Food stamp EBT systems and program-eligible vs. non-eligible food items report to Congress

              18 0C7Y-A-OI /t^-Xi k~L*/l
USDA
United State*
Department of
Agriculture
Food and
Nutrition
Service
Office of
Analysis and
Evaluation
Food Stamp EBT Systems
and Program-Eligible vs.
Non-Eligible Food Items
August 1998
'C?9-co:
Report to Congress
0/
P 18
USDA
United States
Department of
Agriculture
Food and
Consumer
Service
3101 Park
Center Drive
Alexandria. VA
22302-1500
Food Stamp EBT Systems
and Program-Eligible vs. Non-Eligible Food Items
AUGUST 1998
Enclosed for your information is a copy of the "EBT Systems and Program-
Eligible vs. Non-Eligible Food Items" which was produced as a special report to
Congress as part of the Feasibility Study of Capturing Food Data at Checkout.
As part of the Personal Responsibility and Work Opportunity Reconciliation Act
of 1996 (PRWORA) one provision indicates Congress' desire that electronic
benefits transfer (EBT) systems be able to differentiate between program-eligible
and ineligible food items. PRWORA describes Congressional interest in using
technology to limit EBT food stamp purchases to eligible items. This requires
authorized retailers to have electronic scanning systems that are linked at the
point of sale to the EBT system in order to automatically communicate the total
cost of eligible items. PRWORA also mandated that the Food and Nutrition
Service (FNS) report back to Congress in August 1998 on the feasibility of
requiring such a link for food stamp EBT systems. This report is in response to
that request.
If you have any questions regarding this report, please contact Ken Offerman,
Family Programs Staff, Office of Analysis and Evaluation, (703) 305-2124.
AN EQUAL OPPOHRJNITY EMPLOYER £
USDA United States
Department of
Agriculture
Food and
Nutrition
Service
FOOD STAMP EBT SYSTEMS AND
PROGRAM-ELIGIBLE VS. NON-ELIGIBLE
FOOD ITEMS
Office of
Analysis and
Evaluation
August 1998
Authors:
John Kirlin, Abt Associates Inc.
William Adam, CCMI
Submitted by:
Abt Associates Inc.
55 Wheeler Street
Cambridge, MA 02138
Project Director John Kirlin
Submitted to:
Office of Analysis and Evaluation
USDA Food and Nutrition Service
3101 Park Center Drive, Rm. 214
Alexandria, VA 22302
Project Officer: Ken Offerman
RT TO CONGRESS
This study was conducted eater Contract No. t3-3lM4-02f eta tht Food and Nutrition Sarvica.
o< Agriculture, umlw th« mittwrt^ o(tt»« Food SUmp Act of 1»T7, •» amenO>d- Points of vww or
report do not nacaaaarMy rapraaant tha official position of Ilia Food and Nutrition Sarvica.
Daparftmant
mthis
P
The U.S. Department of Agriculture (USDA) prohibits discrimination in all its programs and activities on
the basis of race, color, national origin, gender, religion, age, disability, political beliefs, sexual
orientation, or marital or family status. (Not all prohibited bases apply to all programs.) Persons with
disabilities who require alternative means for communication of program information (Braille, large print,
audiotapc, etc) should contact USDA's TARGET Center at (202) 720-2600 (voice and TDD).
To file a complaint of discrimination, write USDA, Director, Office of Civil Rights, Room 326-W,
Whitten Building, 14th and Independence Avenue, SW, Washington, DC 20250-9410 or call
(202) 720-5964 (voice and TDD) USDA is an equal opportunity provider and employer
7?
Table of Contents
Nummary
Introduction
The EBT System Environment at the Point of Sale
POS Terminal Configurations
Identifying Eligible Food Items
Linking EBT Terminals to Retailers' ECRs
Integrated Terminals and ECRs
Stand-Alonc POS Terminals 8
Estimated Costs 11
Linking EBT and Scanner Systems in the WIC Program 17
Preventing the Purchase of Ineligible Items 18
Exhibits
Exhibit 1: Stores with Scanning Capabilities, by Store Type 12
Exhibit 2: Estimated Costs for Stores with Scanning Systems 14
Exhibit 3: Estimated Costs for Stores without Scanning Systems 16
Exhibit 4: Total Estimated Costs, by Store Type 16
i/
Food Stamp EBT Systems and Program-Eligible
vs. Non-Eligible Food Items
Summary
The Food Stamp Program (FSP) is designed to alleviate poverty-related hunger by increasing the food
purchasing power of low-income households. Program benefits are therefore restricted to the purchase of
eligible food items, as defined by program regulations. As a result, the use of program benefits to buy
non-eligible items and the exchange of benefits for cash (trafficking) represent major areas of concern
within the program. In an effort to reduce the incidence of these problems, the U.S. Congress desires to
know whether electronic benefits transfer (EBT) systems can be configured to differentiate between
program-eligible and non-eligible items.
The only technology currently able to differentiate between eligible and non-eligible items is food
retailers' optical scanning systems, which identify items based on bar-coded information affixed to their
packaging. An estimated 32 percent of all program-authorized retailers currently use scanning systems,
and these stores—which are mostly supermarkets—redeem approximately 74 percent of all food stamp
benefits. Because many scanning systems are programmed to identify FSP-eligible items, the accidental
purchase of non-eligible items with FSP benefits should be reduced in these stores.
The mere presence of an optical scanning system, however, is not sufficient to prevent the purchase of
non-eligible items with FSP benefits. For an EBT system to differentiate between eligible and non-eligible
items, two factors must be present in program-authorized stores. First, the store must use a
scanning system. Second, the store's EBT terminals must be linked to the store's electronic cash registers
at the point of sale (POS) so that information on scanned and eligible items can be passed to the EBT
system. Only then can EBT purchase amounts be limited to the total dollar value of program-eligible
items.
Achieving this linkage is technically feasible si about 95 percent of all authorized retailers. Indeed, the
required linkage already exists in a relatively small percentage of FSP stores using newer, integrated POS
systems and in stores participating in an EBT demonstration for the Special Supplemental Food Program
for Women, Infants and Children (WIC). Introducing the required hardware and software in all FSP-
authorized stores, however, will be quite expensive. The estimated initial cost is $4.60 billion, of which
$3.30 billion is for the estimated 68 percent of program-authorized stores that currently do not scan. To
maintain this functionality over time would require an additional expenditure of $752 million per year to
equip new stores entering the FSP and to establish service agreements for equipment in stores that
currently do not use scanning equipment. These cost estimates are not indicative of the costs the WIC
Program would face in implementing EBT, where costs would likely be lower due to a smaller retailer
base, a larger percentage ofWIC stores already scanning, and differences in technical requirements
between the two programs.
No assumptions are made regarding how the estimated cost of $4.60 billion might be shared between the
public and private sectors. Although many of the equipment upgrades envisioned would benefit retailers
as well as help achieve the desired EBT functionality, most smaller food retailers have been unwilling to
make the investment to date. Further, when considering non-scanning stores, the hurdles to be overcome
in introducing a scanning system within a store extend well beyond price. Implementing a scanning
system requires much more than simply installing new hardware and software. The store must be
committed to creating an accurate computerized price file, working with suppliers to keep the price file
up-to-date, training staff on how to use scanners, and generally dealing with and working through the
problems and hassles that often accompany the introduction of a new technology. Therefore, in order to
achieve Congress's desired intent across all program-authorized stores, a strong commitment would be
needed in terms of both financial resources and an effort to encourage program-authorized stores to adopt
newer technologies and equipment.
Finally, investing in new hardware and software will not eliminate trafficking or the purchase of
ineligible items with food stamp benefits. First, scanning is either not feasible or not practicable in about
S percent of all program-authorized stores (mostly route venders, produce stands, and residential
facilities), so no controls would be added there. Second, even where scanners are used, the new
technological controls cc old be circumvented by retailers who wish to traffic or scan non-eligible food
items as eligible in order to access food stamp benefits.
Introduction
The Food Stamp Program (FSP) is currently transit iomng to a new method for issuing and redeeming
food stamp benefits. Paper food stamp coupons are being replaced with electronic benefits transfer (EBT)
systems. In an EBT system, food stamp recipients receive an EBT card that provides access to a
computerized account in which program benefits are stored. When the card and its associated security
code are used at a special EBT terminal at a store's checkout lane, the dollar amount of the food stamp
purchase is electronically subtracted from the recipient's EBT account and credited to the store's account.
In March 1993, just over 1 percent of food stamp households nationwide received benefits through EBT
systems. By March 1998,37 percent of all food stamp households were receiving benefits through EBT
systems in 30 states. As part of the Personal Responsibility and Work Opportunity Reconciliation Act of
1996 (PRWORA), Congress has mandated that all states issue and redeem food stamp benefits with EBT
by October 1,2002.
One provision within PRWORA indicates Congress' desire that EBT systems be able to differentiate
between program-eligible and ineligible food items. The specific language requires that state EBT
systems include:
(ii) effective not later than 2 years after the date of enactment of this clause, to the extent
practicable, measures that permit a system to differentiate items of food that may be
acquired with an allotment from items of food that may not be acquired with an allot-ment;
1
The FSP currently relies on cashiers to determine eligible from ineligible food items. Neither coupons
nor existing EBT systems indicate what is being purchased and paid for with food stamp benefits. Thus,
they cannot limit what is being paid for with program benefits.
The only automated systems in place in the retail food industry that can identify the items purchased are
optical scanner systems. Using special bar codes placed on food items, scanner systems can identify what
is being brought to the checkout lane for purchase. Scanner systems, however, are not configured to
place limits on the value of EBT transactions. Indeed, in most retail stores in EBT states and counties,
Jierc is no direct link between the EBT system and the retailer's optical scanner system.
This report explores the feasibility and potential cost of enabling EBT systems to differentiate between
program-eligible and ineligible items It considers the cost of upgrading systems in stores that now have
1 Public Law 104-193, Section 825 (aX2)(DXii)
scanners and the cost of installing new systems in stores without scanners. The report also examines the
potential for the purchase of ineligible items even with the introduction ofnew technological controls.
The EBT System Environment at the Point of Sale
Before identifying ways in which a link between an optical scanning system and an EBT system might be
achieved, it is necessary to understand how retailers' point-of-sale (POS) systems at the checkout lane
currently operate. We therefore discuss below POS terminal configurations and how retailers currently
identify food stamp-eligible food items.
POS Terminal Configurations
EBT transactions, together with credit card and debit card transactions, form part of a class of electronic
financial transactions known as electronic funds transfers, or EFT. Any retail food store wishing to
accept a credit, debit, or EBT card for payment must have a terminal at the point of sale with EFT
capabilities. The POS terminal (or a separate "backroom" computer controlling multiple terminals)
formats a message to the EFT processor seeking payment authorization for individual transactions
initiated with the credit, debit, or EBT card.
Excluding for the moment terminals that can handle EBT transactions, retailers have two general types of
POS terminals capable of handling EFT transactions. The most common is a "stand-alone" terminal,
separate from the store's cash register. To use a stand-alone terminal, the cashier needs to manually key-enter
the purchase amount on the terminal's keypad. Far less common are "integrated" POS terminals, in
which all EFT transactions are processed directly by the store's electronic cash register (ECR) With an
integrated terminal no manual entry of purchase amount is required; the total amount of the sale is
automatically incorporated into the EFT transaction request.
With the addition ofEBT, three different terminal configurations are possible:
• stand-alone terminals that process only EBT transactions,
• stand-alone terminals that process credit and debit card transactions, as well as EBT trans-actions;
and
• integrated terminals, in which all electronic funds transactions are processed by the store's
ECR
The configuration in place in any given store depends on several factors. FSP-cithorized stores using
govemment-suppiied equipment may participate in an EBT system without paying any program-related
fees or charges. That is, when a state implements an EBT system, stores without electronic payment
terminals (i.e., those stores not accepting credit or debit cards) can elect to receive stand-alone, EBT-only
terminals from the state free of charge. Unless the store's food stamp redemptions exceed IS percent of
total food sales, however, the number of lanes that will be equipped with free EBT terminals is limited to
one free terminal for each $8,000 or $11,000 in monthly food stamp redemptions.2
Stores having no EFT capabilities can negotiate if they wish with the EBT vendor (or another vendor) for
installation of stand-alone EFT terminals that can accept EBT, credit, and debit cards. Unlike the EBT-only
stand-alone terminals, retail stores need to pay for fully-functional EFT terminals. They may,
however, be able to recover some or all costs through per-EBT-transaction charges negotiated with the
EBT vendor.
Finally, EBT functionality can often be added to stores with existing credit and debit card capability,
whether their existing POS terminals stand alone or are integrated with the lane's ECR Typically, the
software controlling the debit and credit transactions must be modified so that EBT transactions are
routed to the state's selected EBT vendor, either directly or through the store's selected EFT processor.1
It is the store's or processor's responsibility to see that terminal software is upgraded to handle EBT
transactions. Again, per-transaction charges may be applied to EBT transactions handled by the terminal.
These charges would be paid by the EBT vendor.
Identifying Eligible Food Items
Before turning to the issue ofhow EBT systems might be able to differentiate between program-eligible
and ineligible items, we discuss how scanning systems identify eligible items.
It is unlawful to use FSP benefits to purchase anything other than "eligible foods." According to
regulation, eligible foods include:
• Any food or food product intended for human consumption except alcoholic beverages,
tobacco, and hot foods and hot food products prepared for immediate consumption; and
• Seeds and plants to grow foods for the personal consumption of eligible households.4
2 The monthly redemption figure for supermarkets it 511.000, for all other stores it is $8,000
3 Some stores process their own EFT transactions, whereas others contract with a third party for this service.
4 CFR Section 271.2 (Definitions). "Eligible foods" also includes meals prepared and delivered or served by various
institutions, as specified in the regulation.
Food stamps cannot be used to buy:
• Any non-food items, such as:
- petfoods
- soaps, paper products, and household supplies
- grooming items and cosmetics
• Alcoholic beverages and tobacco
• Vitamins and medicines
• Any food that will be eaten in the store
• Hot foods that are ready to eat
• Any food marketed to be heated in the store
In many stores it is up to the cashier to enforce these limits on program-eligible food items. That is, if the
customer says that food stamp benefits will be used to pay for all or a portion of the items brought to the
register, the cashier is supposed to ensure that food stamp benefits are not used to pay for ineligible items.
Although many cashiers are diligent about ensuring that food stamps are used only for eligible items, the
possibility clearly exists that ineligible items will sometimes be purchased with program benefits, either
intentionally or accidentally. This is the case regardless of whether the customer is using food stamp
coupons or an EBT card.
In more and more food stores, however, optical scanning devices are being used to scan bar codes on
purchased items to ring up the item's price. Bar codes on most pre-parkaged items (e.g., cereal, milk,
canned fruits and vegetables, frozen dinners) adhere to a Universal Product Code (UPC) format that
enables the store's POS system to uniquely identify the item.5 Food retailers with scanning systems also
create their own unique bar codes for non-UPC items such as meat, cheese, or fruits und vegetables
supplied by local independent suppliers. These latter bar codes ore referred to as price look up (PLU)
codes. PLU codes generally contain coded information about the item's category or department (e.g.,
aeat) and its unit price.
A store's primary purpose for installing a scanning system is to improve productivity at the checkout
counter When the store maintains a computerized "price file" that lists each UPC in its inventory and its
associated price, die store's POS system can auton tically ring up an item's price when the item's UPC
S The UPC is typically a 12-digit number composed of a six-digit manufacturer's code, a five-digit item number
(selected by the manufacturer), and a single check digit. Some versions of the code remove embedded zeros; the
remaining portion of the code follows an accepted pattern for indicating where the zeros are located within the ovcall
code.
code is scanned.6 Scanning systems also provide a means of tracking inventory. More important for this
report, however, is the fact that most stores with scanning systems also have a means of tracking which
items being purchased are food stamp-eligible. The same computer file that contains a price associated
with each UPC code also can be programmed to contain a food stamp eligibility "flag" associated with
each item. As the store builds and maintains its price file, the flag is set whenever the item is eligible.
The same process occurs for items with PLU codes. Then, as items are scanned, the store's POS system
tracks both total price and the price of all food-stamp-eligible items. After all items are rung up, the POS
system can display a food stamp subtotal f the customer plans to use food stamp benefits to pay for all or
part of the purchase. This process reduces potenti ' cashier error or confusion as to whether an item is
FSP-eligible or not7
Linking EBT Terminals to Retailers' ECRs
To enable EBT systems to distinguish between eligible and ineligible items, two conditions must be met.
First, the store must have an optical scanning system in place, with a price file that flags food stamp-eligible
items. Second, because the scanning system is linked to the stores ECR, the EBT terminal must
communicate w»th the ECR as well Operationally, with such linkage the ECR would first determine the
food stamp total based on the total price of all food stamp-eligible items scanned. Then, the ECR would
generate the EBT truisaction request without requiring manual entry of the food stamp total. Limiting
the transaction request total to the sumi. ' value of FSP items would ensure that food stamp benefits
were not used to buy ineligible items.8
Integrated Terminals and ECRs
The desire that food stamp benefits be limited to food s amp-eligible items is already being met in stores
with integrated POS terminals.9 In such systems, the POS terminal may be integrated with a store's ECR
6 Prices for items with PLU codes are computed by multiplying the item's unit pnee, coded within the PLU, by its
weight or size, as determined at the checkout counter
7 The POS software that identifies FSP-eligible items has been created independent of USDA involvement.
Programming and updating the software to identify which items are eligible are the responsibility of the retailer and
product suppliers USDA has made no effort to monitor or verify the accuracy or timeliness of this software to ensure
thai items are properly flagged
8 'l .us, of course, assumes no overt fraudulent activity, such as scanning eligible iterrs that the I'istomer does not intend
to purchase The potential for fraud is examined further later in this report
9 It should also be pointed out that, in the EBT demonstration ■ n Wyoming, a small number of stores have integrated
POS terminals that limit the purchase of food items in the Special Supplemental Food Program for Women, Infants
nd Children (W1C) to WIC-prescribed items. The efforts of the WIC Program to link scanner systems and EBT are
^escribed later in this report
through cabling, or the terminal and ECR may be built together as a single unit. In either situation, the
ECR's EFT software module will normally be configured to prevent a food stamp EBT transaction
amount from exceeding the subtotal of food stamp-eligible items. For example, once the cashier presses
the "Food Stamp EBT' tender key on the ECR, the ECR will format a message to the EBT vendor
requesting authorization for a food stamp transaction not to exceed the food stamp subtotal of scanned
items.
Stand-Alone POS Terminals
Most retail food stores in EBT locations, however, have stand-alone EBT terminals The EBT terminal is
not linked to either the ECR or the optical scanner device. Instead, the cashier key-enters the requested
EBT transaction amount into the EBT terminal. In stores with scanners, the appropriate dollar value of
food stamp-eligible items is likely to be subtotaled by the ECR In other locations, the clerk must
determine the appropriate subtotal.
For current purposes, stand-alone POS terminals that can process commercial debit or credit transactions
as well as EBT transactions are similar to EBT-only terminals; the EBT purchase amount still needs to be
manually key-entered into the terminal.'0 The following discussion therefore speaks of both types of
terminals as simply "stand-alone" terminals.
The manual key entry of the EBT payment amount on a stand-alone terminal clearly has the potential for
key entry error, even in stores with scanner systems. Furthermore, with manual key entry, there is no
automatic means to ensure that food stamp benefits are not being used to purchase ineligible items. To
achieve the functionality required by Congress, a store owner with a stand-alone terminal would have
three options:
(1) Replace the stand-alone terminal (and the retailc. s current ECR, most likely) with an
integrated terminal/ECR with appropriate software,
(2) Physically connect the existing terminal and ECR and make necessary software mod-ifications;
or
(3) Transfer EFT processing to the existing ECR by making necessary software modifications,
and scrap the old stand-alone terminal.
10 This is the principal distinction between stand-alone and integrated terminals
I
Ofcourse, software modifications would most likely be dor.e by hardware or software vendors, not by the
retailer
The first option takes us to where this section started—an integrated terrninal/ECR already programmed
to meet Congress' requirements. Integrated systems, however, are a very expensive solution for the
individual retailer." As such, it seems a viabie option only for retailers who are about to upgrade their
POS systems anyway. The remainder of this section discusses the other two options noted: physically
connecting the terminal and ECR, and transferring all EFT processing (including EBT) to the ECR.
One way to transfer food stamp subtotal information to an EBT payment terminal is to connect the two
devices physically, for example by connecting the EBT terminal to the ECR with an RJ45 or RS232
cable. The ECR would need to be programmed to pi ss the EBT subtotal amount and program type to the
EBT terminal once the ECR's "EBT Payment" key was pressed The EBT terminal would also require
programming to accommodate the EBT tender total and program type information passed from the ECR
With this reprogramming, the EBT subtotal amount and program type would automatically be present
within the EBT terminal when the clerk (or client) pressed the EBT terminal's "send" button, thereby
initiating EBT processing of the purchase. The EBT terminal's programming would also need to allow
for an "override" function for food stamp or cash assistance pvchases, allowing the clerk to manually
key-enter a lower dollar amount for the EBT transaction, but not a higher amount. The manual override
would be used when the client's remaining EBT balance was less than the purchase amount (for cash
assistance transactions) or food stamp subtotal (for food stamp transactions), or when the client decided
for other reasons to use another payment form (e.g., cash) for part 01 the food stamp-eligible portion of
the total purchase.
To complete the tender process, the customer would enter his or her security code, and the transaction
would be sent to the EBT processor for approval. Once the EBT transaction was authorized, the EBT
terminal would pass the acknowledgment on to the ECR. Upon receipt of the EBT acknowledgment, the
ECR would apply the EBT payment amount to its record of the transaction
There are several substantial hurdles to be faced in achieving the above physical connection and
functionality First, older ECRs do not have an available communications port for a connecting cable In
11 As discussed later in the report, an integrated system is likely to cost at least $8,000 per lane
9
addition, software revisions to many of these older ECRs are no longer supported by the ECR vendor. In
these situations, retailers would likely need to replace their ECRs with newer, integrated models to meet
the goal of linkage.
Even when the EBT terminal and ECR can be connected, both require reprogramming to achieve the
desired linkage. Contacts with EBT vendors suggest that EBT terminal software development would cost
at least $35,000 to $40,000 This estimate, however, does not include the cost of installing the updated
software in the EBT terminals. This cost estimate also assumes that the information being passed from
the ECR would be in a standard format, regardless of ECR manufacturer or model. Without such a
protocol, separate reprogramming would be needed for each model of ECR to which EBT terminals are
connected. There are at least several dozen popular models of ECRs for which separate programing
might be required.
Finally, the ECR needs to be reprogrammed. The programming itself should not be too difficult It is
likely to be time-consuming and difficult, however, to get the numerous manufacturers and retailers
involved to undertake the programming. Furthermore, as noted above, the programming specifications
should adhere to a standard interface protocol with the EBT terminal.
The above discussion suggests that the physical connection approach may be quite difficult, achievable
only on an interface-by-interface basis. Looking to the future, however, several independent software
vendors offer payment system software that will allow the integration of the terminal to the ECR. Even
this software would need to be modified, however, to ensure that the EBT total did not exceed the food
stamp subtotal for food stamp purchases and to allow manual override when the EBT transaction amoint
needed to be less than the food stamp subtotal. Due to the expense involved, these software solutions
tend to be targeted to multi-lane supermarkets with newer POS systems.
Another option for "linking" the terminal and ECR involves processing all EFT transactions directly from
the ECR, eliminating the need for a separate POS (or EBT) terminal. At least two companies provide
software that allows the ECR to control all EFT transactions, directly routing debit and credit transactions
for approval. Although these software products do not now have the capability to process EBT trans-actions,
this functionality could presumably be added. This approach, however, would seriously narrow
retailers' choice of software vendors unless the other major vendors ofECR software decided to develop
and offer similar packages. Unless this happened, the physical connection approach would probably gain
wider acceptance among retailers, ECR manufacturers, and software vendors.
10
Estimated Costs
Approximately 183,300 retailers in the United States are authorized to participate in the FSP. Ofthese,
about 173,700 represent retail food outlets where optical scanning systems could be used to identify
program-eligible food items.12 In January 1998, these stores redeemed $1.44 billion in food stamp
benefits, or over 99 percent of that month's total redemption of $1 45 billion.
By October 1,2002, when EBT is mandated for all states, having established in the prior section that it
should be technically feasible to link ECRs to EBT terminals, the next question is what costs would be
incurred to achieve this linkage. This section assembles available information to provide an estimate of
the cost to upgrade EBT systems. The cost calculations are meant to be conservative, providing a lower-bound
estimate of the cost to link ECRs, scanners, and EBT terminals in nearly all program-authorized
stores. No attempt is made to discuss how these costs, which are substantial, might be allocated or shared
between the public and private sectors.
Exhibit 1 presents the distribution of the 173,700 program-authorized food stores in the United States by
store type, together with two estimates of the percentage of stores equipped with optical scanning
systems. The first estimate is based on USDA's Store Tracking and Redemption Subsystem (STARS)
database. This estimate is a known lower-bound estimate; retailers self-report their scanning status when
they are authorized, but this information is not updated at re-authorization. Overall, the STARS database
indicates that about 18 percent of program-authorized stores use scanners.
The second estimate of stores with scanning systems is based on figures presented in industry trade
publications and, where figures are not available, on the judgement of an independent contractor with
experience in retail scanning systems.11 Trade publications indicate that about 93 percent of chain-based
supermarkets use scanning systems, compared to about 83 percent of independent supermarkets. The
estimate of 88 percent in Exhibit 1 assumes that chain-based and independent supermarkets are evenly
distributed across program-authorized stores. These publications also indicate a substantial recent jump
in the percentage of convenience stores with scanners—up to 33 percent. This estimate seems skewed by
12 The remaining lociuoru include about 5,500 route vendors and produce stands—places where optical scanning
systems cannot be installed or where installation would make no sense because he product being sold has no affixed
UPC codes. Another 3,900 locations are not retail food outlets, they include places like drug and alcohol treatment
centers, women's shelters, group living homes, communal dining facilities, and food wholesalers
13 Consumer Card Marketing, mc. (CCMI) is a subcontractor to Abt Associates Inc. for the study under which this
report has been prepared. CCMI markets card-based "frequent shopper" systems to stores with scanner systems.
11
Exhibit 1
Stores with Scanning Capabilities, by Store Type
Store Type
Number of
Authorized
Stores
Percentage
of Total
Stores
Percentage
of Total
Redemp-tions
Percent with
Scanners
(lower-bound)*
flaairiant HI.
Scanners
(updated
estimate)*
Supermarket 31,295 180 79.2 78 G8
Military commissary 244 0.1 0.1 75 88
Medium to small grocery 44.691 25.7 10.9 5 20
Convenience store 47,665 274 3.0 4 25
Grocery/Gas station 21.792 12.5 1.1 5 10
Other grocery combination 4,844 2.8 1.1 47 60
Specialty food 15,619 9.0 3.6 3 10
General store 2,486 1.4 03 4 10
Grocery/Restaurant 861 0.5 0.1 2 5
Health/Nutrition food 1.580 0.9 0.1 7 10
Other stores 2.621 1.5 0.4 5 10
ALL STORES 173,700 100.0 100.0 18 32
a Based on STARS data.
b Based on recent trade publications and judgement of independent contractor
Note: Percentages m*y not sum of 100 0 due to rounding
the small sample of convenience stores responding to an industry survey, however, so we have used a
more conservative estimate of 25 percent. For the other store types, no evidence regarding the prevalence
of scanning systems is currently available. The assumed values ii. the exhibit are meant to be con-servative
while acknowledging that, over time, more stores are installing scanning systems. With these
newer figures, the estimated proportion of all program-authorized stores with scanning systems is 32
percent.
Stores with scanning systems can be grouped into three categories, depending on what needs to be done
in the store to achieve linkage between the POS/EBT terminal and the ECR Nothing needs to be done in
stores whose ECRs and POS terminals are already integrated. In stores with newer ECRs and stand-alone
terminals, the terminals and ECRs need to be physically linked, and software needs to be upgraded.
Finally, in stores with older ECRs, physical linkage often is impossible because the ECR has no available
12
communications port for a cable to the EBT/POS terminal Linkage in these stores is possible only by
replacing the older systems with newer ones. In estimating the cost of achieving linkage, we have
assumed a 20/40/40 distribution across these categories. That is, we assume that 20 percent of stores with
scanning systems have integrated POS systems, 40 percent have terminals and fcCRs that can be
physically linked, and 40 percent have systems requiring complete replacement.14
Exhibit 2 shows the estimated cost of achieving linkage among stores with scanning systems. Total
estimated cost for these stores is $1.30 billion For the estimated 22,387 stores needing a physical
connection between their ECRs and EBT/POS terminals, the total cost is $15.0 million, or an average of
$670 per store. For the estimated 22,387 stores requiring new equipment, however, the total cost is $ 1.29
billion, or an average of $57,410 per store. These cost estimates are based on the following assumptions
developed by the study's subcontractor:
• For stores requiring new equipment
- For multi-lane stores, cost for a system controller averages $ 15,000 per store, including
regular POS software.15
- Cost for a basic integrated ECR/terminal, with regular POS software and an optical
scanner, averages $8,000 per lane.
- The cost to modify ECR software averages $40 per store.
- The average cost to modify EBT terminal software is $25 pa store.
- Cost for installation and training averages $800 per day, with two to five days needed per
store, depending on size.
- All lanes are equipped, even if EBT terminals arc not present in all lanes
• For stores needing an upgrade
- The cost to modify ECR software averages $40 per store.
- The average cost to modify EBT terminal software is $25 per store.
- The cost to install software and physically link the ECR and terminal averages $200 per
lane.
- In stores with one or two lanes, all lanes are upgraded. In stores with three or more lanes,
one-half of all lanes, on average, are upgraded."
14 No industryMMtracks the distribution of scanning systems according to these categories, either for all Mora as a
group or for specific store types. One EBT vendor stated that, in the states it served, about halfofthe ECR systems
were so old that no communication ports existed. The assumed split of 20/40/40 is a bit more conservative in terms of
futimatwi total costs required to upgrade or replace ECR systems in stores with scanning systems.
15 No controller is needed for single-lane stores.
16 The assumption is that all lanes with EBT terminals are upgraded Under federal EBT regulations, about 47 percent
ofall lanes are eligible for free, government-provided EBT terminals. The actual percent is higher because all lanes
are equipped in some stores, whether by the EBT vendor or store owner.
13
Exhibit 2
Estimated Costs for Stores with Scanning Systems
Store Type
Upgrade Required System Replacement Required
Total Cost
(000s)
Average
Cost/Store
Total Cost
(000s)
Avenge
Cost/Store
Total Cost
(000a)
Supermarket $ 960 $10,577 $ 90,323 $ 994,992 $1,005 569
Military commissary 1,213 104 109,923 9,449 9.554
Medium/Small grocery 334 1,196 20,767 74,247 75,443
Convenience store 360 1,716 21,137 100,749 102,465
Grocery/Gas station 362 315 21,607 18,835 19,150
Other grocery combination 694 807 61,338 71,303 72,109
Specialty food 307 192 15,047 9,401 9,593
General store 368 37 22,102 2.200 2,236
Grocery/Restaurant 343 6 19,385 334 340
Health/Nutrition food 353 22 22,031 1,393 1,415
Other stores 367 38 22,359 2,344 2,383
ALL STORES $ 670 $15,010 $ 57,410 $1,285,245 $1,300,255
Note: Columns may not sum to reported totals due to rounding.
Note that the assumptions regarding lane coverage differ for the two groups of stores. In stores in which
linkage can be achieved with a software upgrade, the ECR software in each lane gets upgraded (at an
average cost of $40 per store), but cabling is required only in those lanes where EBT terminals are
present. Thus, costs are reduced to the extent that EBT lane coverage in a store is less than 100 percent.
In contrast, for stores needing ^graded ECRs, all lanes need to be upgraded even if all lanes are not
equipped with EBT terminals. Otherwise, the store would be operating with a mix of both new and old
ECRs and software. A store could not operate efficiently with two different POS systems, so we must
assume that all lanes are equipped with new ECRs. This accounts for the high cost of totally replacing
the store's POS and ECR terminals
Turning to stores without scanning systems, their equipment and software needs are similar to scanning
stores with older POS systems. That is, they need a complete ECR and POS system at each lane. Thus,
the same assumptions are used in estimating equipment costs for these stores These stores, however, also
14
have to develop an infrastructure to support use of scanners In particular, a store-specific price file needs
to be created and maintained. The price file is a computer file with one record for each type of item in the
store's inventory. Each record typically includes a short descriptor for the item, its bar code identifier
(which is the item's UPC or PLU code), a food stamp-eligibility flag, and the item's price. Whenever the
store wishes to change the price of an item or add a new item to its inventory, the price file needs to be
updated. The cost of creating a price file will vary depending on the size of the store and how data are
collected and added to the file. In any event, it is typically a labor-intensive process. The estimated cost
here varies between $4,000 and $7,500 per store, based on information provided by the study's
subcontractor.
Exhibit 3 presents the estimated costs for installing scanner systems with the desired linkage in stores that
currently do not use scanning systems. The average cost for a single store, $28,028, is much lower than
for scanning stores needing equipment upgrades because stores without scanners tend to be much
smaller.'7 Even with a lower per-store cost, however, the total amount is $3.30 billion. With the number
of program-authorized non-scanning stores estimated at nearly 118,000, any attempt to introduce
unproved technology at the checkout is going to be expensive. When the cost of $3.30 billion is added to
the estimated cost of $1.30 billion for already-scanning stores needing upgrades or new equipment, the
total cost is $4.60 billion. Exhibit 4 shows how this total cost is distributed across the different store
types within the FSP. Even though 88 percent of supermarkets already scan, the cost of upgrades at these
stores and new equipment at the remaining supermarkets represents 30 percent of the total estimated cost
for all stores. This expense arises because the average number of checkout lanes in supermarkets (nearly
nine lanes per store, based on data in the STARS database) is much higher than in other stores. Costs are
high at small- to medium-grocery stores and convenience stores because of the large number of these
stores participating in the FSP.
17 Based on the STARS database and this report's assumptions regarding the percentage of stores with scanning
equipment, non-scanning stores average 1 8 lanes per store. In contrast, stores with scanning systems average S.2
lanes per store This arises because supermarkets and military commissaries are both the largest types of store and the
most likely to scan
15
ExMbttS
Estimate* Costs for Stores without Scanning Systems
Store Type
New System Required
Average
CoetfStore
Total Cost
(000s)
Supermarket $ 97,623 $ 367,367
Military commissary 117,423 3.441
Medium/Small grocery 26,767 956,991
Convenience store 25.137 898,609
Grocery/Gas station 25,607 502.228
Other grocery combination 65,338 126,588
Specialty food 19.047 267,743
General store 26.102 56,446
Grocery/Restaurant 23,385 19.124
HealtWNutrrrion food 26,031 37,022
Other stores 26.359 62.184
ALL STORES $28,028 $3,299,743
ExhJWt4
Total Estimated Costs, by Store Type
Store Type
Total Cost
(000s)
Percentage of
Total Coat
Supermarket $1,372,936 30
Military commissary 12.995 <1
Medium/Small grocery 1.032.434 22
Convenience store 1,001,074 22
Grocery/Gas station 521.378 11
Other grocery combination 196,697 4
Specialty food 277.335 6
General store 60.682 1
Grocery/Restaurant 19,464 <1
Health/Nutrition food 38.437 1
Other stores 64.567 1
ALL STORES $4.599.fr99 100
16
The total cost estimate of $4.60 billion represents the cost to achieve a linkage between EBT terminals
and store ECRs in all currently authorized FSP stores. The cost estimate, which equals approximately
$26,000 per store, will change somewhat to the extent that the number of FSP-authorized stores changes
in the near future. Over time, estimated costs would be expected to decrease as more stores introduce
newer scanner and POS systems on their own. Any expected reduction in total costs is likely to be small,
however, unless the percentage of stores adopting scanner systems increases dramatically, especially in
supermarkets, medium- to small-grocery stores, and convenience stores.
It is also important to consider any costs which would be required to maintain the linkage between EBT
and ECR system: in the future In recent years, an average of about 21,000 new stores have been
authorized annually. If one assumes that these new stores have the same distribution of store types ai. J
existing scanning equipment as current program-authorized stores, then the estimated cost of linking these
stores' EBT terminals with their ECRs would be about $556 million per year." All stores, both new and
old, would also need to establish service agreements to maintain their equipment in working order.
Providing service agreements for all stores would cost about $371 million per year.'9 Ofcourse, stores
with existing scanning equipment and ECR* already pay for their own service agreements, so the total
cost for service agreements in stores that do not currently scan would be lower—about $196 million per
year. In addition, in future years, the scanning equipment and ECRs in many stores may need to be
updated as improved technology becomes available. This report, however, does not attempt to estimate
the cost of future upgrades.
Linking EBT and Scanner Systems in the WIC Program
In recent years, the Special Supplemental Food Program for Women, Infants and Children (WIC) has
begun to explore EBT as a means to automating its paper-based transaction process. WIC benefits,
however, comprise a specific "prescription" of food items tailored to the nutritional needs of the
participant. This makes WIC's requirements much different from those ofthe FSP. In particular, because
the prescribed quantity and list of authorized foods varies from one participant to another, an EBT system
for the WIC Program must be able to recognize what is being purchased before authorizing payment to
the retailer. That is, an automated screening process for eligible foods must be incorporated within the
18 The estimated cost is based on an average cost of $26,482 per store
19 This cost estimate assumes that annual service agreement costs would average $1,000 per lane in small stores, $750
per lane in medium-sized stores, and $500 per lane in supermarkets and military commissaries. The costs are based
on information supplied by a firm providing POS service agreements.
17
system. An EBT demonstration in Natrons County, Wyoming showed the technical feasibility of
integrating scanner technology with an EBT system, and other states are planning shrilar demonstration
projects.
At this point it is too early to determine how the WIC Program's efforts to integrate EBT systems and
scanner systems might affect efforts to achieve a similar functionality in the FSP. The two programs are
very different. For instance, whereas there are over 173,000 FSP-authorized food retailers, WIC has only
about 45,000 retailers authorized nationwide. Furthenr'Ye, although detailed information is not
available, a larger percentage ofWIC versus FSP retailers are supermarkets where scanning systems are
already likely to be present.
The technical requirements for integration also ditto between the two programs. The totai number of
WlC-chgiblc food items across the nation is estimat/xl to be on the order of 10,000, whereas the number
of FSP-chgiblc items is at least ten times greater. Furthermore, within any given state, the number of
WIC-chgible items can be as few as 2,000. Thus, it is possible to develop an EBT system for the WIC
Program without linking the EBT termir.al to the retailer's scanner system and associated host price file.
Instead, a scanning device can be hooked directly to the EBT terminal, and information about the limited
set of WIC-authorized food items can be stored in a separate EBT file. This approach bypasses the
difficult task of integrating the EBT terminal with the retailer's ECR;o Due to these differences in
retailer populations and technical requirements, the cost estimates presented in the previous section
should not be extended to the WIC Program.
Preventing the Purchase of Ineligible Items
At a total estimated initial cost of $4.60 billion, phis an additional cost of $752 million per year, about 95
percent of all FSP-authorized stores could be configured so that EBT benefits could be used to purchase
only program-eligible food items These stores redeem over 99 percent of all food stamp benefits The
final question addressed by this report is how effective this investment might be in limiting the use of
program benefits to the purchase of eligible items. Although we are unable to quantify this effectiveness,
it must be acknowledged that the technological controls offered by scanning systems can be circumvented
in several ways.
20 Several retailers participating in the Wyoming WIC demonstration have had their ECRs integrated with the EBT
terminal, but the EBT vendor had to custom design and build a separate mterface for each different POS system in the
demonstration area.
It
The first circumvention arise* simply because it is not feasible to link EBT terminals to scanning systems
in about 5 percent of th 183,300 establishments authorized by the FSP. Two percent of these estab-lishments
are rxx retail outlets aad therefore do not sell bar-coded items.21 There is nothing to scan in
these establishments. The other 3 percent represent route vendors and produce stands These estab-lishments
either sell large quantities of non-bar-coded items, or they operate in an environment where
scanning would be very difficult to implement All together these route vendors, produce stands, and
non-retail establishments redeem about 0 8 percent of all food stamp benefits Although this percentage
is small, it still presents approximately $135 million in annual food stamp benefits that would not be
subject to scanning controls.
For the estimated 173,700 retail food outlets where scanners either are or could be installed and linked to
EBT terminals, retailers who wish to circumvent the technological controls would have at least two means
todoso. First, we note that the retailer's price file is a critical element to ensuring that only ehgible food
items are purchased with program benefits. The price file needs to be programmed to include a food
stamp eligibility flag for each item in the retailer's inventory of goods sold If an ineligible item was
flagged on the file as ehgible, then the EBT system would have no way of limiting the purchase of that
item with food stamp benefits. In some cases the flag for an ineligible item could be mistakenly
programmed to indicate eligibility, thereby allowing the inadvertent use of program benefits for ineligible
items. In other cases, however, a retailer could fraudulently flag one or more ineligible items as ehgible.
(The programming is straightforward ) Such abuse could be prevented only by government monitoring of
the eligibility flags on retailers' price files. This monitoring would require an entirely new set of
compliance procedures that would be both intrusive and expensive. For instance, it could entail
unannounced, periodic government review of the food stamp eligibility flags on store price files.
Even if monitoring procedures were implemented, trafficking in program benefits would not be
eliminated. Retailers who wished to traffic could simply affix a series ofUPC codes for ehgible food
items to a sheet of paper or cardboard kept near the EBT terminal and scanner When a client wishing to
traffic benefits came to the store, the retailer could scan any combination of the UPC codes until the
desired total amount of the trafficked benefits was reached. Trie retailer could then give the client an
agreed-upon percentage of the total "sale" in cash and receive the full amount of the sale during the EBT
system's normal dairy settlement. By using different combinations of valid UPC codes each time, the
21 Thcie establishments include shelters, rehabilitation cente-s, grot^ '.ivmg quarters, and other providers of prepared
19
retailer could avoid having the transactions identified as suspect during any subsequent investigation or
agency review of EBT transaction data.
It is beyond the scope of this report to estimate how often either of the above means to circumvent
scanning controls might be used The important point to recognize, however, is that trafficking would
still be possible after EBT terminals were linked to scanners, as would the actual purchase of ineligible
items.