Paper or Plastic?

Sometimes the best technology isn't the latest gee-whiz gadget, but something that's been around for a while. Sometimes the best cost-savings ideas aren't the result...
by | July 20, 2009

Sometimes the best technology isn't the latest gee-whiz gadget, but something that's been around for a while. Sometimes the best cost-savings ideas aren't the result of a gut-wrenching policy change, but arise simply by taking advantage of a trail blazed by others.

Such may be the case with using plastic "smart" cards to provide cash benefits instead of issuing paper checks. This technology, which has been around for 30 years, can put these plastic cash cards to use in a variety of benefit programs.

These plastic cards generally take two forms. One is the Electronic Benefits Transfer (EBT) card which is used to disburse food stamps, for example. State agencies typically such EBT card providers a per month fee for each card. The other is debit or cash cards, which are typically free for government agencies because the cards are financed primarily through merchant or user fees. When such a card is used at a point-of-sale transaction, for example, the card user pays the same price as other customers, but a small fee is charged to the merchant by the card issuer. If such a card is used to withdraw funds from an ATM, however, the card holder may (or may not) be charged a transaction fee, depending on the nature and number of such withdrawals. The precise details regarding fees, access to balances via call centers or the Internet, ATM or bank withdrawals are all subject to contractual negotiation.

From welfare to unemployment to child support, disbursing benefits through plastic can be less expensive and less labor intensive than printing and mailing paper checks or other forms of paper benefit delivery such as food stamps. The delivery of these benefits is also more secure with a card and less susceptible to fraud.

Food stamps without the stamps - an early driver of paperless benefits

As of June 17, 2009, food "stamps" will become a thing of the past. As of that date, the USDA will no longer accept the hoary paper coupons and the program, now known as SNAP (Supplemental Nutrition Assistance Program), will be 100% paperless, having completed the shift to electronic benefit transfer to distribute benefits.

Whether called food stamps or SNAP, the program is huge. According to the USDA, in February 2009 a record 32.6 million Americans received benefits worth $34.6 billion. In the past 15 years, the program has gone from being almost totally paper-based to being entirely paperless.

In 1994, the federal food stamps program distributed more than 97% of its benefits in paper form. A decade later, 95% of these benefits were distributed using electronic benefits transfer, in large part due to a requirement in the massive welfare reform of 1996. (See this USDA report to Congress describing this shift). In 2009, the USDA will no longer redeem paper coupons, forcing the last paper holdouts to make the switch.

The transition from paper coupons to EBT has lowered administrative costs, reduced fraud, and enabled greater management visibility into the program.

According to the USDA report to Congress, the switch has enabled better tracking of expenses and helped to cut down on fraud: "Because of the data available from the EBT system, we now have an audit trail of transactions which was not available in the paper system. In response to the availability of Food Stamp transaction data, FNS [Food and Nutrition Service] successfully developed and implemented an automated system to manage the EBT data and assist in detecting fraud."

The SNAP program has some of the hallmarks that make EBT a good candidate--regularly recurring benefits previously provided in paper form. Another good candidate? Unemployment insurance.

The check is not in the mail

The nation's unemployment insurance program looks to be going paperless--and fast. Advances in back-end processes and strong encouragement from the federal Department of Labor make it likely that the shift from paper checks to a paperless system will occur even faster than it did with the food stamp program.

Roughly 30 states now use plastic benefit cards to disburse unemployment insurance payments, saving on check printing, postage, and staff costs. The Kansas Department of Labor, for example, estimates that it will save $300,000 annually in paper and postage costs. In a partnership with Citi Prepaid Services, the expectation is that the new system will be "faster, more secure, and efficient." The Texas Workforce Commission estimates it saves $1.4 million a year by using electronic cards rather than paper checks for unemployment benefits.

Some states that use the plastic benefit cards still allow recipients to collect paper checks if they prefer, but that practice is rapidly disappearing.

Massachusetts will soon be making the switch to paperless, and once their partnership with commercial partners that includes MasterCard goes live, they will cease providing paper checks. There is a twist, however. For some time, Massachusetts has been encouraging recipients to receive their benefits through direct deposit. According to the Massachusetts Department of Unemployment Assistance website, "Over 40% of claimants have signed up for Direct Deposit of their benefit payments." For those recipients who have bank accounts--and given the fact this is a population that has, by definition, held a job recently--the direct deposit approach may be the most efficient of all.

KANSAS - Keeping the lid on fees

Depending on the specific contract terms negotiated by the state agency, these cards can wind up with a somewhat complicated fee structure. Critics have noted that those unfamiliar with ATM cards are sometimes confused by the fees associated with the cards. For the unsophisticated or those who choose to use ATM for frequent small withdrawals, these fees can add up.

According to Kathy Toelkes, a spokeswoman for the Kansas Department of Labor, the agreement with their partner provider is designed with fees in mind. "There are a number of ways a claimant can access their funds without incurring fees," says Toelkes, including one free ATM withdrawal per benefit cycle, free use of the card for Point of Sale purchases, and the ability to transfer the money into an account at any Visa member bank at no fee. Toelkes says the switch to plastic is expected to save the sunflower state more than $300,000 in printing and mailing costs. Following the switch in November 2008, there have been very few complaints. "The program has been successful for the most part," says Toelkes, who says that budget cuts prompted Kansas to look for ways to do more with less, and notes that "it has also been a way for us to help minimize fraud."

The federal department of labor, whose policies require states to provide one free withdrawal per benefit cycle, also defends the use of plastic. Not only does it save money, but it helps poorer recipients, those without bank accounts, of the even more onerous fees associated with check-cashing agencies. Such fees vary, but one check-cashing firm charges $3.50 to cash a $200 check, and $8.75 to cash a $500 check.

"Using direct deposit and debit cards are considered to be more efficient for the state, and provide unemployment insurance beneficiaries with a faster, less expensive, and safer method of receiving benefit payments," Department of Labor Spokeswoman Suzanne Bohnert said in a statement, according to a story by Stephen Clark of Foxnews.com.

OKLAHOMA - Pushing the envelope on plastic

Among states, Oklahoma may be the trendsetter in terms of using electronic forms of payment. To enhance efficiencies, the Oklahoma Department of Human Services not only uses an EBT system for the SNAP program and child care subsidy payments for low-income worker and students, it also centralizes the use of cash cards, enabling smaller programs to benefit from the efficiencies of plastic. A debit card program operated in partnership with Affiliated Computer Services (ACS) disburses the state portion of the Supplemental Security Income program, a sales tax rebate program, and payments from the Child Support Enforcement program. (The funds for Child Support Enforcement originate from non-custodial parents, but the state serves as an intermediary through wage garnishment, levy's, or tax rebate intercept.) In addition, Oklahoma unemployment benefits are also disbursed through a separate card system.

"We probably have more card programs than any other state," says Lisa Henley, the Director of Electronic Payment Systems for the Oklahoma Department of Human Services. Oklahoma's leadership has been recognized by the American Public Human Services Association (APHSA), the Oklahoma Governor's Quality Awards, and several others. In the coming months, Oklahoma will be adding an adoption subsidy program and a foster care payment program to the electronic payment portfolio.

Currently, Oklahoma saves about $1.4 million annually using the electronic payments. The savings arise not only from reduced check printing and mailing costs, but also less time and effort spent tracking down recipients from returned checks. "The client population is very mobile and has a very high address change rate, and often doesn't keep us informed of these changes," says Henley.

Henley calls the fee issue "a valid concern," but believes that a well structured contract can find a balance and enable clients to participate at low or no cost. In general, the cards make life better for clients compared to checks. "It is a cliché, but these cards put our clients in mainstream America," notes Henley. There is no fee for using the card for a point-of-sale purchase, and, unlike paper checks, there are no check-cashing fees. In addition, notes Henley, the plastic cards eliminate the problem of people being mugged for their benefit checks.

The Bottom Line = Win - Win - Win

Almost any regularly recurring benefit payment now sent through paper checks is a good candidate for either direct deposit, plastic cash cards, or both. Agencies save money, clients are better served, business partners make money. Environmentalists also point to the green benefit of this changeover given the reduction in paper consumed through checks and envelopes.

These little plastic cards can make a big difference--the biggest challenge is to thoughtfully design a contract and then work with clients to ensure that clients have a variety of low or no-cost ways to access their funds.

Though a large number of public entities are already using these cards, many still are not. While the technology is no longer cutting edge, for many agencies, this represents a low risk and commercially available approach that can save money and serve clients. As agencies everywhere look to become more efficient, a little plastic card holds the potential for big savings.

John O'Leary (johnoleary@alum.mit.edu) is the executive editor of the Ash Institute's Better, Faster, Cheaper web site, and coauthor of the book "If We Can Put a Man on the Moon..." to be published by the Harvard Business School Press in Fall 2009.

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