OTHER EMERGING FINANCIAL INSTRUMENTS

OTHER EMERGING FINANCIAL INSTRUMENTS

Several other electronic payment systems are currently being prototyped and tested. These include debit cards, electronic benefit transfer cards, and smart cards.

Debit Cards at the Point of Sale (POS)

The fastest growing number of electronic transactions today are debit card point-of-sale transactions. Such a transaction occurs when a customer uses a debit card to make a purchase from a merchant (supermarket, gas station, convenience store, or some other store that accepts such cards instead of us-ing cash, check, or credit card).

The transaction works much like a credit card transaction. For example, a customer gives an ATM card to the merchant for the purchase. The mer-chant swipes the card through a transaction terminal, which reads the infor-mation; the customer enters his personal identification number (PIN); and the terminal routes the transaction through the ATM network back to the customer’s bank for authorization against the customer’s demand deposit account. The funds, once approved, are transferred from the customer’s bank to the merchant’s bank.

These transactions occur within the banking system, and safety of pay-ment is assured. The third-party processors who provide services for mer-chants are also examined by the federal regulators for system integrity. Both the consumer and the merchant maintain bank accounts, and the funds are transmitted inter-bank within the payment system. Authentication is pro-vided by the use of the digital signature or PIN numbers, just as it is at ATMs. Further, PINs are sent through the system in an encrypted form, and the PIN pads and terminals are tamper-proof. Dedicated lines are also often used for transmission,
particularly by larger merchants.

Debit Cards and Electronic Benefits
Transfer

Debit cards are being used extensively for electronic benefits transfer (EBT). Electronic benefits transfer uses debit cards for the electronic delivery of benefits to individuals who otherwise may not have bank accounts. In an EBT system, recipients access their benefits in the same way that consumers use debit cards to access their bank accounts electronically: the card is inserted into or swiped through a card reader and the cardholder
must enter a PIN associated with that card. The benefit recipient can then access his or her benefits to make a purchase or obtain cash. For example, food stamp purchases are charged against the participant’s allotment, and other purchases or cash distributions are charged against the participant’s cash assistance program allotment.

Benefits that can be delivered via EBT generally fall into three cate-gories: federally funded, but state administered benefits (such as food stamps, Aid to Families with Dependent Children programs); state-funded and state-administered benefits (such as general assistance, heating assis-tance, refugee assistance, and supplemental or emergency payments); and benefits that are both federally funded and federally administered (such as Social Security and Veterans benefits).

Through EBT, existing networks and technologies can provide benefit recipients with online access to their funds at pas devices and ATMs. In an EBT process, no paper changes hands, except for the receipt printed for the purchaser by the pas device or the
ATM. Recipients can access cash through any number of establishments, including grocers, drugstores, and financial institutions, as well as ATMs. Certain cash payments can also be facilitated by installing pas devices in housing authority and utility com-pany offices to accept rent and bill payments.

Electronic benefits transfer has several advantages over paper-based, benefit distribution systems. First, EBT is less costly. Currently, many recipi-ents of federal and state benefits must pay significant fees (three or more dollars) to cash their checks. EBT systems are designed to provide no-cost or low-cost access methods.


Second, EBT is more convenient than paper methods. EBT eliminates the need to carry food stamp coupons, stand in long lines to cash checks, or accept the entire benefit amount at one time. EBT programs also provide re-cipients with toll-free customer service lines and multilingual support to handle questions or problems. EBT is safer than cash or coupons, which can be lost or stolen. In EBT, benefits are stored electronically, and can be used only when needed and in the amounts required. Recipients control all ac-cess to their benefits through their cards and PINs. They can also deactivate lost or stolen cards immediately and request a replacement card by a toll free phone call.

Third, EBT is convenient for retailers. It eliminates the time-consuming task of handling food stamp coupons, making grocery checkout procedures faster and easier. By eliminating checks and coupons, EBT reduces losses as-sociated with theft, forgery, and fraud.

Finally, EBT is convenient for the government. Its inherent audit and tracking advantages enhance investigations into suspicious conduct by re-tailers. EBT improves benefit program management by creating an audit trail and record of benefit usage, ensuring that programs are working prop-erly and effectively.