than half (18 of 42) of the programs surveyed
provided data that would allow GAO to determine the percentage of
payments made electronically, in part because state agencies disburse
payments for many programs. For the 5 largest, by dollar value,
programs that provided data, about 54 to 100 percent of payments were
made electronically (see figure below). Agencies consider various
factors, including financial burden to recipients, program and
recipient characteristics, program costs, and fraud and security risks,
when making a decision to use an electronic payment method for the
delivery of benefits.
Various options exist for agencies to increase electronic distribution
of federal benefits, including (1) mandating that recipients receive
benefits electronically, (2) making electronic payment the default
option upon enrollment, (3) promoting electronic payments through
public outreach, (4) piloting electronic distribution programs, and (5)
using electronic payment cards in new ways. Treasury has introduced key
initiatives in its efforts to support and increase the use of
electronic payments, particularly programs for which Treasury disburses
payments, such as Social Security benefits. However, Treasury does not
disburse payments for all federal benefit programs. In 2006 and 2007,
Treasury met with federal Chief Financial Officers (CFO) to discuss
Treasury‘s cash management initiatives, such as increasing electronic
payments. Treasury also discussed electronic payments with program
staff from larger agencies for which Treasury disburses payments.
However, Treasury has no plans to conduct these meetings regularly with
CFO agencies and other smaller agencies. Treasury‘s role as the federal
government‘s leader for payments and its experience with electronic
payment methods suggest that it could provide valuable information and
assistance to smaller agencies with less experience or expertise.
Regularly scheduled outreach efforts to other agencies could provide
opportunities for Treasury to increase the use of electronic payments.
Figure: Percentage of Electronic Payments for the Top 5, by Dollar
Value, Programs That Provided Data:
This figure is a table of data showing the percentage of electronic
payments for the top 5, by dollar value.
Name of program: Social Security Retirement insurance; Total dollar
value of benefit payments (FY 2006): $418,056,535,776; Percentage of
payments made electronically (FY 2006): 87.9%.
Name of program: Social Security Disability insurance; Total dollar
value of benefit payments (FY 2006): $77,846,049,345; Percentage of
payments made electronically (FY 2006): 76.7%.
Name of program: Supplemental Security Income; Total dollar value of
benefit payments (FY 2006): $41,547,968,487; Percentage of payments
made electronically (FY 2006): 53.8%.
Name of program: Food Stamp;
Total dollar value of benefit payments (FY 2006): $30,187,346,987;
Percentage of payments made electronically (FY 2006): 100%.
Name of program: Social Insurance for Railroad Workers; Total dollar
value of benefit payments (FY 2006): $9,934,658,062; Percentage of
payments made electronically (FY 2006): 88%.
Source: GAO analysis of responses to a survey of federal benefit
programs.
[End of figure]
What GAO Recommends:
GAO recommends that Treasury consider conducting outreach to federal
agencies regularly, particularly those that may not use or fully use
electronic payments. Treasury did not comment on the recommendation,
but generally agreed with the report‘s findings.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-645]. For more
information, contact Yvonne Jones at (202) 512-8678 or jonesy@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Most Programs We Surveyed Used Electronic Methods to Distribute
Benefits, but Data on the Extent of Use Are Limited:
Agencies Consider Various Factors When Implementing or Encouraging the
Use of Electronic Payments:
Various Options Exist for Increasing the Use of Electronic Payments,
Including Further Treasury Actions:
Conclusions:
Recommendation for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Selected Data for the 42 Federal Benefit Programs We
Surveyed, by Dollar Value of Benefit Payments (Fiscal Year 2006):
Appendix III: GAO Contact and Staff Acknowledgments:
Figures:
Figure 1: Annual Number of Electronic and Paper Check Payments in the
United States for Selected Years (1995, 2000, 2003, and 2006):
Figure 2: Percentage of Treasury-Disbursed Benefits That Were Made
Electronically, Fiscal Years 1996 through January 2008:
Figure 3: Total Dollar Value and Percentage of Payments That Were Made
Electronically for 18 Programs We Surveyed:
Figure 4: Total Dollar Value and Percentage of Payments That Were Made
by Paper Check for 13 Programs We Surveyed:
Abbreviations:
ACH: automated clearinghouse:
ATM: automated teller machine:
BIA: Bureau of Indian Affairs:
CFDA: Catalog of Federal Domestic Assistance:
CFO: Chief Financial Officer:
DCIA: Debt Collection Improvement Act of 1996:
DHS: Department of Homeland Security:
DOL: Department of Labor:
EBT: Electronic Benefit Transfer:
EFT: Electronic Funds Transfer:
EPC: Electronic Payment Cards:
ETA: Electronic Transfer Account:
FAADS: Federal Assistance Award Data System:
FMS: Financial Management Service:
HHS: Department of Health and Human Services:
NACHA: National Automated Clearinghouse Association:
PCI: Payment Card Industry:
PIN: personal identification number:
POS: point-of-sale:
RRB: Railroad Retirement Board:
SSA: Social Security Administration:
SSI: Supplemental Security Income:
TAA: Trade Adjustment Assistance:
TANF: Temporary Assistance for Needy Families:
TRA: Trade Readjustment Allowance:
UPC: Universal Product Code:
USDA: U.S. Department of Agriculture:
VA: Department of Veterans Affairs:
WIC: Supplemental Nutrition Program for Women, Infants, and Children:
United States Government Accountability Office:
Washington, DC 20548:
June 23, 2008:
The Honorable Tom Davis:
Ranking Member:
Committee on Oversight and Government Reform: House of Representatives:
Dear Mr. Davis:
Federal, state, and local governments are responsible for issuing a
large proportion of the recurring federal benefit payments made to
individuals today. Traditionally, these payments have been made by
paper check, but government agencies have faced increased pressure to
reduce costs while simultaneously increasing the convenience, security,
and timeliness of payment delivery. The high cost of issuing paper
checks already has resulted in an increase in the use of Electronic
Funds Transfer (EFT) to deliver payments. EFT is any transfer of funds
that is initiated through an electronic terminal, telephone, computer,
or magnetic tape for the purpose of ordering, instructing, or
authorizing a financial institution to debit or credit an account.
Direct deposit, the primary example of EFT, provides a low-cost way to
disburse payments. However, direct deposit does not work for consumers
who do not have a bank account or do not sign up for direct deposit. To
reach these recipients, states and the federal government have created
new financial products.
Electronic Benefit Transfer (EBT) was devised in the 1980s to meet the
needs of the U.S. Department of Agriculture's (USDA) Food Stamp
Program. Its initial purpose was to transfer federal benefits
electronically to eligible recipients under certain entitlement and
grant programs. During the early 1990s, several states successfully
developed and implemented EBT projects. Also, a 1996 statute mandated
that food stamp programs nationwide use EBT as their benefit
distribution method no later than October 1, 2002, except for state
agencies facing unusual barriers to implementing an EBT
system.[Footnote 1] According to agency evaluations, EBT has helped to
significantly reduce fraud and has offered benefit recipients a quick,
secure way to receive payments, while allowing agencies to reduce
program costs. These positive results--and the potential for
duplicating them in other benefit programs--have led some Members of
Congress, agencies, and industry representatives to advocate for the
increased use of electronic payment methods. In addition, the
Department of the Treasury (Treasury), as the lead agency for federal
government payments, is striving toward an all-electronic government
for the disbursement and collection of payments.
In response to your request, this report discusses the extent to which
federal programs are using electronic payments to disburse benefits and
the feasibility of expanding the use of electronic payments to other
federal benefit programs. Specifically, we (1) describe the extent to
which federal programs are using electronic payment methods to disburse
benefits; (2) identify factors that agencies consider when implementing
or using electronic payments; and (3) identify potential options for
increasing the use of electronic payments, particularly Treasury's
actions to increase electronic payments.
To respond to these objectives, we reviewed agency documents, reports,
and studies on electronic payments. We interviewed Treasury officials
and collected written and testimonial information about their
experiences in implementing and using electronic payment methods to
distribute benefits, as well as current initiatives aimed at increasing
the use of electronic payments. We conducted a site visit to
Harrisburg, Pennsylvania, to obtain preliminary information on the
state's use of electronic payments because Pennsylvania was the first
state to pilot EBT for the Food Stamp Program in October 1984. We
interviewed officials at the following six federal agencies responsible
for overseeing or administering federal benefit programs to obtain
information on their use of electronic payments to deliver benefits:
USDA, Department of Labor (DOL), Department of Veterans Affairs (VA),
Social Security Administration (SSA), Department of the Interior's
Bureau of Indian Affairs (BIA), and Department of Health and Human
Services (HHS). We also attended conferences sponsored by NACHA--the
Electronic Payments Association's[Footnote 2] Electronic Benefits and
Services Council and the Electronic Funds Transfer Association to
observe presentations from a variety of federal and state agencies,
electronic payment providers, and private-sector consultants on issues
related to implementing and using electronic payment methods to
disburse benefits. To determine the extent to which federal programs
use electronic payments, we identified 455 federal benefit programs
using 2 federal databases, developed and applied criteria to determine
whether the programs should be included in our review, and ultimately
selected 45 federal programs that represented a variety of the types of
federal benefit programs that exist. We conducted a Web-based survey of
the 45 programs that we identified as meeting our criteria for further
review, but later excluded 3 programs upon receiving their survey
responses. We collected data on program characteristics, the extent of
electronic payment use, and other methods of payment. To identify
factors to consider when implementing electronic payments and options
for increasing the use of electronic payments, we met with private-
sector consultants, such as Booz-Allen Hamilton; Maximus; and Burger,
Carroll, and Associates, Inc., who had assisted agencies in developing
or implementing electronic payment solutions, and with three major
electronic payment providers--J.P. Morgan Chase, Affiliated Computer
Services, and EFD (eFunds Corporation). In addition, we obtained the
views of consumer advocacy groups such as the Consumer Federation of
America, Consumers Union, and the National Consumer Law Center. We also
interviewed representatives from groups representing the electronic
payments industry, such as the Electronic Funds Transfer Association
and NACHA--the Electronic Payments Association. Using the results of
our survey to identify responses that were important for describing the
characteristics of each program, we purposively selected the following
5 programs from our survey that represented a variety of
characteristics to use as case illustrations to examine additional
information related to their experiences with using electronic
payments: Supplemental Nutrition Program for Women, Infants, and
Children (WIC); Indian Social Services Welfare Assistance; Supplemental
Security Income (SSI); Unemployment Insurance; and Trade Adjustment
Assistance. Four of the 5 programs that we selected for case
illustrations were federal programs whose benefits were administered by
individual state or tribal agencies. Therefore, we also interviewed
state and tribal agencies in Arizona, California, Georgia, Michigan,
Minnesota, Ohio, Oklahoma, Texas, and Utah to obtain more information
on factors that they considered when deciding to implement electronic
payments and options for increasing the use of electronic payments. In
selecting state agencies and tribes, we considered various factors,
such as whether they were using or planning to use electronic payments
or had conducted pilots to test the feasibility of using electronic
payments, and recommendations from agency officials.
We conducted our work from April 2007 through June 2008 in accordance
with generally accepted government auditing standards. Those standards
require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our findings and
conclusions based on our audit objectives. We believe that the evidence
obtained provides a reasonable basis for our findings and conclusions
based on our audit objectives. Appendix I provides a more detailed
description of our objectives, scope, and methodology. Appendix II
provides a list of the programs we surveyed and data relating to their
use of electronic payments.
Results in Brief:
Most federal benefit programs we surveyed (34 of 42) indicated that
they used 1 or more electronic payment methods, but data limitations
did not allow us to determine the extent to which most of these
agencies did so. Direct deposit was the most common method of payment;
however, programs also used EBT and Electronic Payment Cards (EPC),
which are debit or stored-value cards. The majority of the 34 programs
that used electronic payments also indicated that the majority of the
recipients in their programs received benefits electronically. However,
less than half (18 of 42) of the programs we surveyed provided data
that would allow us to determine the percentage of payments that were
made electronically, in part because states are responsible for
disbursing payments for many federal benefit programs and are not
required to provide specific payment data to the federal agency
overseeing the program. For those 18 programs that were able to provide
data, the percentage of payments that were made electronically ranged
from about 5 to 100 percent; however, for the 5 largest, by dollar
value, of these 18 programs, about 54 to 100 percent of the payments
were made electronically. Also, 8 of the 18 programs paid 100 percent
of their benefit payments electronically, but 6 of these 8 programs
were education assistance programs, in which payments typically were
made to an institution, not to an individual. Finally, 13 of the 42
programs we surveyed provided data that allowed us to determine the
percentage of payments made by paper check. Nine of these 13 programs
distributed less than half of the total dollar value of benefit
payments by paper check, and the remaining 4 programs distributed 100
percent of their benefit payments by paper check.
Agencies consider various factors, including financial burden to
recipients, program and recipient characteristics, program costs, and
fraud and security risks, when making a decision to use an electronic
payment method for the delivery of benefits. While federal and state
agency officials, industry representatives, and others with whom we
spoke widely agree on the advantages of electronic payments for the
recipients, such as secure and timely payments, agencies also consider
perceived disadvantages when implementing electronic payments. For
example, some agency officials and consumer groups told us that
transaction fees and minimum balance requirements imposed by financial
institutions may make using an electronic method costly for recipients
who often have low incomes or low account balances. The characteristics
of the recipients also are important to consider when implementing
electronic payments, according to agency officials. Disabled or elderly
recipients may not have bank accounts or may find it difficult to
manage bank accounts or to use EPCs. In addition, concerns about the
garnishment of federal benefits and the applicability of certain
consumer protections require consideration by agencies seeking to
implement electronic payments. Furthermore, agency officials and
industry representatives stated that certain benefit programs have
characteristics that might make implementing or expanding electronic
payments more complicated. For example, instead of a cash benefit, the
WIC program specifies a food "prescription" that provides specific
nutritional food items to recipients and can only be used at authorized
locations. Therefore, using electronic payments in the WIC program
could offer more technological challenges (e.g., in designing or
updating information systems) than using such payments in a cash
benefit program. While agency officials cited cost reduction and
efficiency as key reasons for implementing electronic payments, up-
front costs such as new systems and software can be a deciding factor
in whether to implement electronic payments, especially for small
programs or programs with limited funding. Finally, agencies consider
the risks associated with different types of electronic payment and
disbursement methods. While electronic payments have reduced some of
the risks associated with paper processes, such as unauthorized use,
loss, and theft, electronic payments are still susceptible to these
risks, although to a lesser extent. However, using electronic payments
creates an electronic record of each transaction, which allows agencies
to monitor transactions to help identify fraud more easily. Although
these factors may present some challenges to implementing electronic
payments for some federal benefit programs, agencies may be able to
address many of these challenges using various options.
Options to increase the use of electronic payment of benefits include
adopting new statutory requirements, conducting public outreach, and
adapting payment cards for more uses. In addition, Treasury has
introduced initiatives to encourage electronic payments. Although the
Debt Collection Improvement Act (DCIA) of 1996 requires federal
payments to be made electronically, Treasury stated that the act does
not include federally funded, state-disbursed payments.[Footnote 3]
Furthermore, Treasury's regulations include a waiver policy that allows
individuals to elect to receive a paper check if they believe that an
electronic payment would impose a hardship or if they do not have a
bank account.[Footnote 4] The most-sweeping option identified by
industry representatives and some agency officials, and one that would
guarantee an increase in use, would involve mandating electronic
payment of benefits for recipients. Although a mandate would present
challenges, they could be overcome. As a less-sweeping alternative,
some industry representatives suggested making electronic payments the
default payment option for recipients upon enrollment to receive
benefits. This option also would require recipients to receive benefits
electronically, but it would give them the choice of opting out of
electronic payments. Another approach that several agencies have taken
is to conduct consumer outreach to educate recipients on the benefits
of electronic payments. For example, Treasury, in partnership with SSA,
has reached out to recipients at preretirement seminars and through
printed publications to encourage them to use direct deposit. In
addition, Treasury has used radio, television, and outdoor advertising-
-such as signage at bus stops--to reach individuals without bank
accounts, or "the unbanked." Furthermore, agencies with whom we met
have implemented pilot programs to test the receptiveness of recipients
or other stakeholders, such as retailers, to electronic methods. At the
same time, these agencies have also used pilot programs to identify
issues that could make electronic payments more feasible. States are
also exploring other types of payment cards and innovative electronic
payment methods. For example some states are considering using a co-
branded card displaying a company logo, such as Visa or MasterCard, as
an option to deliver benefits, because it would allow the recipient to
use the card at more locations. Finally, Treasury has a leadership role
in encouraging electronic solutions for all types of federal payments.
Specifically, to increase the use of electronic payments to distribute
federal benefit payments, Treasury continues to market the benefits of
direct deposit through its "Go Direct" marketing and education campaign
and has introduced new initiatives, such as the Direct Express debit
card, which is geared toward Social Security and SSI recipients who do
not have bank accounts. Treasury is also working closely with SSA to
encourage new enrollees, through a newly designed application process,
to receive their benefits electronically. Treasury's Fiscal Years 2003-
2008 Strategic Plan also discusses a cross-cutting objective and
strategy for increasing electronic payments, such as including federal
program agencies as key partners in achieving this goal.[Footnote 5] As
part of implementing this strategy, in 2006 and 2007, Treasury met with
the Chief Financial Officers (CFO) of the largest federal agencies to
discuss issues related to financial management, including electronic
payments. Treasury has also discussed electronic payments with program
staff at these larger federal agencies. However, Treasury has no plans
to conduct this outreach to CFO agencies and other smaller agencies on
a regular basis. More outreach could provide opportunities for Treasury
to further encourage the use of electronic payments and could help
agencies develop solutions to address the challenges or constraints
they face in this area.
This report contains one recommendation to the Secretary of the
Treasury. To help Treasury achieve its goals of increasing the use of
electronic payments and moving to an all-electronic government, we are
recommending that the Secretary direct Treasury's Commissioner of the
Financial Management Service to consider developing a process for
conducting outreach to federal agencies on a more regular basis, with
the goal of identifying opportunities for increasing the use of
electronic payments. For example, Treasury could meet with agency CFOs
or their designees and with staff from smaller agencies, on a
semiannual or annual basis, to discuss challenges that agencies face in
moving to electronic payments and identify actions that Treasury and
agencies could take to facilitate the transition to electronic
payments. We provided a draft of this report to the Secretaries of
Treasury and USDA for review and comment. Officials from Treasury's
Financial Management Service (FMS) noted that Treasury generally agreed
with the report. Treasury did not comment on the recommendation, but
stated that it would address the recommendation in its statement of
actions to congressional committees not later than 60 days after the
date of this report. Officials from USDA's Food and Nutrition Service
stated that they agreed with the overall message of the report.
Treasury and USDA also provided technical comments, which we
incorporated in the report as appropriate.
Background:
Efficient payment systems are important for the smooth functioning of
the large and complex U.S. economy. As the availability and use of
technology evolves, the payment systems at all government levels must
adapt to the changing needs and expectations of individuals,
businesses, and governments. The U.S. Treasury disburses the great
majority of federal government payments, including benefit payments.
Increasingly, in recent years, Treasury has made those disbursements
electronically. Treasury and other federal agencies using electronic
payments have a variety of mechanisms with which to make benefit
payments, including direct deposit, EBT, and other EPCs.
Trends in the Use of Paper Checks and Electronic Payments in the United
States:
In the United States, many payments traditionally made with paper
instruments--checks and cash--are now being made electronically, with
debit or credit cards or via the automated clearinghouse
(ACH).[Footnote 6] Until recently, paper checks accounted for the
majority of noncash payments. A 2002 Federal Reserve Board of Governors
(Federal Reserve) study concluded that the number of checks paid
annually in the United States likely began to decline during the mid-
1990s.[Footnote 7] A 2005 Federal Reserve study stated that the average
annual rate of decline in the number of checks paid is estimated to
have been 3.3 percent between 1995 and 2000 and 4.3 percent between
2000 and 2003.[Footnote 8]
The cumulative effect of the growth in electronic payments has only
recently become large enough to substantially affect the number of
checks paid. By 2003, led by rapid growth in debit card payments, the
number of electronic payments exceeded the number of check payments for
the first time in U.S. history. As of 2006, electronic payments
comprised over two thirds of all noncash payments by number, but less
than half by value.[Footnote 9] Specifically, the number of electronic
payments was 62.7 billion in 2006, with a value of $34.1 trillion,
compared with 30.6 billion checks paid in 2006, with a value of $41.7
trillion. Some of the increase in the use of electronic payments was
due to changes in the financial behavior of consumers and businesses,
particularly their payment instrument choice. For example, electronic
payments have been used more frequently in transactions where checks or
cash may have been used in the past. Many other factors, such as growth
in economic activity and population, may have contributed to the
increase in electronic payments. Figure 1 shows the annual number of
electronic and paper check payments in the United States for selected
years--that is, 1995, 2000, 2003, and 2006.
Figure 1: Annual Number of Electronic and Paper Check Payments in the
United States for Selected Years (1995, 2000, 2003, and 2006):
This figure is a combination vertical bar graph showing the annual
number of electronic and paper check payments in the United States for
selected years, (1995, 2000, 2003, and 2006). The bars represent
electronic and paper check. The X axis represents the year, and the Y
axis represents the number of payments.
Year: 1995;
Number of payments: electronic: 14.7;
Number of payments: paper check: 49.5.
Year: 2000;
Number of payments: electronic: 30.5;
Number of payments: paper check: 41.9.
Year: 2003;
Number of payments: electronic: 44.2;
Number of payments: paper check: 37.3.
Year: 2005;
Number of payments: electronic: 62.7;
Number of payments: paper check: 30.6.
[See PDF for image]
Source: Federal Reserve.
[End of figure]
The large number of electronic payments generally indicates the growing
efficiency of the payment system, according to the 2005 Federal Reserve
study. The processing of paper payments typically requires extensive
physical handling. Automation has created opportunities for depository
institutions and other payment processors not only to introduce new
payment instruments, but also to reduce their costs in processing paper
and electronic payments. Future innovations are expected to continue to
help decrease costs and add value and functionality.
Federal Benefit Payments Made Electronically and by Paper Check:
Treasury's FMS is the primary disburser of payments to individuals and
businesses on behalf of federal agencies. Annually, FMS disburses
almost 1 billion payments, with an associated dollar value of more than
$1.6 trillion. Programs administered by SSA account for the largest
percentage of Treasury-disbursed benefit payments. The majority of
SSA's payments fall under the Old-Age and Survivors Insurance and the
Disability Insurance programs. These programs combined are commonly
referred to as Social Security. In addition, SSA administers the SSI
program. Besides administering payments for SSA, Treasury makes
retirement and compensation payments on behalf of (1) DOL for victims
of black lung disease, (2) the Office of Personnel Management for
retirement benefits for federal employees, (3) the Railroad Retirement
Board (RRB) for retired railroad workers, and (4) VA for benefits paid
to veterans or their survivors. As of fiscal year 2008 (through
January), about 88 percent of all Treasury-disbursed payments are
benefit payments made on behalf of these agencies.
Treasury's use of electronic payments to disburse these benefit
payments has increased significantly over the past decade. As shown in
figure 2, in fiscal year 1996 Treasury disbursed 56 percent of the
total volume of benefit payments electronically compared with 81
percent in fiscal year 2007. As of fiscal year 2008 (through January),
81.6 percent of these benefits were paid electronically. Treasury
experienced the greatest gains in the use of electronic payments
between fiscal years 1996 and 1999, where there were increases of about
5 to 6 percent per year. Beginning in fiscal year 2000, electronic
payment volumes generally increased about 1 percent per year.
Figure 2: Percentage of Treasury-Disbursed Benefits That Were Made
Electronically, Fiscal Years 1996 through January 2008:
This figure is a line graph showing percentage of treasury-disbursed
benefits that were made electronically, fiscal years 1996 through
January 2008. The X axis represents the fiscal year, and the Y axis
represents the percentage.
Fiscal year: 1996;
Percentage: 56%.
Fiscal year: 1997;
Percentage: 62%.
Fiscal year: 1998;
Percentage: 68%.
Fiscal year: 1999;
Percentage: 73%.
Fiscal year: 2000;
Percentage: 75%.
Fiscal year: 2001;
Percentage: 76%.
Fiscal year: 2002;
Percentage: 77%.
Fiscal year: 2003;
Percentage: 77%.
Fiscal year: 2004;
Percentage: 78%.
Fiscal year: 2005;
Percentage: 79%.
Fiscal year: 2006;
Percentage: 80%.
Fiscal year: 2007;
Percentage: 81%.
Fiscal year: 2008 (Jan.);
Percentage: 81.6%.
[See PDF for image]
Source: Department of the Treasury, Financial Management Service.
[End of figure]
Methods That Federal Agencies Use to Disburse Benefits Electronically:
Federal agencies use several electronic methods, some dating to the
1970s, to distribute recurring benefits and payments to individuals. As
originally implemented, direct deposit is the electronic transfer of a
benefit or other type of payment into a checking, share draft, savings,
or prepaid card account. However, this option could only be used for
delivering benefits when a benefit recipient who has a bank account
chooses to authorize direct deposit. Technological advances in the way
EFT works now allow for direct deposit to payroll and other types of
prepaid debit cards that are not tied to an individual account in the
name of the cardholder, but rather draw funds from a pooled account
that may hold money belonging to thousands of cardholders. Federal
programs, such as Social Security, SSI, Railroad Retirement, Veterans
Benefits, and Civil Service Retirement, have used direct deposit since
as early as 1976.
The DCIA instructed Treasury to ensure that individuals have access to
an account at a financial institution, that such an account have the
same consumer protections provided to other account holders, and that
the account be provided at a reasonable cost.[Footnote 10] In a
variation of direct deposit, Treasury designed the Electronic Transfer
Account (ETA) in July 1999 to ensure that individuals who receive a
federal benefit, wage, salary, or retirement payment have access to a
federally insured account.[Footnote 11] According to Treasury, at the
time of our review, there were currently about 90,000 active ETA
accounts.
In addition to methods that link and distribute benefits to a bank or
other account, the federal government uses a variety of disbursement
options that employ cards. For example, the primary delivery vehicles
for food stamp payments are EBT cards. Food stamp recipients use a
debit-type card that allows them to access their food stamp benefits at
point-of-sale (POS) terminals in USDA-authorized retail grocers. The
EBT cards are industry-standard magnetic stripe debit cards that are
protected by using an industry-standard personal identification number
(PIN). These cards are not tied to a consumer asset account, and
generally the account structures and processing requirements differ
from other payment cards. EBT cards can be used to deliver benefits to
banked and unbanked recipients and also can be used to deliver multiple
benefits using a single card. EBT works well when the benefit form is
noncash and when access to benefits are limited to certain locations,
like food retailers.
Other types of cards can be used for multiple functions or at a wide
variety of retail locations. For example, EPCs can be employed to
deliver benefit payments to banked and unbanked recipients. One EPC can
be used to deliver multiple payments to the cardholder--for example,
enabling the cardholder to receive both state and federal payments.
Depending on the structure and enrollment criteria of programs, EPCs
also can be used to receive direct deposit of payroll or other
nongovernment payments. Some EPCs are debit cards tied to a cardholder-
owned account, while others are prepaid or stored-value cards tied to
an aggregated account that is not cardholder owned. The stored-value
card allows a prepaid balance of funds to be recorded electronically on
a card. Both types of EPCs can support government payment needs. The
debit cards use magnetic stripe technology and can be processed online
or offline. An online transaction results in the immediate electronic
transfer of funds and requires the use of a PIN to authorize the
transaction. With an offline transaction, a hold is placed against the
buyer's account for the amount of the transaction, but the settlement
is not made immediately. Offline debit transactions can be signature-
based--that is, they require the customer to sign a receipt--or PIN-
secured. Embedded computer chips can turn stored-value cards into
"smart cards" that store cardholder information. Smart cards are
considered offline systems because they do not have a real-time
connection to a host processing system that authorizes the transaction.
Transaction authorization and PIN verification occur in communications
between the chip and a smart card "reader" at the POS. Furthermore,
EPCs can be "branded" or "nonbranded." Branded cards have a MasterCard,
American Express, Discover, or Visa logo and allow cardholders to
conduct signature-based transactions anywhere that those brands are
accepted as well as at ATM and POS machines. Nonbranded cards allow PIN-
based transactions only through POS or ATM networks.
Federal Government Benefit Programs:
Federal benefit programs generally are any such programs administered
or funded by the federal government, or by any agent or state on behalf
of the federal government, that provide cash or in-kind assistance in
the form of payments, grants, loans, or loan guarantees to individuals.
Government assistance programs can be critically important to the well-
being of individuals and their families. A variety of benefit programs
exist for veterans, seniors, students, children, people with
disabilities, dependents, disaster victims, farmers, caregivers, and
others. As discussed more fully in appendix I, for this review, we
identified and analyzed data for 42 federal benefit programs that
provided recurring payments to individuals. These programs are under
the purview of 11 federal agencies, including SSA, DOL, USDA, and HHS,
among others. The types of federal programs that we identified included
food and nutrition assistance programs, training and education
assistance programs, and income support programs.
Most Programs We Surveyed Used Electronic Methods to Distribute
Benefits, but Data on the Extent of Use Are Limited:
Our survey of 42 federal benefit programs showed that the majority of
these programs were using electronic payments to deliver benefits to
recipients. In some cases, the programs used more than 1 type of
electronic payment. However, 6 programs indicated that they did not use
electronic payments, and that they disbursed benefit payments by paper
check. Eighteen of the 42 programs we surveyed provided data we needed
to compute the percentage of payments made electronically. Of these 18
programs, the percentage of payments made electronically ranged from
about 5 to 100 percent. Some programs were unable to provide us with
data because they are federal benefit programs administered by states.
Thus, data are collected by individual states and are not available at
the federal level.
Most Programs We Surveyed Used Electronic Payment Methods to Distribute
Benefits, but a Small Number of Programs Did Not:
Of the 42 programs we surveyed, 34 programs (81 percent) indicated that
they used electronic payment methods to distribute benefits to
recipients; 6 programs indicated they did not use electronic payments;
and 2 programs indicated that they were unsure whether they used
electronic payments. Of the 34 programs that used electronic payments,
20 programs were administered at the federal level--as opposed to the
state agency level--and about half of the 34 programs paid cash
benefits to recipients on a monthly basis. In addition, 16 of the 34
programs using electronic payments were needs-based programs, which
require recipients to meet some qualifications on the basis of factors
such as income, familial status, or household size.
As shown in more detail in appendix II, 31 of the 34 programs that used
electronic payments provided data on the number of recipients in the
program, and 30 of the 34 programs provided data on the total dollar
value of benefits made to recipients in the program in fiscal year
2006. More specifically, 16 of the 34 programs that used electronic
payments indicated there were fewer than 1 million recipients in the
program in fiscal year 2006. Two programs--Food Stamp and Social
Security Retirement Insurance--reported having 26.7 million and 33.9
million recipients, respectively, in fiscal year 2006. The remaining
programs that used electronic payments reported having between 1
million and 9 million recipients.[Footnote 12] In addition, 7 of the 34
programs that used electronic payments indicated that the total dollar
value of payments made to recipients in fiscal year was less than $20
million. Fifteen programs reported disbursing $100 million to $10
billion in benefit payments in fiscal year 2006, and the remaining
programs that used electronic payments disbursed more than $10 billion
in benefit payments during the same year. The largest program we
surveyed, in terms of dollar value of benefit payments, was the Social
Security Retirement Insurance program, which distributed $418 billion
in benefit payments in fiscal year 2006.[Footnote 13]
The programs used a variety of electronic payment options for
delivering the benefits. For example, 25 programs distributed benefits
through direct deposit; 9 programs used EBT; and 8 programs used
another type of EPC, such as the debit card. However, some programs
used more than 1 type of electronic method. The Low Income Home Energy
Assistance Program, for example, indicated that it used 3 electronic
payment options--direct deposit, EBT card, and debit card.
Most of the 34 programs that made electronic payments indicated that
they did so for a majority of their recipients. About 59 percent of the
programs that responded to the question (20 of 34) indicated that all,
almost all, or most of their recipients received payments through
electronic methods. Twenty-three programs (68 percent of those who
responded to the question) indicated that about half or more of their
recipients received payments electronically.
Although most of the programs we surveyed used an electronic payment
method, the following 6 programs indicated that they did not use an
electronic payment method to distribute benefits, and that they
delivered benefits using paper checks:
* Women, Infants, and Children Farmers' Market Nutrition Program:
* Survivors and Dependents Educational Assistance:
* Post-Vietnam Era Veterans' Educational Assistance:
* Indian Employment Assistance:
* Indian Job Placement United Sioux Tribe Development Corporation:
* Indian Social Services Welfare Assistance Program:
These 6 programs each had fewer than 3 million recipients in fiscal
year 2006 and expended less than $500 million in benefit payments that
year. [Footnote 14] Four programs had fewer than 100,000 recipients in
fiscal year 2006. The Women, Infants, and Children Farmers' Market
Nutrition Program had about 2.5 million recipients. In addition, 4
programs expended less than $100 million in fiscal year 2006, but the
Survivors and Dependents Educational Assistance program expended about
$495 million in benefit payments. All 6 programs provided cash benefits
to recipients; however, the frequency of payments made to the
recipients varied. For example, 3 programs paid benefits monthly, 2
programs paid benefits annually, and 1 program distributed benefits on
a quarterly basis. See appendix II for selected information on the 42
programs we surveyed.
Limited Data on the Percentage of Payments Made Electronically Were
Available:
Eighteen of the 42 programs we surveyed were able to provide specific
data that would allow us to calculate the percentage of the total
dollar value of payments that were made electronically (see fig. 3). Of
these 18 programs, the percentage of payments made electronically
ranged from about 5 to 100 percent. One reason for some programs'
inability to provide data was that they are federal benefit programs
administered by states. Thus, data were collected by individual states
and were not available at the federal level. Other reasons for the
programs not being able to provide the data included their not being
able to disaggregate payment data or collect payment data by type of
payment.
Eight of these 18 programs reported having made 100 percent of their
payments electronically (see fig. 3). However, 6 of these programs are
education assistance programs, which may pay benefits directly to an
educational institution, rather than to an individual. For example, the
Nurse Anesthetist Traineeships, Scholars and Fellows, and Minority
Faculty Fellowship programs indicated that they distribute their
benefits directly to universities or training providers by electronic
means. The remaining 2 programs that reported making 100 percent of
their payments electronically were USDA's Nutrition Assistance for
Puerto Rico and Food Stamp programs.
Figure 3: Total Dollar Value and Percentage of Payments That Were Made
Electronically for 18 Programs We Surveyed:
Agency: Education;
Total dollar value of benefit payments (FY 2006): $1,305,357,374;
Name of program: Leveraging Educational Assistance Partnership;
Percentage of payments made electronically: 4.9%.
Agency: SSA;
Total dollar value of benefit payments (FY 2006): $41,547,968,487;
Name of program: Supplemental Security Income;
Percentage of payments made electronically: 53.8%.
Agency: DOL;
Total dollar value of benefit payments (FY 2006): $625,000,000;
Name of program: Coal Mine Workers' Compensation;
Percentage of payments made electronically: 60.0%.
Agency: Justice;
Total dollar value of benefit payments (FY 2006): $882,015;
Name of program: Public Safety Officers' Educational Assistance;
Percentage of payments made electronically: 67.7%.
Agency: SSA;
Total dollar value of benefit payments (FY 2006): $77,846,049,345;
Name of program: Social Security Disability Insurance;
Percentage of payments made electronically: 76.7%.
Agency: SSA;
Total dollar value of benefit payments (FY 2006): $418,056,535,776;
Name of program: Social Security Retirement Insurance;
Percentage of payments made electronically: 87.9%.
Agency: RRB;
Total dollar value of benefit payments (FY 2006): $9,934,658,062;
Name of program: Social Insurance for Railroad Workers;
Percentage of payments made electronically: 88.0%.
Agency: VA;
Total dollar value of benefit payments (FY 2006): $1,995,531,647;
Name of program: All-Volunteer Force Educational Assistance;
Percentage of payments made electronically: 91.6%.
Agency: USDA;
Total dollar value of benefit payments (FY 2006): $351,601,585;
Name of program: Milk Income Loss Contract Program;
Percentage of payments made electronically: 95.9%.
Agency: SSA;
Total dollar value of benefit payments (FY 2006): $15,247,594;
Name of program: Special Benefits for Certain World War II Veterans;
Percentage of payments made electronically: 98.9%.
Agency: USDA;
Total dollar value of benefit payments (FY 2006): $30,187,346,987;
Name of program: Food Stamp;
Percentage of payments made electronically: 100.0%.
Agency: HHS;
Total dollar value of benefit payments (FY 2006): $1,250,000;
Name of program: Nurse Anesthetist Traineeships;
Percentage of payments made electronically: 100.0%.
Agency: Education;
Total dollar value of benefit payments (FY 2006): $240,000,000;
Name of program: Academic Competitiveness Grants;
Percentage of payments made electronically: 100.0%.
Agency: HHS;
Total dollar value of benefit payments (FY 2006): $1,067,968;
Name of program: Disadvantaged Health Professions Faculty Loan
Repayment;
Percentage of payments made electronically: 100.0%.
Agency: USDA;
Total dollar value of benefit payments (FY 2006): $1,412,694,137;
Name of program: Nutrition Assistance for Puerto Rico;
Percentage of payments made electronically: 100.0%.
Agency: DHS;
Total dollar value of benefit payments (FY 2006): $10,200,000;
Name of program: Nutrition Assistance for Puerto Rico;
Percentage of payments made electronically: 100.0%.
Agency: Transportation;
Total dollar value of benefit payments (FY 2006): $722,516;
Name of program: Scholars and Fellows;
Percentage of payments made electronically: 100.0%.
Agency: HHS;
Total dollar value of benefit payments (FY 2006): $108,786;
Name of program: State Maritime Schools;
Percentage of payments made electronically: 100.0%.
[See PDF for image]
Source: GAO analysis of responses to a survey of federal benefit
programs.
[End of figure]
While most programs we surveyed used electronic means, many programs
indicated that they used paper checks to distribute benefits. Thirteen
of the 42 programs provided sufficient data that would allow us to
calculate the percentage of the total dollar value of payments paid by
paper check (see fig. 4). For those 13 programs, the percentage of
payments made by paper check ranged from about 1 to 100 percent. Of
these 13 programs, 9 distributed less than half of the total dollar
value of benefit payments by paper check. The remaining 4 programs
distributed 100 percent of their benefit payments by paper check.
Figure 4: Total Dollar Value and Percentage of Payments That Were Made
by Paper Check for 13 Programs We Surveyed:
Agency: SSA;
Total dollar value of benefit payments (FY 2006): $15,247,594;
Name of program: Special Benefits for Certain World War II Veterans;
Percentage of payments made by paper check (FY 2006): 1.1%.
Agency: USDA;
Total dollar value of benefit payments (FY 2006): $351,601,585;
Name of program: Milk Income Loss Contact Program;
Percentage of payments made by paper check (FY 2006): 4.1%.
Agency: VA;
Total dollar value of benefit payments (FY 2006): $1,995,531,647;
Name of program: All-Volunteer Force Educational Assistance;
Percentage of payments made by paper check (FY 2006): 8.4%.
Agency: RRB;
Total dollar value of benefit payments (FY 2006): $9,934,658,062;
Name of program: Social Insurance for Railroad Workers;
Percentage of payments made by paper check (FY 2006): 12.0%.
Agency: SSA;
Total dollar value of benefit payments (FY 2006): $418,056,535,776;
Name of program: Social Security Retirement Insurance;
Percentage of payments made by paper check (FY 2006): 12.1%.
Agency: SSA;
Total dollar value of benefit payments (FY 2006): $77,846,049,345;
Name of program: Social Security Disability Insurance;
Percentage of payments made by paper check (FY 2006): 23.3%.
Agency: Justice;
Total dollar value of benefit payments (FY 2006): $882,015;
Name of program: Public Safety Officers' Educational Assistance;
Percentage of payments made by paper check (FY 2006): 31.9%.
Agency: DOL;
Total dollar value of benefit payments (FY 2006): $625,000,000;
Name of program: Coal Mine Workers' Compensation;
Percentage of payments made by paper check (FY 2006): 40.0%.
Agency: SSA;
Total dollar value of benefit payments (FY 2006): $41,547,968,487;
Name of program: Supplemental Security Income;
Percentage of payments made by paper check (FY 2006): 46.2%.
Agency: USDA;
Total dollar value of benefit payments (FY 2006): $18,400,000;
Name of program: WIC Farmer's Market Nutrition Program;
Percentage of payments made by paper check (FY 2006): 100.0%.
Agency: VA;
Total dollar value of benefit payments (FY 2006): $494,909,355;
Name of program: Survivors and Dependents Educational Assistance;
Percentage of payments made by paper check (FY 2006): 100.0%.
Agency: VA;
Total dollar value of benefit payments (FY 2006): $1,034,991;
Name of program: Post-Vietnam Era Veterans' Educational Assistance;
Percentage of payments made by paper check (FY 2006): 100.0%.
Agency: Interior;
Total dollar value of benefit payments (FY 2006): $80,000,000;
Name of program: Indian Social Services Welfare Assistance;
Percentage of payments made by paper check (FY 2006): 100.0%.
[See PDF for image]
Source: GAO analysis of responses to a survey of federal benefit
programs.
[End of figure]
Agencies Consider Various Factors When Implementing or Encouraging the
Use of Electronic Payments:
Federal and state agencies, industry representatives, and others widely
agree on the advantages of electronic payments, including timely
payments for recipients and reduced costs for agencies. However,
agencies also consider other factors, such as certain perceived
disadvantages, program characteristics, costs and efficiencies, and
security risks, when determining whether and how to implement
electronic payments or when encouraging the increased use and
acceptance of electronic payments among recipients and the public.
Many Recognize the Advantages of Electronic Payments, but Agencies Also
Consider Perceived Disadvantages When Implementing Electronic Payments:
According to agency officials, industry representatives, and consumer
groups, the use of electronic methods to make benefit payments has
advantages for the recipient. For example, according to agency
officials, electronic payments are secure and reliable because they use
the ACH network to deliver payment. According to Treasury, ACH provides
the recipient with a secure, dependable, and efficient way to receive
payments. Recipients can also receive their payments more quickly.
Benefit payments are deposited on a specific date, and recipients no
longer have to wait in line to pick up a check or wait for it to arrive
in the mail. Benefits paid electronically are also more easily replaced
if lost or stolen. Treasury officials explained that if a check were
stolen, it might take as long as several months to replace a claimant's
check; in contrast, if an electronic payment file were lost or
misdirected, replacement funds could be provided electronically on the
same or the next day. Also, recipients can purchase products as needed
without forfeiting unused benefits. For example, the vast majority of
benefits under USDA's WIC program are issued using paper checks or
vouchers, but certain states are piloting or have implemented WIC EBT,
which is an electronic method for distributing WIC benefits. When the
WIC program uses paper vouchers, recipients have to purchase all food
items listed on their voucher at one time. With WIC EBT, however,
recipients can buy as much or as little of their authorized food
prescription at any time during the authorized benefit period, and the
EBT system automatically manages expiration of any unused benefits.
According to a consumer group representative, electronic payments offer
other advantages, including convenience and the ability to withdraw
funds in small increments to prevent the need for recipients to carry
around large sums of cash. Finally, electronic payment methods can
provide intangible benefits. According to agency and industry
representatives, EBT cards reduced the stigma associated with using
food stamp coupons or vouchers. Representatives from one industry group
stated that recipients involved in focus groups stated that using the
EBT card gave them a sense of pride. Furthermore, an evaluation of the
EBT system in one state indicated that substantial majorities of
recipients, retailers, and financial institutions prefer the EBT system
to the check or coupon system.
However, certain bank and automated teller machine (ATM) fees
associated with electronic payments may increase the cost of using
electronic payments, especially for recipients with precarious
financial circumstances or low account balances. Minimum balance
requirements for bank accounts may pose a hindrance for recipients,
according to agency officials, because financial institutions may
impose fees when the account balances fall below the minimum
requirement. Also, according to agency officials and a consumer group
representative, ATM withdrawal fees can increase the costs of using an
electronic payment, especially when out-of-network ATMs are used.
Financial institutions are permitted to impose fees for overdrawn
accounts, which may affect recipients who may not be financially savvy
or who have precarious financial circumstances, according to agency
officials and a consumer group representative. Furthermore, recipients
residing in rural or remote areas often lack access to financial
services, making the delivery of benefits to a bank account or on an
EPC more challenging. For example, agency officials stated that many
businesses in rural areas, particularly those on Indian reservations,
do not accept debit cards. In addition, agency officials explained that
remote Indian reservations and Alaska Native communities may lack the
infrastructure (e.g., telephone lines and the Internet) needed to
implement electronic payments, and not all reservations have access to
banks and ATMs.
Certain recipients may face specific challenges in obtaining electronic
payments or using cards to access benefits. For example, some SSI and
VA recipients have mental or physical disabilities that could hinder
their ability to manage a bank account for direct deposit of their
benefits. Also, because many SSI recipients have an individual
appointed to manage their benefit payments due to the nature of their
disabilities, the use of electronic payments can pose challenges
relating to titling of accounts. Moreover, dexterity and visual
challenges that elderly recipients or recipients with disabilities face
also can make it difficult to use an EPC. In addition to issues related
to physical and mental disabilities, according to VA officials, some
older veterans from the World War II and Vietnam War eras simply
distrust the government and would prefer to receive a paper check.
Certain banking practices and varying levels of consumer protection may
hinder the acceptance of electronic payments by some consumer group
representatives and recipients. Although some federal benefits are
generally exempt from garnishment, a consumer group representative with
whom we spoke was concerned that banks did not distinguish exempted
funds when processing a garnishment order. Certain federal benefit
payments--such as Social Security, SSI, and veterans' benefits, which
are generally exempt under federal law from garnishment and the claims
of judgment creditors[Footnote 15]--often constitute an important part
of, and sometimes all of, a recipient's income. As a result, when
financial institutions receive garnishment orders and place freezes on
accounts containing exempt federal benefit funds pending resolution of
the garnishment process, the recipients of these funds can face
significant hardship. At the same time, financial institutions are
required by state law to comply with garnishment orders, which may
necessitate placing a freeze on an account that contains federal
benefit payments. According to the consumer group representative,
payments drawn on an account before the recipient becomes aware that
the account was frozen are returned to the bank unpaid, and the bank
assesses fees for those returned items, which are also taken from the
recipient's account. The representative stated that this practice
causes a hardship for low-income, elderly, and disabled Social Security
recipients. Also according to this representative and an agency
official, some recipients make a deliberate decision to receive a paper
check, rather than to sign up for direct deposit, so that their
benefits will not be garnished.
Treasury officials acknowledged concerns related to the garnishment of
benefits, and stated that Treasury is working with banking regulators
to determine how best to segregate funds in bank accounts to address
such issues. On September 28, 2007, the federal financial institution
regulatory agencies issued proposed guidance to encourage financial
institutions to have policies and procedures in place regarding the
handling of garnishment orders.[Footnote 16] The agencies developed the
proposed guidance to address concerns associated with the garnishment
of exempt federal benefit payments, and to encourage financial
institutions to minimize the hardships encountered by federal benefit
recipients while remaining in compliance with applicable law. Among the
practices included in the proposed guidance are that a financial
institution should:
* promptly determine if an account contains only exempt federal benefit
funds,
* promptly notify a consumer when receiving a garnishment order and
placing a freeze on the consumer's account,
* minimize the cost to the consumer when the account containing exempt
funds is frozen by refraining from imposing overdraft or insufficient
funds fees or by refunding such fees when the freeze is lifted, and:
* offer consumers segregated accounts containing only federal benefit
funds without commingling other funds.
Treasury officials stated that they recognized the concerns of many
benefit recipients that their federal benefit payments may be garnished
in violation of federal law. Treasury has a new payment option that may
help to address this issue--the Direct Express card, which is more
fully discussed later in this report. According to Treasury, this card
has no monthly fee and many free services, and, because only federal
benefit payments may be deposited on the card, there should not be any
confusion concerning whether an individual's money is generally
protected from garnishment in accordance with federal law.
Consumer groups have also raised concerns about the varying levels of
consumer protection offered to recipients receiving benefits through
different electronic methods. According to consumer group
representatives with whom we spoke, consumer protections are not the
same for recipients using EPCs. Regulation E, the implementing rule of
the Electronic Fund Transfer Act,[Footnote 17] establishes protections
for individuals engaging in electronic fund transfers and applies to
any electronic fund transfer that authorizes a financial institution to
debit or credit a consumer's account.[Footnote 18] However, Regulation
E does not apply to needs-tested benefits in a program established
under state or local law or administered by a state or local
agency.[Footnote 19]
According to USDA officials, EBT cards that are used to deliver food
stamp and other cash benefits administered by the states, such as
Temporary Assistance for Needy Families (TANF), are exempt from
Regulation E requirements. Recipients using these cards, for example,
may not be compensated for benefits that might have been used by an
unauthorized individual, according to consumer group representatives.
Although such EBT cards are not covered by Regulation E, an industry
representative told us that some benefit programs have requirements for
dispute resolution. For example, USDA has dispute resolution
requirements for food stamp EBT transactions that were perceived by the
official to be in the best interest of the beneficiary.
Noncash or Service Delivery Programs May Require More Planning and
Consideration When Implementing Electronic Payment Methods:
Certain programs have characteristics that make implementing or
expanding electronic payments more complicated. According to agencies
and industry representatives, programs that distribute cash benefits
can be easily converted to electronic payments. However, noncash or
service delivery programs can present more complex planning and
technology challenges. For example, WIC benefits are not cash, but a
food "prescription," that provides certain nutritional items tailored
to the needs of the individual recipient that only can be obtained at
authorized retailers. Challenges to the electronic distribution of WIC
benefits include keeping the database of universal product codes (UPC)
updated, because the codes are needed to identify eligible food items.
USDA is currently working to implement, and some states have
volunteered to pilot, a national UPC database that would allow agencies
and food manufacturers to enter product information into the database.
A workgroup of state agencies, food retailers, and food manufacturers
was convened to assist in identifying and resolving critical issues
associated with the database.
Another challenge to distributing WIC benefits electronically is
processing the different types of WIC EBT transactions. For example,
some states use an "online" EBT card with the magnetic stripe, and
other states use the "offline" EBT card with the circuit chip. USDA
officials stated that USDA is working with retailers to update their
existing cash register systems so they can process both types of EBT
cards used by state agencies. Furthermore, according to USDA officials,
not having a common set of standards for transaction processing to
govern WIC EBT transactions poses a challenge. Therefore, USDA works
with retailers, industry representatives, and state agencies in an
effort to develop standards that will lay the groundwork for nationwide
WIC EBT. According to USDA officials, USDA has worked with Accredited
Standards Committee X9, Inc., which is an American National Standards
Institute accredited standards developing organization, to define
common processes for WIC EBT transactions processed using both online
and offline EBT cards and is working with certain states to develop
standard practices for WIC EBT transactions, such as setting standards
for the type of information that should be on a WIC EBT receipt.
The Trade Adjustment Assistance (TAA) program administered by DOL,
which provides assistance to individuals adversely affected by
increased imports to help them obtain suitable employment, is composed
of an income-assistance component and service-delivery components. The
income-assistance component of the benefit, called Trade Readjustment
Allowance (TRA), is provided to individuals in the form of a monetary,
or cash, payment. One of the service-delivery components of the benefit
provides assistance for education or training in the form of vouchers.
Officials in one state have explored ways to implement an electronic
solution for training vouchers issued through the TAA program.
Officials we interviewed in other states stated they had successfully
implemented or planned to implement an electronic payment option for
the TRA cash benefit. For example, almost all TRA benefits in Minnesota
are disbursed using a debit card or direct deposit, and state officials
in Georgia stated that they have successfully delivered TRA benefits
through direct deposit since 1999. State officials we interviewed in
California stated that they were considering issuing TRA benefits using
a debit card.
Payments for programs, such as unemployment insurance and Social
Security, that do not restrict how or where funds are used can be made
through many types of electronic methods. Treasury officials stated
that one method--EBT--is a better option for programs with restrictions
such as the Food Stamp Program, which only can be redeemed for eligible
food items at authorized locations. According to a paper published by
NACHA--The Electronic Payments Association, EBT is generally most
effective as a payment solution when the transfer of value involves
requirements specific to program policy or unique recipient needs that
differentiate it from a simple payment product. [Footnote 20] One
industry representative with whom we met stated that if a benefit
program has rules restricting how the benefits are accessed and used,
then it needs an EBT solution. If the benefits are unrestricted, then
other payment cards work well. Another industry representative also
stated that if a benefit payment is strictly cash, then EBT is not the
best option; rather, EPCs are better for benefits that include cash
payments.
Along with the type of benefit, agencies also consider how to meet the
needs of various stakeholders when deciding to implement an electronic
payment solution. For example, USDA officials stated that they had to
consider the impact of WIC EBT on grocers and retailers to develop a
system that would meet the needs of all users. Agency officials in one
state told us that they conducted focus groups with local health
clinics, grocers, WIC recipients, and the advocacy community to obtain
input from all stakeholders prior to implementing WIC EBT. Stakeholder
reluctance, on the other hand, can inhibit federal programs from
implementing electronic payments or prolong the development of an
electronic payment mechanism. For example, an industry representative
we interviewed explained that one state opposed the interoperability of
EBT among states because it did not get the additional revenue from
sales taxes when its EBT customers purchased food items from a
bordering state with no sales tax.[Footnote 21]
Up-front and Operating Costs Can Be Deciding Factors When Implementing
Electronic Payment Systems:
Typically, it costs less to issue an electronic payment than to issue a
paper check. Treasury estimated that in fiscal year 2007, a check
payment cost the federal government $0.979 and an electronic payment
cost $0.099. According to Treasury, the government could have
potentially realized an annualized cost savings in fiscal year 2007 of
more than $189 million for all check payments that could have been paid
electronically. State agencies have also cited cost reduction and
efficiency as key reasons for implementing electronic payments. For
example, electronic payments eliminate check ordering, storage,
printing, and postage costs for the agency. The use of electronic
payments also reduces paperwork and other administrative processes for
the agency.
According to some state agency officials and industry representatives,
cost savings and efficiency are only fully realized when 100 percent of
payments are disbursed electronically. For example, an industry
representative stated that the benefits of electronic payments are
realized when paper checks are eliminated; that is, when there is no
need for any type of infrastructure to distribute and process checks.
Another industry representative with whom we spoke also stated that, in
the long run, as fewer and fewer paper checks are printed, the cost per
check will continue to increase because there will be fewer economies
of scale. According to this representative, true efficiencies would be
realized only when checks are no longer used. Officials in one state
agency stated that providing recipients with benefits by paper check
was not an option because the agency would need two parallel payment
systems to accomplish one task, which would not be cost-effective. In
response to these officials' and representatives' statements, Treasury
stated that it maintains a check payment system in addition to its
electronic payment options. One of the reasons that Treasury maintains
its check payment system is to make payments to recipients without bank
accounts, or unbanked recipients. According to Treasury, approximately
4 million recipients of Social Security and SSI benefits are unbanked,
and there has been no widely used national initiative to deliver
electronic payments to unbanked recipients.[Footnote 22] Furthermore,
electronic payments to the unbanked are not mandated. According to
Treasury, the savings from making an electronic payment compared with
making a check payment will continue to be realized as check costs rise
due to postage increases and other cost increases, such as paper and
envelopes.
However, cost can be a deciding factor in implementing or choosing
between electronic payment methods, according to agency officials.
According to some agency officials with whom we spoke, implementing
electronic payments for a benefit program is resource-driven. To
accomplish electronic payments, agencies need funding and staff.
According to BIA officials, some Indian reservations and Alaska Native
communities would have difficulty bearing the costs associated with
administering and maintaining an electronic system. An industry
representative with whom we spoke explained that a primary cost of
implementing electronic payments is associated with modifying software,
planning meetings to discuss technical and operational aspects of the
project, and training staff. Agency officials explained that before
implementing electronic payments for a specific program, they have to
consider the cost-effectiveness of doing so. For example, the current
payment system for the Veterans Education Assistance Program is not
capable of generating electronic payment files and would have to be
redesigned to accommodate this feature. Fewer than 500 individuals are
eligible to receive benefits under this program, and the number of
eligible recipients is declining. Therefore, VA officials stated that
the benefits they would realize from implementing electronic payments
for this program would not outweigh the associated up-front costs.
Other agency officials echoed VA's sentiment, stating that it is
sensible for an issuer to use electronic payments to make large numbers
of payments. However, if the issuer were making only a small number of
payments, it might be more advantageous for it to issue paper checks.
Small or low-volume programs were not the only ones that cited up-front
costs as a challenge to the electronic delivery of benefits. The WIC
program has had difficulty finding an electronic payment model that can
provide effective services at a reasonable cost. For example, a WIC EBT
system requires sophisticated POS devices that can identify and sort
foods by category and amount. Also, according to a USDA official, the
WIC program does not have much funding for development of new payment
systems. For example, an early attempt at WIC EBT in the New England
region was inhibited by, among other things, up-front costs borne by
the WIC program. In another example, USDA terminated a WIC EBT pilot in
Ohio due to the high costs associated with the monthly caseload. USDA
officials explained that states have to be able to afford to operate
the WIC EBT program within the administrative funding amount provided
annually. According to USDA, if Ohio had expanded its WIC EBT pilot
statewide, the costs would have been too expensive to operate, given
the amount of funding the state received to administer the program.
However, according to USDA officials, other states have successfully
implemented WIC EBT within the cost restraints of the program. For
example, Wyoming was the first state to implement WIC EBT statewide in
January 2002, and New Mexico implemented WIC EBT statewide in December
2007.[Footnote 23] Texas and Michigan are currently in the process of
implementing WIC EBT statewide and expect to be fully implemented by
early 2009. USDA also provides grants to states to assist with
implementing WIC EBT. According to USDA officials, they give priority
to states that are piloting WIC EBT. In 2007, USDA also offered
preplanning awards for states that expressed an interest in using WIC
EBT. States can use the preplanning grant funds to conduct feasibility
studies for implementing WIC EBT, among other things.
According to USDA officials, a thorough cost evaluation is needed
before a state agency can determine whether it can afford the ongoing
cost of WIC EBT within its nutrition services and administration
budget. USDA officials stated that many factors impact the
affordability of WIC EBT. Because each state agency has discretion in
how it operates its WIC program and designs its paper benefit delivery
system, costs vary from state to state. This cost variation, in turn,
makes it difficult to assess the affordability of EBT across all
states. Each state agency must assess whether it can find savings by
replacing current paper-based systems with electronic benefit delivery
systems. For example, if a state agency's banking costs for processing
paper food instruments is high, elimination of that cost may help
offset the cost of EBT. Furthermore, states that can process EBT
transactions using state resources, rather than hiring an EBT
processor, may experience a lower EBT cost than state agencies that
must pay ongoing processor fees.
Furthermore, although different electronic payment methods can appear
to be equally cost-efficient and feasible to implement, they may
present different operational costs. Generally, state agencies bear the
cost of making payments using EBT because they pay a fixed cost to the
EBT provider on the basis of the number of households that receive a
benefit allotment in a given month. Payment providers can provide other
payment cards at no cost to the state agency because they can gain
revenue from the transaction in the form of interchange or other
transaction fees (e.g., ATM withdrawal fees) paid by the retailer or
the card user. An industry representative stated that, at one time, EBT
was a good means for distributing cash payments to beneficiaries, but
now the current trend is for programs that distribute cash benefits to
provide beneficiaries with branded EPCs that function like debit cards.
The administering agency must pay a monthly fee for each individual
that uses an EBT card. However, with branded EPC cards, the
administering agency may not be responsible for a monthly fee because
the card issuer (e.g., VISA or MasterCard) collects a portion of the
interchange fees.
Although Electronic Payments Have Security and Audit Features, Agencies
Consider Fraud Risks and System Vulnerabilities When Using Electronic
Payment Methods:
Electronic payments can help reduce certain risks associated with a
paper environment, including fraud and payment system vulnerabilities,
but risks continue to exist in an electronic environment. In an effort
to bolster information system security in the federal government,
Congress passed the Federal Information Security Management Act of
2002,[Footnote 24] which authorized and strengthened information
security program, evaluation, and annual reporting requirements for
federal agencies. Virtually all federal operations are supported by
automated systems and electronic data, and agencies would find it
difficult, if not impossible, to carry out their missions and account
for their resources without these information assets. Therefore, it is
important for agencies to safeguard their systems against risks such as
loss or theft of resources (such as federal payments and collections),
modification or destruction of data, and unauthorized uses of computer
resources. According to agency officials and industry representatives,
risks associated with an agency's payment system exist regardless of
the method used to distribute benefits. As agencies implement
electronic methods for distributing benefit payments, they should be
aware of how susceptible to risk the payment system is and how risks
may change in an electronic environment.
To assist agencies in providing adequate security, the federal
government and the electronic payments industry have developed
standards for EBT and other types of EPCs. Federal rules and
regulations resulting from the Personal Responsibility and Work
Opportunity Reconciliation Act of 1996, which mandated nationwide EBT
issuance of food stamp benefits, established technical standards for
processing EBT transactions. Also, the Quest Operating Rules, which set
forth the requirements for the distribution of government benefits
under the Quest service mark, provide technical standards for the
exchange and processing of EBT transactions.[Footnote 25] Adherence to
the Quest Operating Rules is optional, and states that have not adopted
these rules operate under state-specific rules. According to USDA
officials, whether or not states adopt the Quest Operating Rules, they
must follow the standards and regulations established by various
federal rules governing food stamp EBT transactions, which include
compliance with applicable standards developed by the American National
Standards Institute and the International Organization for
Standardization. In addition, the Payment Card Industry (PCI) Data
Security Standard, which major credit card companies developed to help
organizations that process card payments prevent credit card fraud and
various other security vulnerabilities and threats, provides a set of
comprehensive requirements for enhancing payment account data
security[Footnote 26]. One industry representative stated that the
increased use of payment cards has resulted in an increased awareness
of the importance of maintaining high standards for security.
In addition to security standards, electronic payments provide a
complete audit trail for agencies, which makes it easier to resolve
payment errors and detect fraud. According to USDA officials, EBT
systems in particular can identify suspected patterns of fraud and
create electronic audit trails that provide the agency with an
opportunity to target its fraud investigations. USDA collects daily
food stamp transaction data from each state and adds the data to its
EBT transaction database for analysis. The system scans these data to
flag transactions or sets of transactions that fit a certain set of
criteria defined by established patterns of fraudulent activity. The
system then generates a monthly "Watch List" of retailers with
suspicious transaction patterns incongruent with a store's particular
type of retail operation. Since adopting EBT for food stamps, USDA
officials told us that fraud has been reduced dramatically. The
national rate of food stamp trafficking declined from about 3.8 cents
per dollar of benefits redeemed in 1993 to about 1 cent per dollar
during the period of 2002 to 2005.
However, electronic payments are susceptible to unauthorized use, loss,
or theft, just as paper payments, albeit to a lesser extent. According
to Treasury officials, most problems are associated with paper checks.
They stated that the level of risk with check payments will always be
considerably higher than that of electronic payments, since checks are
more susceptible to being lost, stolen, or forged. Electronic systems
also are vulnerable to the use of benefits inconsistent with program
policy or the erroneous or unauthorized establishment and funding of
benefits. The use of EBT cards for food stamps has changed how food
stamp benefits are trafficked, for example, by making it much more
difficult for middlemen who previously collected and redeemed large
amounts of paper coupons from recipients who were willing to sell them.
Now, some food stamp recipients can stand outside of stores offering to
loan their EBT cards to shoppers entering the store. In this situation,
the shopper would purchase groceries using the card and return it with
a discounted amount of cash to the recipient upon leaving the store.
Recipients can also swipe their EBT card, but instead of buying
groceries, they receive a discounted amount of cash and the retailer
keeps the difference. In addition, for certain VA benefits, there is a
risk that authorized individuals could fail to notify the agency that a
recipient is deceased to continue to receive funds, and could continue
to withdraw funds from the deceased recipient's bank account. According
to an industry representative, recipients can sell an EPC and the PIN,
and then report that the card had been lost or stolen to recoup lost
benefits. However, according to federal and state agency officials and
industry representatives, electronic payments are much less susceptible
to fraud and risk than payments made by a paper instrument, such as a
check or voucher.
Various Options Exist for Increasing the Use of Electronic Payments,
Including Further Treasury Actions:
Federal and state agencies could employ various options to increase the
use of electronic payments to distribute federal benefit payments.
These options include requiring recipients to receive their benefits
electronically through mandates, making electronic payment the default
option, promoting the benefits of electronic payment through public
outreach, using pilot programs, and applying EPCs in a variety of ways.
The most-sweeping option for increasing use of electronic payments
would be mandating electronic payments without exception for
recipients. Other, less-sweeping alternatives also could result in the
increased use of electronic payments, and they range from making
electronic payment a default option upon benefit enrollment to greater
public education and outreach. These alternatives also include piloting
electronic distribution programs and applying EPCs in new ways.
Treasury, the primary disbursing agency for the federal government, has
introduced several initiatives and conducted outreach to federal
agencies in its efforts to support and increase the use of electronic
payments. For example, Treasury has met with CFOs from the largest
federal agencies to discuss Treasury's program initiatives, such as
increasing electronic payments. However, Treasury has no plans to meet
with CFO agencies and other smaller agencies on a regular basis.
Options to Increase Electronic Payments Could Include New Statutory
Requirements or Widescale Adoption of Methods Some Agencies Already Use
or Have Piloted:
The most-sweeping option--and one that would guarantee an increase in
the use of electronic payments--would involve mandating electronic
payments without exceptions for recipients. Congress could mandate that
all federal benefit payments be made electronically and not allow
recipients to opt out of receiving payments electronically. Current
federal law[Footnote 27] covers some, but not all, federal benefit
payments, since, as stated by Treasury, the law does not include
federally funded, state-disbursed payments. In addition, Treasury's
implementing regulations include a waiver policy, which permits
individuals to determine for themselves whether direct deposit would
cause them a hardship.
The Personal Responsibility and Work Opportunity Reconciliation Act of
1996 is an example of a mandate with no exceptions for recipients. The
act required that state agencies administering the Food Stamp Program
use EBT exclusively by 2002 to distribute benefits, except for those
states facing unusual barriers to implementing an EBT system. However,
once implemented, EBT became mandatory for the recipients. In a 2002
report, we did not identify any overall technical barriers impeding the
statewide implementation of EBT systems.[Footnote 28] Although, we did
note that four jurisdictions, which collectively distributed about 1.7
percent of food stamp benefits nationally, delayed their
implementation, in part, due to concerns over the higher cost of EBT
over the old paper coupon system of food stamp benefit
delivery.[Footnote 29] According to USDA, as of June 2004, all 50
states, the District of Columbia, Guam, Puerto Rico, and the Virgin
Islands were operating EBT systems to issue food stamp benefits.
Overall, several industry representatives agreed that EBT works well,
and many prefer it because it is convenient and safer than checks or
cash. Furthermore, some agency officials with whom we spoke said they
require or will require electronic payments for certain state-
administered federal benefits, such as unemployment insurance, without
a statutory mandate. Specifically, agency officials said they notified
recipients that direct deposit or a debit card were the only payment
options available to them.
However, a mandate would present challenges, particularly for certain
types of programs. For example, as we noted in the previous section of
this report, challenges to using EBT for WIC involve the product-driven
nature of the benefit. Although Congress has not mandated that USDA WIC
benefits be distributed electronically, one industry representative and
two agency officials indicated that states adopting EBT for the WIC
program are by default making EBT distribution a requirement because
that is the only way the benefits would be distributed. As of March
2008, only two states had implemented WIC EBT statewide. Depending on
the type of technology being used, states may need to modify the
existing electronic checkout system to process WIC transactions.
According to one industry representative, an electronic WIC solution
that uses a magnetic stripe can be used at any retailer equipped with
an electronic cash register system. However, a solution that uses smart
card technology, where a chip is embedded in the card, would require
special equipment to read the chip. Furthermore, a representative of
one consumer group noted that making electronic payments mandatory for
recipients reduces the incentive for the industry to develop good EBT
products and deliver quality services. Some consumer groups and
industry representatives believe that recipients should be given a
choice of how their benefit payments are distributed.
Rather than mandating electronic payments for recipients, agencies
could choose a less-sweeping option that would make electronic payment
the primary payment option on benefit applications. According to some
industry representatives, enrollment in a benefits program should
automatically default to electronic distribution. That is, individuals
would receive benefits electronically, unless they specifically opted
out and asked for a paper check. According to one industry group, this
approach likely would foster broader acceptance and prove less
intimidating to elderly recipients than an approach without the choice
of opting out. In addition, a few industry representatives stated that
recipients were less likely to opt out of receiving payments
electronically because it would require some effort on their part. Some
industry representatives indicated that exceptions could be retained
for certain recipients with special challenges or needs--for example,
those living in remote areas with limited banking access--should
continue to receive paper checks. However, one industry representative
contended that providing an opt out puts an agency in the position of
having to support multiple distribution processes; that is, electronic
as well as paper infrastructures. Furthermore, officials from one state
told us that having parallel systems reduced cost savings. Officials
from another state we interviewed said that offering paper checks as an
option afforded recipients a ready opportunity to decline electronic
payments.
In another approach, agencies could conduct consumer outreach to
educate recipients of the benefits they could derive from receiving
their payments electronically and, as a result, could increase their
acceptance and use of electronic methods. Agency officials, some
consumer groups, and industry representatives indicated that consumer
outreach helps in promoting electronic payments. Along these lines,
Treasury has conducted consumer outreach through a variety of means.
For example, Treasury, in partnership with SSA, has communicated
directly with Social Security recipients at preretirement seminars and
indirectly through printed publications. More specifically, Treasury's
key marketing strategy to inform check recipients about the advantages
of direct deposit is to include mail inserts with their payments.
Treasury also has tailored its communications strategies for different
audiences. According to Treasury officials, the use of media such as
radio, television, and outdoor advertising (e.g., signage at bus stops)
is a better way to reach the unbanked, rather than the use of print
media. In other examples, officials from one state agency told us they
issued press releases about the benefits of electronic payments, sent
mailings to recipients of certain benefit payments to encourage them to
sign up for direct deposit or the debit card, and led discussions with
labor union representatives and workers to obtain feedback. Two
representatives from an industry group stated that they did not know
how effective conducting consumer outreach would be because it was
already well-known that electronic payment programs worked well. They
also stated that mail inserts might not be effective because
individuals tended to throw inserts away.
Piloting an electronic benefit program is yet another mechanism that
agencies can use to increase electronic payments. Implementing pilot
programs can demonstrate whether recipients or other stakeholders, such
as retailers, are receptive to electronic payments and identify needed
refinements or fixes that could make electronic payments more feasible.
Several industry representatives and agency officials agreed that pilot
programs give agencies a chance to test information and payment systems
as well as an opportunity to gauge public perceptions and acceptance of
methods and products that agencies use. However, one industry
representative contended that pilots are not always necessary because
the success of electronic payment solutions had already been proven.
Several states--including Michigan, New Mexico, Ohio, Texas,
Washington, and Wyoming--have piloted or are in the process of piloting
WIC EBT to test its feasibility before rolling out the program
statewide. According to the results of the Washington State online WIC
demonstration project and some agency officials and industry
representatives, the pilots helped gain acceptance among retailers,
recipients, and others. In a survey of participants in the Washington
State pilot, 60 percent of the recipients said EBT was much better than
paper checks. While the survey results for retail staff, including
managers, were mixed, they agreed that they liked the concept of WIC
EBT but believed that enhancements to the terminals were necessary.
Washington's WIC commitment was only for 6 months, and, according to
USDA, Kentucky will continue the project begun in Washington to further
test the use of online technology for WIC EBT. An agency official from
another state reported that the pilot program led to enhancements of
its WIC EBT pilot system. Specifically, its vendor identified a glitch
in the pilot system that placed a hold on recipients' benefit accounts
while waiting for the EBT host to confirm a transaction. The delayed
processing could have prevented the recipients from using the EBT cards
for a few hours. The vendor modified the system so that this step was
no longer required and recipients' accounts were no longer put on hold.
In contrast, as we have previously discussed, Ohio's pilot was
terminated in June 2005 because of the high cost to process EBT
transactions. According to USDA officials, it would have been too
expensive, at that time, for Ohio to operate the WIC EBT system
statewide with the amount of administrative funding it received.
As EBT has become more widely accepted and the use of debit card
technology has increased, state agencies administering federal benefits
are exploring other types of EPCs to further increase the use of
electronic payments. The recent increased use of debit card payments
(e.g., according to the 2007 Federal Reserve Payments Study, the number
of debit card payments increased from 15.6 billion in 2003 to 25.3
billion in 2006)[Footnote 30] has led states to explore using
variations of the EBT and the EPC cards to deliver benefit payments.
For example, some states have explored using hybrid cards to deliver
multiple state-administered benefits. Hybrid technology involves the
issuance of a single card with a magnetic stripe and integrated chip
technology that could allow recipients to access benefits as well as
store cardholder information such as medical records. Specifically,
benefits such as Food Stamp and TANF would be accessed by swiping the
magnetic stripe, whereas medical information would be read from the
integrated chip embedded in the card. According to an industry group,
smart cards are generally more durable than magnetic stripe cards
because the data on the stripe can easily be changed or can be erased
by magnets. In addition, smart cards have the ability to carry a
variety of applications, such as identification and payment data, on a
single card.
While some states have used the EBT card to deliver multiple benefits,
some have also been considering using a "co-branded" EBT card to
deliver a number of benefits. The card--which, for example, can bear
both the Quest service mark[Footnote 31] and a logo, such as Visa or
MasterCard--would allow benefit recipients to access restricted and
unrestricted government-issued benefits using a single payment card.
Specifically, the co-branded card would be accepted for unrestricted
cash transactions at all locations that accept commercial payments such
as Visa or MasterCard. With co-branding it is presumed that food stamp
benefits, which are restricted, would be established as a separate
account type from cash benefits, thereby ensuring that purchases could
only be made at USDA authorized retail locations. Individual states
have been considering co-branded cards for a variety of reasons.
According to the Electronic Benefits and Services Council's white paper
on the co-branding of EBT cards, some states have determined that their
clients would like a single card.[Footnote 32] For example, 87 percent
of the clients surveyed in Texas would like to have a single card.
States on the Gulf Coast have sought the best and easiest way to
disburse funds after a disaster. Furthermore, other states seek to
increase the number of locations where recipients could access benefits
and payments. However, the concept of co-branding is relatively new,
and state agencies and the electronic payment industry continue to
explore many issues associated with co-branding. For example, according
to the Electronic Benefits and Services Council's white paper, a
cardholder could conduct a co-branded transaction by using either a PIN
or a signature. Federal regulation limits food stamp transactions to
PIN-based transactions, and merchants favor the use of PIN-based
transactions because they are comparatively low cost for the retailer.
However, a signature-based transaction generally allows the cardholder
to access cash benefits at virtually any retail location that accepts
commercial payments, such as Visa or MasterCard.
Treasury Has Introduced Three Initiatives and Conducted Limited
Outreach with Federal Agencies to Support the Use of Electronic
Payments:
Treasury, as the primary disbursing agency for the federal government,
has introduced two initiatives and is working on a third program to
encourage the use of electronic payments to distribute federal benefit
payments for programs for which they disburse payments. The first
initiative, "Go Direct," is Treasury's marketing and education campaign
targeting check recipients. The goal of the campaign is to have more
individuals convert from paper checks to direct deposit by emphasizing
the benefits of direct deposit--such as safety, security, and
convenience. According to Treasury, over the last 3 years, 1.8 million
recipients have converted from paper checks to direct deposit. However,
the rate of growth in direct deposit has slowed. Furthermore, Treasury
stated that it faced challenges in converting unbanked recipients to
electronic payments and in reaching new enrollees.
To overcome challenges related to converting check payments to
electronic payments, Treasury developed a second initiative.
Specifically, in January 2007, Treasury piloted the Direct Express
debit card (bearing the MasterCard logo) for 1 year to unbanked Social
Security and SSI recipients in Illinois. Approximately 3,000 recipients
participated in the program. According to its Web site, Treasury's
financial agent established a Direct Express account for the
recipients, who then could use the card at ATMs to access benefits in
their accounts. The pilot was successful, and Treasury launched the
Direct Express card nationwide in April 2008. According to Treasury
officials, results of a survey conducted after the pilot showed that 85
percent of the card users were satisfied with the debit card, and that
88 percent indicated that they would refer the program to a family
member or a friend. Information provided on Treasury's Web site
indicated that Direct Express gives recipients the advantages of direct
deposit, even if they do not have a bank account. In addition, Treasury
explained on its Web site that the Direct Express card offers
cardholders the convenience and security of making purchases anywhere
that MasterCard is accepted and of getting cash back at thousands of
locations and ATMs. Some of the services provided free of charge
include:
* purchases at retail locations, cash back with purchases, or cash
withdrawal through banks or credit unions;
* one ATM cash withdrawal for each deposit posted to accounts each
month when using a Direct Express ATM;
* balance inquiry at ATMs, by telephone or online; and:
* access to the toll-free customer service number or Web site 24 hours
a day, 7 days a week.
Furthermore, the Direct Express card benefits are FDIC-insured, and the
consumer protections of Regulation E (such as disclosures of consumer
liability and procedures for resolving errors) apply to the debit card
account. The Web site also notes that Treasury and SSA strongly
recommend that Social Security and SSI recipients receive benefits
electronically--either by direct deposit to their bank accounts or to a
Direct Express debit card. However, recipients are not required to sign
up for the Direct Express card if they do not have a bank account.
Furthermore, if after signing up for a Direct Express card, recipients
do not like using it, they may close their card account. As an
alternative, Treasury suggests that these recipients enroll in direct
deposit. According to Treasury officials, because of the many features
that we have previously described, they are optimistic that the debit
card will reach the core of check recipients that are reticent about
electronic payments.
Lastly, to address the challenge that new enrollees present, Treasury
is working closely with SSA to ensure that new SSA benefit enrollees
sign up for direct deposit at the point of the initial application for
benefits. Through a newly designed application process, SSA will
encourage benefit applicants to sign up for direct deposit into an
existing bank account. Furthermore, SSA will offer the Direct Express
debit card to individuals who do not have bank accounts. Treasury and
SSA will also market direct deposit and the Direct Express debit card
to preretirees.
Although Treasury disburses payments for some federal agencies and
programs, it does not disburse payments on behalf of all federal
agencies because some agencies have authority to disburse payments
themselves--for example, when an agency has statutory authority or when
Treasury delegates to an agency the authority to issue specific
payments. As the federal government's leader for payments, Treasury
said that its goal is to move toward an all-electronic government for
disbursement and collection of payments. Toward this end, Treasury, in
its Fiscal Years 2003-2008 Strategic Plan has discussed increasing
electronic payments as a strategic goal and also has identified a cross-
cutting objective and strategy, such as including federal program
agencies as key partners in achieving this goal. Furthermore, Treasury
encourages all agencies to improve their cash management practices by
using EFT whenever cost-effective, practicable, and consistent with
statutory authority. For example, Treasury officials told us that they
met with CFOs from the largest federal agencies (those under the CFO
Act) to discuss payment solutions and other issues, and that they are
willing to meet with any federal agency to discuss issuing payments on
their behalf electronically.[Footnote 33] Specifically, in the late
fall of 2006 and early 2007, FMS's Commissioner and Deputy Commissioner
established an effort to meet with the CFO and Deputy Chief Financial
Officer of each of the 24 CFO Act agencies. In addition, the
Commissioner and Deputy Commissioner attended a Small Agency Council
meeting of the financial officers of executive federal agencies that
are not a part of the CFO Act.
These meetings with other agencies were designed as an opportunity for
Treasury to strengthen communications and establish relationships with
those who influence financial management within the federal sector as
well as to discuss Treasury's program initiatives, such as increasing
electronic payments. According to Treasury, there was universal support
during the CFO meetings for its goal of moving to all-electronic means
for payments and collection. Treasury also noted that agencies cited as
concerns a lack of staff and a lack of funding resources to undertake
EFT and related electronic initiatives, although these concerns were
not specific to electronic payment. Treasury introduced this action due
to personnel changes in FMS's Office of the Commissioner and in the CFO
offices of some agencies. In addition, according to Treasury, as a part
of its routine business activities, Treasury conducted informal
outreach at the program level, particularly to staff from the larger
agencies for which it disburses payments, such as SSA and VA, to
encourage the use of electronic payments. These efforts were positive
in introducing agencies to Treasury's initiatives and also provided
Treasury with information on some of the challenges agencies were
facing in using electronic methods. However, while Treasury's focus has
primarily been on the larger agencies for which it disburses payments,
smaller agencies could also benefit from these outreach efforts.
Treasury has not conducted outreach to CFOs and staff from smaller
agencies on a consistent basis and has no plans for more regular
outreach to CFOs and smaller agencies, including those that may not
fully use electronic payments. However, officials from one agency told
us that other agencies could benefit from Treasury's experience and
expertise on electronic solutions. By developing a means to ensure
regular dialogue with the CFO Act agencies and other smaller agencies
for which Treasury disburses payments, Treasury may be able to further
encourage the use of electronic payments and help agencies develop
solutions to address the challenges or constraints they are facing.
Such action could assist Treasury in reaching its goal of moving to an
all-electronic government for payments.
Conclusions:
The use of electronic payments to disburse federal benefits appears to
be increasingly accepted by agencies and recipients. The results of our
survey of 42 federal benefit programs indicated that 34 programs used
some form of electronic payment to disburse benefits to the majority of
recipients. At the same time, some of these programs also continue to
disburse benefits using a paper check, and some programs we surveyed
did not disburse benefits electronically, which means that some
challenges remain to increasing the use of electronic payments. Agency
officials and industry and consumer group representatives were largely
in agreement that there are several advantages of electronic payments
compared with paper checks, but they also recognized that agencies have
several factors to consider when making the decision to implement an
electronic payment method. When agencies decide to implement an
electronic payment method to disburse benefits, they do so while
considering the perceived disadvantages of electronic payments,
characteristics of the program whose payments will be made
electronically, costs of implementing and using an electronic method,
and potential risks associated with electronic payments. Taking these
factors into consideration can help agencies understand how best to
choose and implement the most appropriate electronic payment method for
distribution of federal benefit payments. Doing so might also have the
added benefit of encouraging the increased use and acceptance of
electronic payments among recipients.
Federal and state agencies have a range of options to increase the use
of electronic payments to distribute federal benefits payments, and,
specifically, Treasury has a leadership role in supporting the use of
electronic payments. These options include the most-sweeping option
that mandates electronic payments without exception to less-sweeping
alternatives that range from making electronic payment a default option
to conducting more public education and outreach and implementing pilot
programs. Moreover, through its initiatives, such as the "Go Direct"
campaign and the Direct Express debit card, Treasury has used some of
these options and assisted agencies for which it disburses payments in
increasing the use of electronic payments. Treasury has also taken
steps to encourage federal agencies to improve their financial
management practices, including increasing the use of electronic
payments. Conducting such an outreach effort on a more regularly
scheduled basis--including meeting with the agencies we identified in
this report that did not use electronic payments or did not fully use
electronic payments to disburse benefits--would allow Treasury to
include more detailed discussions about electronic payments and develop
ongoing relationships with agencies' CFOs and staff who could use
Treasury's expertise to move toward the use of electronic payments
governmentwide.
Recommendation for Executive Action:
To help Treasury achieve its goals of increasing the use of electronic
payments and moving to an all-electronic government, we recommend that
the Secretary of the Treasury direct the Commissioner of FMS to
consider developing a process for conducting outreach to federal
agencies on a more regular basis, with the goal of identifying
opportunities for increasing the use of electronic payments. For
example, Treasury could meet with agency CFOs, or their designees and
with staff from smaller agencies, on a semiannual or annual basis to
discuss challenges that agencies face in moving to electronic payments
and to identify actions that Treasury and agencies could take to
facilitate the transition to electronic payments.
Agency Comments and Our Evaluation:
We requested comments on a draft of this report from the Secretaries of
Treasury and USDA. In an e-mail summarizing comments from Treasury's
Financial Management Service, Treasury noted that it generally agreed
with the report. Treasury did not comment on the recommendation but
stated that it would address the recommendation in its statement of
actions to congressional committees not later than 60 days after the
date of the report. Treasury suggested we note in the report that while
there has been increased support for mandating electronic payments,
some consumer and special interest groups have not been supportive of
implementing a mandatory electronic delivery method for delivering
benefits. Our report presented various options that exist for agencies
to increase electronic distribution of federal benefits, including
mandating electronic payments for recipients. We noted in the report
that there are concerns about making electronic payments mandatory.
Specifically, we stated that some consumer groups and industry
representatives believe that recipients should be given a choice of how
their benefits payments are distributed. Treasury also provided
technical comments that we incorporated in the report as appropriate.
Officials from USDA's Food and Nutrition Service provided oral comments
on a draft of this report and stated that they agreed with its overall
message. USDA officials specifically stated that up-front costs did not
pose the greatest challenge to implementing WIC EBT because the WIC
program provides grants to state agencies for EBT project planning and
development. Although these officials expressed concern that the grant
funds are limited, they stated that the bigger issue for WIC is the
ability of state agencies to afford the ongoing costs of EBT. We added
language in the report that explains the difficulty with assessing
states' ability to afford the ongoing costs of a WIC EBT program. USDA
officials also stated that while WIC EBT will allow greater cost
monitoring and provide administrative efficiencies, cost reduction is
not a key reason for implementing WIC EBT. We understand that not all
programs implement electronic payments solely to reduce costs.
Nonetheless, agency officials we interviewed cited cost reduction and
efficiency as key reasons for implementing electronic payments. We did
not specifically attribute this statement to USDA officials, nor did we
make a specific reference to WIC EBT.
USDA officials also noted that the report discussed fees that could be
passed on to recipients, such as those for minimum balances or ATM
fees, but that such fees do not apply to EBT cards that offer access to
targeted benefits outside of banks--for example, Food Stamp or WIC
benefits redeemed at authorized retailers using the EBT card. We
acknowledge that the type of fee and extent to which fees apply vary by
the type of electronic payment method being used. We also understand
that there are no associated fees for recipients when using EBT cards
to access Food Stamp and WIC benefits. However, such fees may apply
when accessing other types of benefits--for example, unrestricted cash
benefits--using an EBT card or another type of EPC. Our intent was to
generally describe the types of perceived disadvantages of using
electronic payment methods--which included fees, recipient and benefit
characteristics, and certain banking practices, among others--and not
necessarily to link only EBT to a discussion of fees or to imply that
all methods of electronic payment have all of the perceived
disadvantages described in the report. USDA officials also provided
technical comments, which we incorporated in the report where
appropriate.
As agreed with your office, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
from the report date. At that time, we will send copies of the report
to the Chairman, House Committee on Oversight and Government Reform,
and other interested congressional committees. We are also sending
copies of this report to the Secretary of the Treasury; the Secretary
of Agriculture; the Chairman, Board of Governors of the Federal Reserve
System; the Commissioner of the Social Security Administration; the
Secretary of Labor; and other interested parties. We will make copies
available to others upon request. In addition, the report will be
available at no charge on the GAO Web site at [hyperlink,
http://www.gao.gov].
If you or your staff have any questions concerning this report, please
contact me at (202) 512-8678 or jonesy@gao.gov. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this report. Key contributors to this report are
listed in appendix III.
Sincerely yours,
Signed by:
Yvonne D. Jones:
Director, Financial Markets and Community Investment:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
Our objectives were to (1) describe the extent to which federal
programs are using electronic payment methods to disburse benefits; (2)
identify factors that agencies consider when implementing or using
electronic payments; and (3) identify potential options for increasing
the use of electronic payments, particularly the Department of the
Treasury's (Treasury) actions to increase electronic payments.
To respond to these objectives, we reviewed agency documents, reports,
and studies on electronic payments. We interviewed Treasury officials
and collected written and testimonial information about their
experiences in implementing and using electronic payment methods to
distribute benefits, as well as current initiatives aimed at increasing
the use of electronic payments. We conducted a site visit to
Harrisburg, Pennsylvania, and met with state agency officials in the
state's Department of Health, Department of Public Welfare, and Office
of the Budget to obtain information on the state's use of electronic
payments because Pennsylvania was the first state to pilot Electronic
Benefit Transfer for the Food Stamp Program in October 1984. We
interviewed officials at the following six federal agencies responsible
for overseeing or administering federal benefit programs that provided
recurring benefits to individuals to obtain information on their use of
electronic payments: the U.S. Department of Agriculture (USDA),
Department of Labor (DOL), Department of Veterans Affairs, Social
Security Administration (SSA), Department of the Interior's Bureau of
Indian Affairs, and Department of Health and Human Services. We also
attended conferences sponsored by NACHA--The Electronic Payments
Association's Electronic Benefits and Services Council and the
Electronic Funds Transfer Association to observe presentations from a
variety of federal and state agencies, electronic payment providers,
and private-sector consultants on issues related to implementing and
using electronic payment methods to disburse benefits.
To determine the extent to which federal programs use electronic
payments, we used the Catalog of Federal Domestic Assistance (CFDA) and
the Federal Assistance Award Data System (FAADS) to identify federal
benefit programs that provided recurring payments to
individuals.[Footnote 34] CFDA and FAADS, used together, provided
general information on each federal benefit program, including a brief
description of the program, the number of recipients in the program,
and dollar amounts obligated for the program. Our analysis of CFDA and
FAADS data began on June 14, 2007, and we used the most recently
available data as of that date for our analysis. For CFDA, we analyzed
data from fiscal year 2006. The most recent complete set of available
data from FAADS was from fiscal year 2005.[Footnote 35]
We first queried the CFDA database to obtain a list of programs that
would be suitable for our review.[Footnote 36] The CFDA query returned
a list of programs, for which the team needed corresponding data from
FAADS, including the number of recipients and the dollar amount
obligated for each program. The unique CFDA number for each program was
the primary data element that allowed us to obtain corresponding
information from the FAADS database for those programs identified in
CFDA. Therefore, we queried a list of similar programs using the FAADS
database. These queries ultimately returned 455 federal benefit
programs.
The team developed criteria and, using program descriptions from CFDA,
agency, and other government Web sites, conducted a content analysis of
the programs to determine which of the 455 programs identified by FAADS
and CFDA met our criteria for further review. For example, consistent
with our criteria, we excluded programs whose benefits were not
ultimately paid to individuals, programs that did not provide recurring
payments, loan or loan guarantee programs, programs whose payments were
made in connection with an insurance program, and programs whose
payments subsidized the hiring or salaries of employees. On the basis
of our review of the programs using these multiple sources of
information, we selected 45 federal programs that met the
criteria.[Footnote 37] As such, the final selection of programs for
study was a nonrandom, nongeneralizable sample of programs selected to
represent a variety of federal benefit programs that exist.
The FAADS and CFDA databases provided information that allowed us to
identify programs, but the databases did not provide information on
whether electronic payments were used to disburse benefit payments.
Therefore, we surveyed the 45 programs we identified to obtain
information on the extent to which they used electronic payments. We
conducted a Web-based survey with the 11 agencies responsible for
administering the 45 programs, but we later excluded 3 programs upon
receiving their survey responses.[Footnote 38] We requested the names
and e-mail addresses of specific program respondents--typically,
program officials or managers in the divisions responsible for
administering the program--from the GAO liaison at each agency in which
we sent surveys. To ensure security and data integrity, we provided
each program respondent with a Web address, a unique identification
number, and a password to allow them access to the survey.
The survey included questions on program funding and benefits, program
data and statistics, electronic payments, paper check payments, voucher
payments, and other types of payments used to deliver benefits. To
prepare for the survey, we pretested the survey with program officials
for 4 programs to determine whether respondents would understand
questions the way that we intended. Since the survey was administered
via the Internet, we also conducted a usability pretest with officials
from 1 of the programs we surveyed to observe the respondent answering
the survey questions as they would appear when the survey was
activated. To increase the response rate of the survey respondents, we
sent two reminder notices via e-mails to encourage completion prior to
the survey deadline and conducted follow-up telephone calls to those
programs that did not respond to the survey by the initial deadline. We
checked the validity of the survey data by conducting limited checks of
the accuracy of survey responses from agency officials using a data
verification protocol. We identified key survey items for which we
wanted to verify or obtain additional information as well as other
survey items that were missing or incomplete. For the programs that we
determined should not have been included in the review on the basis of
their survey responses, we did not conduct follow-up if the program
provided sufficient information to determine that it should have been
excluded.
Survey development, such as obtaining contact information for survey
respondents and conducting survey pretests began on September 10, 2007,
and our collection of survey responses ended on January 31, 2008. We
received responses from all 42 programs, providing an overall response
rate of 100 percent. While the overall response rate to the survey was
100 percent, not all survey questions were answered by our respondents,
particularly the two questions that asked for the total dollar value of
benefits paid electronically and by paper check.
To assess the reliability of the FAADS and CFDA databases, we (1)
reviewed existing information related to the data sources, (2)
performed electronic testing for obvious errors in accuracy and
completeness, and (3) interviewed agency officials knowledgeable about
these data. There were certain limitations with the FAADS and CFDA
databases--namely, the fact that the information is self-reported by
various agencies and may have missing or incorrect information.
However, given our intended use of the FAADS and CFDA data--to identify
programs that provide recurring benefits to individuals, not to
identify the entire universe of federal benefit programs or make
statements about a particular population of programs--and the results
of previous reliability assessments of CFDA, the data elements were
sufficiently reliable for the purposes of selecting a variety of
programs to include in our review.
To identify factors to consider when implementing electronic payments
and options for increasing use of electronic payments, we interviewed
and obtained documentation from Treasury and other federal agencies,
such as USDA, DOL, and SSA, among others. We also met with experienced
private-sector consultants who had assisted agencies in developing or
implementing electronic payment solutions, such as Booz-Allen Hamilton;
Maximus; and Burger, Carroll, and Associates, Inc., and with the three
major electronic payment providers that agencies use to implement
electronic payment solutions--J.P. Morgan Chase, Affiliated Computer
Services, and EFD (eFunds Corporation). In addition, we obtained the
views of consumer advocacy organizations, such as the Consumer
Federation of America, Consumers Union, and the National Consumer Law
Center. Finally, we interviewed representatives from groups
representing the electronic payments industry, such as the Electronic
Funds Transfer Association and NACHA--The Electronic Payments
Association.
We also selected the following 5 programs from our survey to use as
case illustrations and examined additional information related to their
experiences using electronic payments: Supplemental Nutrition Program
for Women, Infants, and Children; Indian Social Services Welfare
Assistance; Supplemental Security Income; Unemployment Insurance; and
Trade Adjustment Assistance. In selecting programs for case
illustrations, we considered survey responses that were important for
describing the characteristics of each program, such as the type and
frequency of the benefit payment; the number of recipients in the
program; the dollar value of benefit payments made to recipients in the
program; and the extent to which the program used electronic payments
to disburse benefits. The team then purposively selected programs that
represented a variety of the characteristics found in the data.
Four of the 5 programs that we selected for case illustrations were
federal programs whose benefits were administered by individual state
or tribal agencies. For these programs, we selected state and tribal
agencies in Arizona, California, Georgia, Michigan, Minnesota, Ohio,
Oklahoma, Texas, and Utah and conducted interviews with program
officials to obtain more information on factors that they considered
when deciding to implement electronic payments and options for
increasing the use of electronic payments. In selecting state agencies
and tribes, we considered various factors, such as whether they were
using or planning to use electronic payments, had conducted pilots to
test the feasibility of using electronic payments, and recommendations
from agency officials.
We conducted our work from April 2007 through June 2008 in accordance
with generally accepted government auditing standards. Those standards
require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our findings and
conclusions based on our audit objectives. We believe that the evidence
obtained provides a reasonable basis for our findings and conclusions
based on our audit objectives.
[End of section]
Appendix II: Selected Data for the 42 Federal Benefit Programs We
Surveyed, by Dollar Value of Benefit Payments (Fiscal Year 2006):
Agency: Social Security Administration;
Program name: Social Security Retirement Insurance;
Dollar value of benefit payments (FY 2006): $418,056,535,776;
Number of participants (FY 2006): 33,945,000;
Use an electronic payment method?: Yes;
Type of benefit: Cash.
Agency: Social Security Administration;
Program name: Social Security Disability Insurance;
Dollar value of benefit payments (FY 2006): 77,846,049,345;
Number of participants (FY 2006): 8,612,000;
Use an electronic payment method?: Yes;
Type of benefit: Cash.
Agency: Social Security Administration;
Program name: Supplemental Security Income;
Dollar value of benefit payments (FY 2006): 41,547,968,487;
Number of participants (FY 2006): 7,200,000;
Use an electronic payment method?: Yes;
Type of benefit: Cash.
Agency: Department of Labor;
Program name: Unemployment Insurance;
Dollar value of benefit payments (FY 2006): 30,986,000,000;
Number of participants (FY 2006): 7,540,000;
Use an electronic payment method?: Yes;
Type of benefit: Cash.
Agency: U.S. Department of Agriculture;
Program name: Food Stamp;
Dollar value of benefit payments (FY 2006): 30,187,346,987;
Number of participants (FY 2006): 26,671,819;
Use an electronic payment method?: Yes;
Type of benefit: Noncash.
Agency: Department of Veterans Affairs;
Program name: Veterans Compensation for Service-Connected Disability;
Dollar value of benefit payments (FY 2006): 28,318,763,832;
Number of participants (FY 2006): 2,725,824;
Use an electronic payment method?: Yes;
Type of benefit: Cash.
Agency: Department of Education;
Program name: Federal Pell Grant Program;
Dollar value of benefit payments (FY 2006): 12,856,697,796;
Number of participants (FY 2006): 5,164,302;
Use an electronic payment method?: Yes;
Type of benefit: Cash.
Agency: Department of Health and Human Services;
Program name: Temporary Assistance for Needy Families;
Dollar value of benefit payments (FY 2006): 11,287,301,420;
Number of participants (FY 2006): 4,230,189;
Use an electronic payment method?: Yes;
Type of benefit: Both cash and noncash.
Agency: Railroad Retirement Board;
Program name: Social Insurance for Railroad Workers;
Dollar value of benefit payments (FY 2006): 9,934,658,062;
Number of participants (FY 2006): 577,600;
Use an electronic payment method?: Yes;
Type of benefit: Cash.
Agency: U.S. Department of Agriculture;
Program name: Special Supplemental Nutrition Program for Women,
Infants, and Children;
Dollar value of benefit payments (FY 2006): 5,072,000,000;
Number of participants (FY 2006): 8,088,000;
Use an electronic payment method?: Yes;
Type of benefit: Noncash.
Agency: Department of Veterans Affairs;
Program name: Pension Program;
Dollar value of benefit payments (FY 2006): 3,426,982,020;
Number of participants (FY 2006): 536,294;
Use an electronic payment method?: Yes;
Type of benefit: Cash.
Agency: Department of Health and Human Services;
Program name: Low- Income Home Energy Assistance;
Dollar value of benefit payments (FY 2006): 2,480,000,000;
Number of participants (FY 2006): 5,300,000;
Use an electronic payment method?: Yes;
Type of benefit: Both cash and noncash.
Agency: Department of Veterans Affairs;
Program name: All-Volunteer Force Educational Assistance;
Dollar value of benefit payments (FY 2006): 1,995,531,647;
Number of participants (FY 2006): 332,184;
Use an electronic payment method?: Yes;
Type of benefit: Cash.
Agency: U.S. Department of Agriculture;
Program name: Nutrition Assistance for Puerto Rico;
Dollar value of benefit payments (FY 2006): 1,412,694,137;
Number of participants (FY 2006): 1,064,039;
Use an electronic payment method?: Yes;
Type of benefit: Both cash and noncash.
Agency: Department of Education;
Program name: Leveraging Educational Assistance Partnership;
Dollar value of benefit payments (FY 2006): 1,305,357,374;
Number of participants (FY 2006): 1,107,038;
Use an electronic payment method?: Yes;
Type of benefit: Cash.
Agency: Department of Education;
Program name: Federal Supplemental Educational Opportunity Grants;
Dollar value of benefit payments (FY 2006): 864,902,427;
Number of participants (FY 2006): 1,011,742;
Use an electronic payment method?: Yes;
Type of benefit: Other.
Agency: Department of Labor;
Program name: Coal Mine Workers' Compensation;
Dollar value of benefit payments (FY 2006): 625,000,000;
Number of participants (FY 2006): 81,000;
Use an electronic payment method?: Yes;
Type of benefit: Cash.
Agency: Department of Labor;
Program name: Trade Adjustment Assistance;
Dollar value of benefit payments (FY 2006): 503,722,489;
Number of participants (FY 2006): 83,989;
Use an electronic payment method?: Yes;
Type of benefit: Both cash and noncash.
Agency: Department of Veterans Affairs;
Program name: Survivors and Dependents Educational Assistance;
Dollar value of benefit payments (FY 2006): 494,909,355;
Number of participants (FY 2006): 75,460;
Use an electronic payment method?: No;
Type of benefit: Cash.
Agency: Department of Labor;
Program name: Disaster Unemployment Assistance;
Dollar value of benefit payments (FY 2006): 401,074,801;
Number of participants (FY 2006): 172,633;
Use an electronic payment method?: Yes;
Type of benefit: Cash.
Agency: Department of Veterans Affairs;
Program name: Veterans Dependency and Indemnity Compensation for
Service-Connected Death;
Dollar value of benefit payments (FY 2006): 358,137,814;
Number of participants (FY 2006): 341,438;
Use an electronic payment method?: Yes;
Type of benefit: Cash.
Agency: U.S. Department of Agriculture;
Program name: Milk Income Loss Contract Program;
Dollar value of benefit payments (FY 2006): 351,601,585;
Number of participants (FY 2006): 52,430;
Use an electronic payment method?: Yes;
Type of benefit: Cash.
Agency: Department of Education;
Program name: Academic Competitiveness Grants;
Dollar value of benefit payments (FY 2006): 240,000,000;
Number of participants (FY 2006): 307,545;
Use an electronic payment method?: Yes;
Type of benefit: Cash.
Agency: Department of Health and Human Services;
Program name: Refugee and Entrant Assistance State Administered
Programs;
Dollar value of benefit payments (FY 2006): 171,276,542;
Number of participants (FY 2006): N/A;
Use an electronic payment method?: Yes;
Type of benefit: Both cash and noncash.
Agency: Department of the Interior;
Program name: Indian Social Services Welfare Assistance;
Dollar value of benefit payments (FY 2006): 80,000,000;
Number of participants (FY 2006): N/A;
Use an electronic payment method?: No;
Type of benefit: Cash.
Agency: Department of Health and Human Services;
Program name: Family Support Payments to States Assistance Payments;
Dollar value of benefit payments (FY 2006): 32,800,000;
Number of participants (FY 2006): N/A;
Use an electronic payment method?: Not sure;
Type of benefit: Both cash and noncash.
Agency: U.S. Department of Agriculture;
Program name: WIC Farmers' Market Nutrition Program;
Dollar value of benefit payments (FY 2006): 18,400,000;
Number of participants (FY 2006): 2,497,162;
Use an electronic payment method?: No;
Type of benefit: Cash.
Agency: Social Security Administration;
Program name: Special Benefits for Certain World War II Veterans;
Dollar value of benefit payments (FY 2006): 15,247,594;
Number of participants (FY 2006): 2,450;
Use an electronic payment method?: Yes;
Type of benefit: Cash.
Agency: Department of the Interior;
Program name: Indian Employment Assistance;
Dollar value of benefit payments (FY 2006): 14,051,101;
Number of participants (FY 2006): 6,109;
Use an electronic payment method?: No;
Type of benefit: Cash.
Agency: Department of Homeland Security;
Program name: Scholars and Fellows;
Dollar value of benefit payments (FY 2006): 10,200,000;
Number of participants (FY 2006): 266;
Use an electronic payment method?: Yes;
Type of benefit: Cash.
Agency: Department of Health and Human Services;
Program name: Nurse Anesthetist Traineeships;
Dollar value of benefit payments (FY 2006): 1,250,000;
Number of participants (FY 2006): 74;
Use an electronic payment method?: Yes;
Type of benefit: Cash.
Agency: Department of Health and Human Services;
Program name: Disadvantaged Health Professions Faculty Loan Repayment;
Dollar value of benefit payments (FY 2006): 1,067,968;
Number of participants (FY 2006): 71;
Use an electronic payment method?: Yes;
Type of benefit: Cash.
Agency: Department of Veterans Affairs;
Program name: Post-Vietnam Era Veterans' Educational Assistance;
Dollar value of benefit payments (FY 2006): 1,034,991;
Number of participants (FY 2006): 627;
Use an electronic payment method?: No;
Type of benefit: Cash.
Agency: Department of Justice;
Program name: Public Safety Officers' Educational Assistance;
Dollar value of benefit payments (FY 2006): 882,015;
Number of participants (FY 2006): 189;
Use an electronic payment method?: Yes;
Type of benefit: Cash.
Agency: Department of Transportation;
Program name: State Maritime Schools;
Dollar value of benefit payments (FY 2006): 722,516;
Number of participants (FY 2006): 181;
Use an electronic payment method?: Yes;
Type of benefit: Cash.
Agency: Department of Health and Human Services;
Program name: Minority Faculty Fellowship Program;
Dollar value of benefit payments (FY 2006): 108,786;
Number of participants (FY 2006): 2;
Use an electronic payment method?: Yes;
Type of benefit: Cash.
Agency: Department of the Interior;
Program name: Indian Job Placement United Sioux Tribe Development
Corporation;
Dollar value of benefit payments (FY 2006): N/A;
Number of participants (FY 2006): 0;
Use an electronic payment method?: No;
Type of benefit: Cash.
Agency: Social Security Administration;
Program name: Social Security Survivors Insurance;
Dollar value of benefit payments (FY 2006): N/A;
Number of participants (FY 2006): 6,566,000;
Use an electronic payment method?: Yes;
Type of benefit: Cash.
Agency: Department of Health and Human Services;
Program name: Chafee Education and Training Vouchers Program;
Dollar value of benefit payments (FY 2006): N/A;
Number of participants (FY 2006): N/A;
Use an electronic payment method?: Yes;
Type of benefit: Cash.
Agency: Department of Veterans Affairs;
Program name: Vocational Training and Rehabilitation for Vietnam
Veterans' Children with Spina Bifida or Other Covered Birth Defects;
Dollar value of benefit payments (FY 2006): N/A;
Number of participants (FY 2006): N/A;
Use an electronic payment method?: Not sure;
Type of benefit: Both cash and noncash.
Agency: Department of Veterans Affairs;
Program name: Monthly Allowance for Children of Vietnam Veterans Born
with Spina Bifida;
Dollar value of benefit payments (FY 2006): N/A;
Number of participants (FY 2006): N/A;
Use an electronic payment method?: Yes;
Type of benefit: Both cash and noncash.
Agency: Department of Health and Human Services;
Program name: Child Care Mandatory and Matching Funds of the Child Care
and Development Fund;
Dollar value of benefit payments (FY 2006): N/A;
Number of participants (FY 2006): 1,799,300;
Use an electronic payment method?: Yes;
Type of benefit: Cash.
Source: GAO analysis of responses to a survey of federal benefit
programs.
[End of table]
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
Yvonne D. Jones, (202) 512-8678 or jonesy@gao.gov:
Staff Acknowledgments:
In addition to the individual named above, Kay Kuhlman, Assistant
Director; Mark Egger; Kevin Jackson; Jamila Jones; Yola Lewis; Robert
Lowthian; Natalie Maddox; Andrew Nelson; Carl Ramirez; Linda Rego; and
Barbara Roesmann made key contributions to the report.
[End of section]
Footnotes:
[1] 7 U.S.C. § 2016(i)(1)(A).
[2] This association is also known as the National Automated
Clearinghouse Association.
[3] Pub. L. No. 104-134, title III, § 31001(x)(1), 110 Stat. 1321-376
(Apr. 26, 1996), codified at 31 U.S.C. § 3332.
[4] 31 C.F.R. § 208.4(a).
[5] U.S. Department of the Treasury, Financial Management Service,
Strategic Plan for Fiscal Years 2003-2008 (Sept. 30, 2003).
[6] The ACH network is a funds transfer system governed by a specific
set of rules that provides for the interbank clearing of electronic
entries for participating institutions. Both the Federal Reserve System
and the private sector provide ACH services. Our 1997 report on the
U.S. payment system provides additional information on the ACH network.
GAO, Payments, Clearance, and Settlement: A Guide to the Systems,
Risks, and Issues, GAO/GGD-97-73 (Washington, D.C.: June 20, 1997).
[7] Geoffrey R. Gerdes and Jack K. Walton II, ''The Use of Checks and
Other Noncash Payment Instruments in the United States,'' Federal
Reserve Bulletin, vol. 88 (August 2002), 360-374.
[8] Geoffrey R. Gerdes, Jack K. Walton II, May X. Liu, and Darrel W.
Parke, "Trends in the Use of Payment Instruments in the United States,"
Federal Reserve Bulletin (Spring 2005), 180-201.
[9] Noncash payments include payments by check, debit card, credit
card, ACH, and EBT.
[10] Pub. L. No. 104-134, title III, § 31001(x)(1), 110 Stat. 1321-376
(Apr. 26, 1996) codified at 31 U.S.C. § 3332.
[11] A federally insured financial institution is defined as any
financial institution whose deposits are insured by the Federal Deposit
Insurance Corporation or the National Credit Union Administration. 31
C.F.R. § 208.2(i).
[12] Three programs that used electronic payments did not provide data
on the number of recipients in the program in fiscal year 2006.
[13] Four programs that used electronic payments did not provide data
on the total dollar value of benefits disbursed in fiscal year 2006.
[14] Of these 6 programs, the Indian Social Services Welfare Assistance
program did not provide data on the number of recipients in the program
in fiscal year 2006 and the Indian Job Placement United Sioux Tribe
Development Corporation did not provide data on the total dollar value
of benefit payments made to program recipients that year.
[15] See 42 U.S.C. § 407(a); 42 U.S.C. § 1383(d)(1); 38 U.S.C. § 5301;
and 45 U.S.C. § 231m(a).
[16] See "Proposed Guidance on Garnishment of Exempt Federal Benefit
Funds," 72 Fed. Reg. 55273 (Sept. 28, 2007). The Office of the
Controller of the Currency; Board of Governors of the Federal Reserve
System; Federal Deposit Insurance Corporation; Office of Thrift
Supervision; and the National Credit Union Administration developed the
proposed guidance.
[17] Pub. L. No. 90-321, title IX, as added Pub. L. No. 95-630, title
XX, § 2001, 92 Stat. 3728 (Nov. 10, 1978).
[18] 12 C.F.R. § 205.3(a).
[19] 12 C.F.R. § 205.15(a). This provision of Regulation E implements
sections 891 and 907 of the Personal Responsibility and Work
Opportunity Reconciliation Act of 1996, which generally exempts state
and local government needs-tested EBT programs from the disclosures,
protections, responsibilities, and remedies established by the
Electronic Fund Transfer Act. See Pub. L. No. 104-193, title VIII, §
891, title IX, § 907, 110 Stat. 2346, 2350 (Aug. 22, 1996), codified at
15 U.S.C. § 1693b(d)(2)(B).
[20] NACHA--The Electronic Payments Association, Electronic
Disbursement Options (November 2003).
[21] In commenting on a draft of this report, USDA officials clarified
that the interoperability of EBT is only permitted with the Food Stamp
Program and not with WIC.
[22] In 2002, we conducted an analysis of 1998 and 1999 data from the
U.S. Census Bureau's Survey of Income and Program Participation to
estimate the number of unbanked benefit recipients. The analysis
suggested that the number of unbanked recipients, at that time, may
have been over 11 million recipients, twice as high as Treasury's
estimate. GAO, Electronic Transfers: Use by Federal Payment Recipients
Has Increased but Obstacles to Greater Participation Remain, GAO-02-913
(Washington, D.C.: Sept. 12, 2002).
[23] In providing comments on a draft of this report, USDA officials
clarified that Wyoming's WIC EBT costs were being supplemented with
state funds.
[24] Pub. L. No. 107-347, title III, 116 Stat. 2946 (Dec. 17, 2002).
[25] The Quest Operating Rules were developed by NACHA--The Electronic
Payments Association's Electronic Benefits and Services Council. The
rules clearly define the agreements, roles, and responsibilities for
the various parties involved in EBT transactions.
[26] The PCI Data Security Standard was developed by the PCI Security
Standards Council--founded by American Express, Discover Financial
Services, JCB International, MasterCard Worldwide, and Visa, Inc. to
enhance, disseminate, and assist with the implementation of security
standards for payment account security.
[27] Pub. L. No. 104-134, title III, § 31001(x)(1), 110 Stat. 1321-376
(Apr. 26, 1996) codified at 31 U.S.C. § 3332.
[28] GAO, Food Stamp Program: Implementation of Electronic Benefit
Transfer (EBT) Systems, GAO-02-332 (Washington, D.C.: Jan. 16, 2002).
[29] Subsequent to our 2002 report, USDA issued a report to Congress on
food stamp EBT systems. According to the USDA report, the following
seven state agencies had not completed implementation of a statewide
EBT system by October 1, 2002: California, Delaware, Guam, Iowa, Maine,
the Virgin Islands, and West Virginia. These jurisdictions received
approval from USDA's Food and Nutrition Service to extend the EBT
implementation deadline. See USDA, Food Stamp Electronic Benefit
Transfer Systems: A Report to Congress (October 2003).
[30] Federal Reserve System, The 2007 Federal Reserve Payments Study:
Noncash Payment Trends in the United States: 2003-2006 (Dec. 10, 2007).
[31] The Quest service mark is only used on cards in states that have
adopted the Quest Operating Rules.
[32] Electronic Benefits and Services Council, Co-Branding of EBT
Cards: Review and Identification of Issues White Paper (November 2007).
The Electronic Benefits and Services Council develops and maintains the
Quest Operating Rules, which specify uniform rights and
responsibilities for those involved in processing EBT transactions. The
council consists of a broad cross section of public and private-sector
EBT stakeholders and includes the Co-Branding Work Group.
[33] Pub. L. No. 101-576, 104 Stat. 2838 (Nov. 15, 1990), codified at
31 U.S. C. § 901(b). The agencies listed in this provision are the
Departments of Agriculture, Commerce, Defense, Education, Energy,
Health and Human Services, Homeland Security, Housing and Urban
Development, Interior, Justice, Labor, State, Transportation, Treasury,
Veterans Affairs; and the Environmental Protection Agency, the National
Aeronautics and Space Administration, the Agency for International
Development, the General Services Administration, the National Science
Foundation, the Nuclear Regulatory Commission, the Office of Personnel
Management, the Small Business Administration, and the Social Security
Administration.
[34] The CFDA database is administered by the General Services
Administration and provides narrative records of federal benefit and
service assistance programs compiled with information self-reported by
agencies. The FAADS database is a central collection of selected data
on federal financial assistance award transactions, administered by the
U.S. Census Bureau.
[35] The fourth quarter 2006 FAADS data were made available on Census'
Web site as of August 31, 2007. However, we did not use that data
because, by that time, the team had already identified programs on the
basis of existing FAADS and CFDA data and was in the process of
developing and implementing the Web-based survey.
[36] We selected programs from CFDA that were classified as Formula
Grants, Direct Payments for Specified Use, and Direct Payments for
Unrestricted Use. We did not select a number of program lists from CFDA
because they did not appear to return the types of programs that would
be most suitable for our review. For example, programs that were coded
as "Project Grants" were not selected, since our understanding of
project grants was that they were funding provided by the government
for a specific purpose, with characteristics, such as nonrecurring
payments, that excluded them from our review. However, we later
reviewed a sample of programs that were classified as "Project Grants"
and, ultimately, determined that those programs would not be included
in our review.
[37] Initially, we identified 44 programs, but we later learned that 1
program we had identified was actually administered as 2 separate
programs. Therefore, we expanded the number of programs identified to
45.
[38] On the basis of survey responses and the follow-up we conducted,
we collapsed 2 programs into 1, and decided to exclude 2 additional
programs when we learned they did not meet our criteria for inclusion
in the review and, thus, should not have been surveyed. Ultimately, we
analyzed survey responses for 42 federal benefit programs.
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