The Pew Charitable Trusts

WASHINGTON -- The switch to the delivery of cash and food stamp benefits by eletronic card is costing many of the nation's poor money and inconvenience, advocates say.

With the transition, states have handed over responsibility for the systems to private banks. Advocates for the poor say the deals the states have struck with these banks have diminished much of the promise the new technology once held.

"I think it has a lot of potential to be a good thing. I think it is unfortunate that some of that potential has been squandered." said David Super, General Counsel for the Center on Budget and Public Policy Priorities, a liberal advocacy group in Washington.

Among the most controversial developments are new restrictions on travel for food stamp users and new ATM fees for welfare recipients.

When the states began changing to new swipe- or smart-card systems to deliver benefits to the poor in the early 1990s, they promised savings for taxpayers and simplicity for participants. The cards would bring single mothers on welfare into the banking system and that would improve their financial acumen, proponents said.

Under the 1996 welfare law, Congress directed states to establish electronic benefit transfer (EBT) systems for food stamps. So far, 39 states have fully or partially complied. Twenty-nine of those states require welfare recipients get their cash assistance the same way.

As food stamp coupons disappeared, the food-stamp program was supposed to realize the most savings. That has not happened yet.

"The administrative savings are not going to be as dramatic as early predictions indicated," said Phil Shanholtzer, spokesman for the U.S. Department of Agriculture, which oversees the food-stamp program.

Some advocates say the cards have reduced the stigma of public assistance for many who depend on food stamps. Recipients no longer have to count out coupons in front of strangers. In many states, recipients can use the same machines as ATM cardholders.

But food stamp recipients have lost a key benefit they once had. For the most part, they cannot use their new cards when they travel to other regions of the country. Illinois cards cannot be used in Washington, D.C. Under the old system, recipients could take their paper coupons anywhere.

U.S. Rep. Robert Goodlatte, a Republican from Virginia, has introduced legislation in Washington that would require all states to use the same cards by 2002.

The card system has also created problems for the disabled. Missouri surveyed 900 elderly and disabled who, 90 days later, had not yet accessed their food stamp benefits through their cards. Nearly one-third, or 300 people, said they did not understand the new system. With food stamps enrollment falling faster than the poverty rate -- more than 8 million have left the program since 1994 -- advocates are concerned that EBT may be contributing to the decline.

Nor have the cards led welfare recipients to open bank accounts. Without bank accounts, recipients in many states must pay access fees or surcharges at ATM machines.  

Although Illinois expanded its electronic system statewide in 1997, only five percent of welfare recipients there have their checks deposited electronically, says Dory Rand of the National Center on Poverty Law in Chicago. Rand recently pushed the state to begin publicizing direct deposit.

To be sure, many on welfare in Illinois and elsewhere used to have expensive money exchangers cash their welfare checks. Many others, however, had the option of asking a friend or store to do so.

By mandating ATM usage without requiring banks and stores to waive fees and surcharges, many states are, in essence, requiring all recipients to pay to access their benefits.

In five states, Alaska, Arizona, Colorado, Idaho and Washington, banks are not required to give welfare recipients any free visits to automated teller machines to withdraw money or view their balances.

Seven states, Alabama, California, Florida, Georgia, Illinois, New York, and Pennsylvania, allow banks and retailers to tack on surcharges to recipients who access their accounts through their machines.

In Kansas, Louisiana and Missouri, recipients are likely to pay both an access fee and a surcharge.

New fees have stirred the most controversy in New York State. This summer, New York City expanded its electronic benefits system from Staten Island to Manhattan and the Bronx. Previously, welfare recipients in New York City could go to their local check-casher to receive their bimonthly payments. The state, not the recipient, paid the check casher's fee.

Under New York's new card system, however, recipients must use an ATM machine. They can withdraw their benefits without cost, four times a month, but only at machines operated by Citibank, the bank designated to handle the electronic accounts.

Because Citibank owns few ATMs in neighborhoods where most welfare recipients live, recipients have the option of paying for a subway ride to a free ATM or paying a surcharge to use another bank's machine.

After the New York Times on August 16 ran an article on Citibank's practices, the bank agreed to grant recipients four free transactions at any ATM on the regional New York Central Exchange (NYCE) network. More than a month later, however, the free access is not yet in place.

"Citibank EBT reached an agreement with the NYCE network to provide electronic benefits free through the NYCE network. Bear in mind, however, that we are a contractor with the State of New York, and the State of New York has to agree to the terms and conditions before anything can be finalized. That process is now underway. We're waiting for the state to approve it (the agreement) so it can be implemented," Citibank spokeswoman Nina Das told stateline.org.

Sixty percent of welfare recipients in New York City are still going to check cashers and are paying for it, says Liz Kreuger of the Community Food Resource Center.

Throughout the country, Citibank dominates EBT. Twenty-nine states have hired it to run their systems. When another operator, Transactive Corporation, said it would leave the business when its contracts expire, Citibank said it would buy Transactive's accounts. When the Justice Department filed suit to block the deal, Citibank relented.

Because Citibank has said it has yet to realize a profit on its welfare accounts, advocates for the poor are concerned. "I think there is a real danger that when these contracts come up for renewal, we will see the removal of any free access," said Barbara Leyser, a consultant to the National Consumer Law Center who tracks EBT policy.

Michael Kharfen, a spokesman for the Department of Health and Human Services, says the federal government has no responsibility or authority to monitor state contracts. The department does track the amount of a state's welfare benefit, but not how those benefits are delivered.

A national EBT Task Force was disbanded in 1996 after the federal welfare law transferred most of the authority over welfare programs to the states.