Potential impacts of hybrid EBT systems on the food stamp program : a special topics report on hybrid systems

              Alf6 i 11 •
COMPLETED A ?/. l'< H ?9
United States
Department of
Agriculture
Food and
Consumer
Service
Office of
Analysis and
Evaluation
Evaluation of the Off-Line
Electronic Benefits Transfer
Demonstration
Potential Impacts of Hybrid
EBT Systems on the
Food Stamp Program
A Special Topics Report
on Hybrid Systems
fS -6 Vi 130 t
Potential Impacts of Hybrid EBT Systems
on the Food Stamp Program
A Special Topics Report on Hybrid Systems
December 1994
Authors:
Gary L. Glickman
Laura M. Carter
Eugene J. Costa
Edith M. Smith
Submitted by:
Phoenix Planning & Evaluation, Ltd.
3204 Tower Oaks Boulevard
Rockville, Maryland 20852
Submitted to:
U.S. Department of Agriculture
Food and Consumer Service
Contract Management Branch
Administrative Services Division
3101 Park Center Drive, Room 914
Alexandria, Virginia 22302
Project Director: Gary L. Glickman Project Officer: Margaret Andrews
This study was conducted under Contract Number 53-3198-0-013 with the Food and Nutrition Service, U.S.
Department of Agriculture, under the authority of the Food Stamp Act of 1977, as amended. Points of view or
opinions stated in this report do not necessarily represent the official position of the Food and Nutrition Service.
ACKNOWLEDGMENTS
Several individuals at the Food and Consumer Service1 provided significant time and
input in helping define the scope of this report, and in providing reviews and comments on
the survey documents used in directing interviews with industry experts. Special thanks are
extended to Margaret Andrews, Carol Olander, Jeff Cohen, Joyce Kohler, Julie Kresge, and
the Midwest Regional Office.
The writers would also like to thank the panel of industry experts who provided
review and input on all of the hybrid EBT scenarios presented within this report. Their
experience and expertise in POS and ATM equipment, functionality, and developments were
instrumental in our interpretation of the feasibility of hybrid systems.
Each of these experts contributed valuable knowledge of the existing services offered
and used for EBT and commercial application, as well as their view of the future of POS
and ATMs in the United States.
Our panel of experts included:
Henry Dreifus, Dreifus Associates, Ltd.
Scott Goodwin, Advanced Promotional Technology
William Haeuser, Eltrax Systems, Inc.
George Harrison, Advanced Promotional Technology
Lawrence Ladouceur, MasterCard Technology Development
Lawrence Linden, Linden & Associates
Gilles Lisimaque, Gemplus Card International
Jean McKenna, VISA International
Thomas McLaughlin, Deluxe Data Systems, Inc.
Kevin Meyer, MasterCard Technology Development
Benjamin Miller, Independent Consultant
C. Sidney Price, National Processing Company
James Russell, CoreStates Financial Corporation
John Taskett, Micro Card Technologies, Inc.
John Woczik, Verifone
Additional data was obtained through The Food Marketing Institute, The National
Association of Convenience Stores, Ohio's Food Grocers Association, Payment Systems
News, Bank Network News, and Money Station.
FCS Contract Number: 53-3198-013
FCS Project officer: Margaret Andrews
Formerly the Food and Nutrition Service.
TABLE OF CONTENTS
Eage.
Chapter 1: PROJECT OVERVIEW 1
Research Questions 1
Project Methodology 4
Organization of Report 5
Chapter 2: BACKGROUND 7
EBT Technologies 7
Hybrid EBT Systems 11
Chapter 3: WHAT ARE THE PRACTICAL CONSIDERATIONS
IN IMPLEMENTING A HYBRID SYSTEM? 13
Availability of Terminals Capable of Supporting Hybrid Systems 13
Availability of Transaction Processors Which Support On-line
and Off-line Processing 24
The Impact of Hybrid EBT Systems on Third Party Processors 25
The Outlook for Deployment of Smart Card Based Financial
Processing Systems 28
The Cost Implications of Implementing and Operating Hybrid EBT Systems .. 34
Chapter 4: WHAT ARE FEASIBLE PROGRAM ALTERNATIVES
FOR COMBINING ON-LINE AND OFF-LINE TECHNOLOGIES? . 37
The Impact of an Expanded Off-line EBT System on The Achievement
cf Interstate Compatibility for Food Stamp Transactions 37
Hybrid Scenarios 38
Chapter 5: THE ECONOMICS OF A HYBRID SYSTEM 53
Design Consideration and Their Impact on Costs 53
Summary of The Economics of a Hybrid System 61
v. V
TABLE OF CONTENTS
(continued)
Eage
APPENDICES
Appendix A Scenario 1: On-line or Off-line EBT Systems
Based Upon Geographic Area A-l
Appendix B Scenario 2: One Benefit Program On-line and
One Benefit Program Off-line Operating Within
The Same Geographic Area B-l
Appendix C Scenario 3: One Benefit Program Accessed Via
Both On-line and Off-line Technology C-l
Appendix D Scenario 4: Off-line Security and On-line
Transaction Processing D-l
v.
i\
Chapter 1
PROJECT OVERVIEW
Throughout the past decade, the Food and Consumer Service (FCS)1 of the U.S.
Department of Agriculture has demonstrated the delivery of Food Stamp Program (FSP)
benefits electronically, using both or-line and off-line technology. Evaluations of these
demonstrations2 have determined that both technologies are viable methods for delivering
FSP benefits to recipients, although both provide different advantages and disadvantages.
FCS initiated this special topic report to explore the technical and practical considerations
of implementing and operating EBT systems for single or multiple programs which combine
both on-line and off-line technologies.
RESEARCH QUESTIONS
The study addressed the following research questions posed by FCS:
• Given the existing technology in 1993, what are the feasible program alternatives
for combining on-line and off-line technologies?
• What are the practical considerations in implementing and operating hybrid EBT
systems?
• What information is available to project the potential cost of hybrid systems?
These questions and the issues surrounding them are presented below.3
1 Formerly the Food and Nutrition Service (FNS).
2 Gary L. Glickman, et al., The Impacts of the Off-line EBTDemonstration on the Food
Stamp Program, Phoenix Planning & Evaluation, Ltd., Rockville, MD, April, 1994; and, John
A. Kirlin, et al., The. Impacts of the State-Initiated EBT Demonstrations on the Food Stamp
Program, Abt Associates Inc., Cambridge, MA, April, 1993.
3 Data collection regarding each of these questions was conducted during the Summer
of 1993. The information presented herein was not updated to reflect changes that may
have occurred since then.
1
What are Feasible Program Alternatives for Combining On-line and Off-line Technologies?
This question explores the technical and functional feasibility of hybrid EBT systems.
Four hybrid scenarios were developed from conversations with FCS and discussions with
experts in the fields of electronic transaction processing, card and security technology, and
POS terminal development. The scenarios include:
• on-line or off-line EBT systems based upon geographic area;
• one benefit program on-line and one benefit program off-line operating within
the same geographic area;
• one benefit program accessed via both on-line and off-line technology; and
• off-line security and on-line transaction processing.
The first two scenarios focused discussions on the ramifications of sharing the card
access vehicle and support system access technologies. The last two scenarios researched
the feasibility of utilizing both on-line and off-line technologies to deliver a single set of
benefits.
What are the Practical Considerations in Implementing a Hybrid EBT System?
This question explores the practical side of implementing a hybrid system and centers
on five primary issues:
The availability of terminals capable of supporting a hybrid system. Within this
document we examine existing POS and ATM devices, their current capabilities,
and the potential to retrofit or enhance these terminals to process both on-line
and off-line transactions.1 In addition, we gathered expert opinion on the likely
future of smart card technology in the United States to determine if anticipated
developments will support, conflict with, or have no impact on EBT.
1 Retrofitting of ATM and POS terminals to process both on-line and off-line
transactions may require the following: reprogramming to include additional processing
software and hardware modifications (re-engineering) to accommodate the attachment of
other equipment (e.g., the creation of an additional input/output (I/O) port for attaching
a smart card reader).
The availability of transaction processors which support on-line and off-line
processing. In the existing EBT sites, a single processor provides either on-line
or off-line services. A hybrid system supporting both on-line and off-line
technologies may be operated by two processors or a single processor, depending
upon the design of the system. Issues surrounding the number of processors
needed to support various hybrid scenarios are identified.1
"Die impact of hybrid EBT systems on third party processors. The ability of third
party processors to support hybrid EBT systems was examined. Alternative
methods for transaction processing to accommodate any limitations of third party
processors were also explored.
The outlook for deployment ofsmart card basedfinancial processing systems. The
widespread acceptance of smart cards will require a change in the existing
infrastructure, which was developed to support magnetic stripe, on-line
processing. This document explores some of the issues driving the development
of smart card applications.
The cost considerations of implementing and operating a hybrid EBT system. A
discussion of the cost advantages and disadvantages of each of the hybrid
scenarios is provided. This cost information is based on data gathered from the
off-line and on-line EBT demonstration projects 2 and provided by the industry
experts.
What Information is Available to Project The Cost of Hybrid Systems?
This question focuses on the economics of a hybrid EBT system and is discussed
generally in terms of design, development, implementation, and operations of each of the
four scenarios.
The evaluations of on-line and off-line EBT systems have examined the costs of
providing food stamp benefits at specific EBT sites. These evaluations provide benchmarks
for the overall cost of designing, developing, implementing, and operating on-line and off-
1 These include: the ability to provide processing for both on-line and off-line systems;
the prospect of joint ventures between processors; and the administrative issues surrounding
issuance file transfers and modifications to numerous processors, properly directing the
benefit authorization information, settlement and other technical and procedural issues.
2 Glickman, op. cit.
line EBTsystems. The findings of these evaluations, supplemented with information derived
from some of the experts interviewed, were used to address hybrid costs.
PROJECT METHODOLOGY
The project was conducted in two phases. The first phase centered on the
development of the four hybrid scenarios, while the second phase focused on determining
the potential impacts of each scenario. The methodology used for each of the project
phases is discussed below.
Phase One - Development of the Hybrid Scenarios
The hybrid scenarios were developed from discussions with FCS, transaction
processors, and card and terminal manufacturers. These discussions considered a variety
of ways in which on-line and off-line technologies may be combined to maximize the
strengths and advantages offered by both technologies, while minimizing the weaknesses or
disadvantages. In addition, consideration was given to hybrid scenarios which may arise if
both on-line and off-line EBT systems co-existed (i.e., on-line EBT for the delivery of some
benefit programs and off-line EBT for the delivery of other benefit programs or on-line
EBT in one area and off-line EBT in a neighboring area).
Four hybrid scenarios emerged from these discussions. A limited number of industry
experts were then asked to review the scenarios for technical and functional viability. From
interviews with these experts, detailed descriptions of the processing options, capabilities,
and other considerations were developed for each scenario.
Phase Two - Potential Impacts of Hybrid EBT Systems
The second phase of the project involved researching the technical and functional
implications of each of the hybrid scenarios. The information for this research was obtained
through the following:
in-depth interviews with industry experts including card and terminal
manufacturers, third party processors, industry consultants, and bank card
membership organizations (VISA and MasterCard); and
comprehensive review of data provided by retail associations and networks, and
obtained from the evaluation reports prepared for the off-line and on-line EBT
demonstration projects.
A list of individuals with expertise in plastic card applications was developed with the
assistance of FCS.1 These experts were selected for their experience with transaction
processing, card and security technologies, POS terminal development, and innovative card
applications. In this phase, industry experts were called upon to: review hybrid scenarios,
assess the direction of the point-of-sale (POS) and automated teller machine (ATM)
infrastructure within the United States, and identify the future applications for magnetic
stripe and smart cards. In-person and telephone interviews were conducted with each of the
industry experts. Interview guides were provided in advance of the interviews to provide
background into the project's research objectives and each of the four hybrid scenarios.
In addition to reviewing the hybrid scenarios, industry experts also provided
information on technical developments, market trends in transaction processing and card
usage, and the impacts hybrid scenarios might have on the existing or anticipated
commercial environments (e.g., commercial transaction processing). Estimates on the extent
of POS deployment in the United States were provided by network operators, terminal
manufacturers, and retail associations. Terminal manufacturers also addressed the
possibility and requirements to retrofit existing terminals in order to accommodate hybrid
scenarios. Equipment and operating costs were provided by the industry experts whenever
possible.
1 The list of i dustry experts is included in the Acknowledgments of this report.
5
ORGANIZATION OF THE REPORT
Chapter 2 provides a brief background on EBT systems and a discussion of on-line
and off-line system processing. In addition, each of the hybrid EBT scenarios is described.
Chapter 3 explores the practical considerations of hybrid EBT systems while Chapter 4
examines the technical feasibility of hybrid systems. Chapter 4 includes a detailed
description of each of the hybrid scenario along with a discussion of the processing options
and issues surrounding the scenarios. Chapter 5 addresses the economics of hybrid scenarios
in terms of system design, development, implementation and operations.
Chapter 2
BACKGROUND
The Food and Consumer Service (FCS) has taken a lead in the exploration of EBT
as part of a continuing effort to improve the efficiency and integrity of benefit programs.
In 1983, FCS launched an EBT system in Reading, Pennsylvania, to deliver Food Stamp
Program (FSP) benefits. This effort marked the first of several demonstration projects to
test the functional capabilities of EBT. Today, eight EBT systems are in operation
throughout the nation and more are in various stages of system development. In addition
to the efforts of FCS, other federal and state agencies are actively participating in the
development of EBT systems.
EBT is an electronic funds transfer technology which combines automated financial
transaction processing with point-of-sale (POS) terminals and card access devices to deliver
federal and state benefits to recipients. Recipients use a plastic card to access food stamp
and cash benefits at POS terminals and cash benefits at automated teller machines (ATMs).
EBT does not impact the recipient certification processes, but provides an electronic
alternative to paper-based benefit delivery methods including paper food coupons and
checks.
EBT TECHNOLOGIES
Two technological approaches to EBT have been demonstrated to distribute food
stamp benefits: on-line using a magnetic stripe card and off-line using an integrated circuit
(IC) chip embedded on a card (smart card). Most of the food stamp EBT demonstrations
use on-line technology. Only two demonstrations have been conducted to examine off-line
EBT systems: the Dayton, Ohio, off-line EBT demonstration, which issues food stamp
benefits, and the Wyoming off-line EBT project, which issued Special Supplemental Food
Program for Women, Infants, and Children (WIC) benefits. Two additional off-line
demonstration projects are scheduled: one in Wyoming which will distribute WIC and FSP
benefits to a larger participant area and retailer base than the previous demonstration, and
the other in Ohio which will be a state-wide demonstration project separate from the current
demonstration project in Dayton. This second project is scheduled to begin by March 1995.
Early demonstrations focused on the feasibility of EBT. Results from the evaluation
of the off-line EBT demonstration in Dayton and the on-line EBT demonstration projects1
have proven that both approaches are an effective and reliable means of delivering benefits.
Recipients prefer EBT to food coupons and paper checks because it is more convenient and
less costly to use. Retailers who accept food stamps find that EBT relieves them of the
burden of having to store, count, and deposit food coupons. Financial institutions, which
process checks and food coupons, also prefer EBT over the paper-based alternatives because
it reduces handling costs and automates deposits to retail accounts.
On-line and Off-line EBT
Both on-line and off-line EBT systems are functionally similar from the recipient
point of view, though many aspects of the actual processing are different. An on-line EBT
system requires a real-time communications link with a central database or EBT host
computer. Verification of the recipient's personal account number (PAN) and personal
identification number (PIN), authorization of transaction requests, and maintenance of the
transaction history are all conducted at the EBT host computer. The plastic card in an on-line
EBT system functions primarily as an access device to route the transaction request to
the EBT host computer by maintaining the recipient's PAN and necessary routing
information. On-line systems typically use a magnetic stripe card but are not necessarily
synonymous with this technology. A variety of card technologies may accommodate on-line
transaction processing, including smart cards and optical memory cards.
An off-line EBT system does not require a real-time telecommunications link with
the EBT host computer, although a telecommunications link is necessary to update the EBT
host computer and conduct retailer settlement. The plastic card in an off-line system
1 On-line evaluation projects for Pennsylvania, Minnesota, and New Mexico.
8
maintains the recipient's benefit account and security information. Verification of the
recipient's access and authorization of transaction requests are conducted between the card
and the POS terminal. To accommodate this functionality, the card must have memory and
processing capability. Currently the off-line EBT demonstration projects have all used smart
cards, although optical memory cards and non-standard magnetic stripe cards may support
off-line transaction processing as well (e.g., transit fare system). A brief discussion of on-line
and off-line processing is provided below.
On-line EBT
An on-line EBT system operates similar to a commercial debit or credit card system.
To access benefits, the recipient inserts the benefit card into an ATM or POS terminal and
enters his or her PIN. The amount of the benefit draw is entered into the terminal and an
ele. ronic message is sent through a telecommunications link to the EBT host computer.
The host verifies the recipient's PIN, authorizes the transaction against the recipient's
available balance, and sends an authorization or denial message back to the ATM or POS
terminal. All authorized transactions are immediately posted to the recipient's account and
reflected in the available balance.
Manual transactions are necessary when the telecommunications network, POS
terminal, or EBT host computer is malfunctioning. If the EBT host computer is operating,
the manual transaction may be authorized over the telephone against the real-time account
balance maintained at the EBT host computer. If the manual transaction is the result of
the EBT host computer malfunctioning, no account information will be available to
authorize the transaction request.
Benefit issuances and adjustments are posted directly to the EBT host computer with
no additional card interaction. Hot card files, used to block access to a benefit account, are
also updated without delay at the EBT host, providing immediate protection to the benefit
balance when a card is reported lost or stolen.
Off-line EBT
In an off-line EBT system, the recipient's access information and benefit account data
is maintained on the card. Transaction processing is similar to that of an on-line system,
except that no interaction with the EBT host computer is necessary at the time of each
transaction. To process a transaction, the recipient inserts the benefit card into the POS
device and enters his or her PIN. The PIN validation is performed immediately between
the card and the POS device. The system then checks the in-store database to determine
if the card is listed on the hot card file or if there are any staged transactions to be posted
to the card.1 Information found on the in-store database is loaded to the card and the
amount of the benefit draw is then entered into the terminal for authorization against the
available balance on the card. At the end of each business day, the retailer initiates
settlement through a telecommunications link with the EBT host. A batch transfer of the
day's transactions is sent to update the EBT host computer. At this time, the host may also
send issuance or hot card files to update the store's terminals.
Manual transactions are necessary when a benefit card or POS terminal is
malfunctioning. Manual transactions may be authorized over the telephone against the
account balance maintained at the EBT host computer. However, the host balance may not
reflect the most recent account balance, since it includes only those transactions which have
been transmitted to the EBT host computer for settlement. In addition, manual transactions
may be immediately posted to the EBT host computer, but the recipient's benefit balance
on the card - against which all non-manual transactions are authorized - will not be
updated until after the next download of account adjustments during settlement. Therefore,
overdrafts of benefit accounts can occur since the balance on the card is used to authorize
any subsequent, non-manual transactions. Due to the liability associated with authorizing
transactions against an uncertain benefit balance, the Dayton off-line EBT system requires
that retailers accept full liability for any manual transactions processed.
Staged transactions may include new benefit issuances and manual transactions.
10
In the Dayton demonstration, the posting of benefit issuances is a three step process.
First, the EBT host receives the issuance data from the state, similar to the issuance process
for an on-line system; second, the host computer transmits the issuance data to a selected
number of retailers or issuance locations; third, the issuance data is posted to the benefit
card when it is presented at one of the issuance locations. Unlike benefit issuances, benefit
adjustments, manual transactions, and hot card files may be transmitted to all retailers for
updates to cards during normal transaction processing.
HYBRID EBT SYSTEMS
This section provides a brief overview of each of the four hybrid scenarios developed
and examined within this study.
Scenario Number 1: On-line or Off-line EBT Based Upon Geographic Area
Scenario number 1 examines the use of both on-line and off-line EBT systems in
different locations within a state. For example, an off-line EBT system may be implemented
in an urban area, where transaction volumes are expected to be high, to reduce
telecommunications costs, while an on-line EBT system may be implemented in a rural area
where transaction volumes are expected to be low. This scenario explores the impact of co-existing
systems and the capability of transaction processing across technologies.
Scenario Number 2: One Benefit Program On-line and One Benefit Program Off-line
Within The Same Geographical Area
This scenario examines the implications of operating an on-line EBT system for one
benefit program (or group of programs) and an off-line EBT system for another benefit
program (or group of programs). For example, non-cash benefit programs might be
administered off-line while cash benefit programs would be on-line, or vice versa.
11
Scenario Number 3: One Benefit Program Accessed Via Both On-line and Off-line
Technology
Scenario number 3 explores the feasibility of one benefit program or benefit account,
accessed by both on-line and off-line technologies. In this scenario, the benefit card has a
magnetic stripe and an IC chip. The recipient may access their benefits using either off-line
or on-line transaction processing depending on the terminal capability at the retail location.
Scenario Number 4: OfT-Iine Security and On-line Transaction Processing
This scenario explores using a smart card in an on-line transaction processing
environment. The benefit card is a smart card with memory capacity. The card maintains
the transaction routing information along with the recipient identification and security
information. The recipient's benefit account is maintained at a central database.
Transactions are authorized and posted against the central database through a
telecommunications link at the time of each transaction.
12
Chapter 3
WHAT ARE THE PRACTICAL CONSIDERATIONS
IN IMPLEMENTING A HYBRID SYSTEM?
The practical considerations for implementing hybrid electronic benefits transfer
(EBT) systems are addressed in this chapter. They are:
the availability of terminals capable of supporting a hybrid system;
the availability of transaction processors which support on-line and off-line
processing;
the impact of hybrid EBT systems on third party processors;
the outlook for deployment of smart card based financial processing systems;
and
the cost implications of implementing and operating hybrid EBT systems.
In addition to these considerations, several administrative and practical considerations
are addressed in the review of the hybrid scenarios in Chapter 4.
AVAILABILITY OF TERMINALS CAPABLE OF SUPPORTING HYBRID SYSTEMS
ATM and POS terminals are available with dual processing capabilities to read both
magnetic stripe and smart cards. This dual processing capability has been deployed
throughout France and other European countries for several years. However, within the
United States, the deployment of dual processing terminals is just now beginning to occur.
To date, most terminals deployed in the U.S. that support smart cards do not also support
magnetic stripe cards and are used almost exclusively in what is called a "closed" system, e.g.,
a pre-paid card on a university campus (and many of these applications actually use the
magnetic stripe on the cards instead of the chip). One industry expert indicated that one
bank in the United States has begun installing ATMs with smart card capability. Likewise,
most major manufacturers of POS terminals and ATMs reported that they are currently
developing and/or manufacturing POS terminals with dual capability.
13
Point of Sale (POS) Terminals
A large number of devices with varying capabilities can be classified as POS
terminals. The most common is a small keypad device usually located next to the cash
register and used for credit and debit card sales. These low cost devices contain two key
components: a magnetic stripe reader and a modem. The reader extracts information from
the stripe on the card, usually the bank routing number and the account number and sends
this information to a database via the modem. The terminal has limited memory and
processing capability.
There are three main applications that utilize this type of device. The first is check
authorization/credit card processing. In check authorization, the customer is typically issued
a "convenience" card that contains a magnetic stripe. The data on the stripe identifies the
customer. A message is sent to a central database for authorization. The central database
usually maintains a negative file indicating customers from whom checks should not be
accepted. In credit card processing, the merchant uses the device to obtain an authorization
number from a bank processor indicating that there is a sufficient balance available in the
customer's line of credit. The merchant then "runs" the card through a device which prints
the account number and merchant number on the credit slip. The customer signs the slip
and the merchant submits it to his or her processing institution for credit.
The next application is referred to as EDC (electronic draft capture) in which the
processing institution captures all data necessary to credit the merchant and debit the card
account as the transaction is processed. EDC eliminates the need to process the paper
credit slip. The merchant either runs the card through a separate device to print a credit
slip for the customer to sign as evidence of the sale or uses POS equipment to automatically
print the draft. In either event, the merchant retains the credit slip as evidence of the sale
or for back-up.
The third application is debit. Debit card processing typically requires that the
customer validate and authorize the sale by entering a personal identification number (PIN)
14
rather than a physical signature. Processing debit card transactions therefore requires the
addition of a PIN pad to acquire and encrypt the PIN data. This POS device/printer/PIN
pad represents the minimum configuration for EBT. However, our research indicates that
few retailers are equipped with this configuration, though many may be equipped for check
authorization or credit card processing.
Extent ofPOS Deployment
As of mid 1993, approximately 33 percent of all major supermarkets in the United
States have on-line authorization capabilities.1 This includes POS debit/credit card
processing as well as check authorization. Interest in POS terminals has continued to
increase over the past several years and experts predicted that all major supermarkets will
be equipped with on-line authorization capabilities within the next few years. Smaller
grocers and convenience stores are showing a slower migration to POS (excluding
combination gas station/convenience stores which are implementing POS for gas and other
purchases). Experts suggest that on-line POS may not be cost effective for smaller grocers
and convenience stores because the average transaction amount for these stores ($3 to $14)
does not justify the cost of on-line authorization.2 Fees such as discount fees (between 1 -
4 percent of the total transaction), telecommunications costs, interchange fees, switch fees,
and settlement fees may exceed profit margins for low dollar transactions. It was the
opinion of several experts that an average transaction amount of $20 or more was necessary
to justify implementing debit or credit POS.
1 Through telephone conversations with VISA International and The Food Marketing
Institute, both organizations indicated that there are approximately 30,000 multi-lane
supermarkets in the United States, of which roughly 10,000 have electronic authorization
(check, debit, or credit) capabilities.
2 The average transacts amounts for small retailers and convenience stores was
provided by industry experts th 3b telephone interviews and confirmed with the National
Association of Convenience St res. A similar average transaction amount was experienced
in the Dayton, Ohio off-line EBT demonstration.
15
Based on available information, POS deployment in the State of Ohio is estimated
to be less than five percent.1 Additional telephone interviews with retailers at several large
supermarkets in the state confirmed the low presence of POS terminals but indicated that
they were planning to implement systems within the next two years. (Approximately
seventeen percent of the authorized food stamp retailers in Ohio are large supermarkets.)
Existing Terminals
POS terminals currently deployed at retail stores can be divided into four categories:
Basic POS Terminal; Enhanced POS Terminal; Integrated Terminals; and, Integrated
Electronic Cash Registers. The functionality and requirements to retrofit these terminals
to process both magnetic stripe and smart cards are described below.
Basic Terminals, (e.g., Verifone Tranz 330 and 340) These terminals (pictured in
Figure 1) read magnetic stripe cards and are used in retail stores to process credit and debit
transactions. The terminals typically have limited memory (32k bytes RAM), a built-in
magnetic stripe card reader, a digital display screen, and one-to-four input/output (I/O)
ports available for connection with a PIN pad, printer, power source or local area network
(LAN). The terminals do not usually communicate directly with a cash register.
Transaction amounts are entered into the terminal by the check-out clerk and are verified
by the cardholder through the key pad portion of the terminal. Transaction processing is
controlled by software installed in the terminal. The amount of memory available within
the terminal can affect how sophisticated the process will be. If the application requires that
1 Information was gathered through telephone interviews with the industry experts,
listed in the acknowledgements, and the following organizations: Ohio's Food Grocers
Association, The Food Marketing Institute, National Association of Convenience Stores,
Payment Systems News, Bank Network News, and Money Station. In addition, Money
Station, the largest transaction processor for the state, provided a list of all stores in the
state with POS capabilities, including food retailers and non-food retailers. The total
number of stores with POS capabilities in Ohio (370 food retailers and non-food retailers),
is five percent of the total authorized food stamp retailers in the state (approximately 7,400)
as provided by the Midwest Regional FNS Office.
16
a PIN be entered, this is usually
accomplished on a PIN pad connected into
one of the available I/O ports.
Basic terminals are the most
prominent terminals in the United States.
Experts estimated that 80 percent of all
retail POS terminals fall into this category.
The Tranz 340 was the initial terminal used
in the Dayton off-line EBT project.1 The
Tranz 340 terminals were modified to
process smart cards only. The modifications
included the following:
- J^w
^11
Figure 1 - Verifonc Tranz 340
• attaching a smart card reader
with additional memory and built in PIN pad through the PIN pad port;
• disabling the magnetic stripe processing capability by removing the required
application software (to free terminal memory so that the smart card
processing software could be installed); and
• loading the terminal with smart card processing software.
This process did not create a terminal capable of supporting a hybrid system since
the magnetic stripe card capability was disabled.
Experts were divided on whether it is practical to modify a basic terminal to process
both magnetic stripe and smart card transactions and whether it would be cost effective or
desirable to do so. Some experts indicated that some older terminals may not have
sufficient ports to support the PIN pad/card reader. However, those who suggested that the
terminals could be retrofitted indicated that the following modifications would be required:
1 The EBT processor is now implementing the OTT 2000 for single lane retailers
(discussed later) as well as the DataCard 48SIC for multi-lane retailers.
17
an enhanced PIN pad with integrated smart card reader and sufficient
terminal memory to accommodate off-line transaction processing
(approximately $100 - $150, depending on the amount of memory and number
of terminals purchased);1 and
installation of smart card processing software into the enhanced PIN pad. As
previously stated, the memory in the basic terminal is not currently sufficient
to accommodate both the magnetic stripe and smart card software
applications.
Experts agreed that modifying basic
terminals was not a desirable approach to
implementing hybrid EBT for three reasons.
First, the cost to retrofit the terminals may
not be cost effective ($100 - $150 plus the
cost to develop special software and
hardware modifications that may be needed)
compared to the purchase price of a new
terminal with built in dual processing
capability. Second, additional attachments
would make the terminal cumbersome and
undesirable to retailers; and last, separate
readers for magnetic stripe and smart cards Up"* 2 - Verifone Omni 490
could lead to confusion for recipients and
retail clerks.
Enhanced Terminals, (e.g., Verifone Omni 490) - Like the basic terminals, enhanced
terminals (shown in Figure 2) read magnetic stripe cards and are used in retail stores to
process on-line credit and debit transactions. However, these terminals are usually located
on the customer side of the check-out counter, typically have 256k byte RAM of memory,
with a PIN pad, programmable keys, and five ports for connection with a register, bar code
1 Cost data were gathered through telephone interviews with industry experts and
manufacturers.
18
reader, LAN, printer, and power source. Enhanced terminals are in increasing demand by
large supermarkets because of the additional convenience they provide (e.g., interaction with
the register, single-unit PIN pad and reader, and user-friendly screen instructions). The cost
of these terminals range from $400 - $700.!
Experts believe enhanced terminals can be adapted to process both magnetic stripe
and smart cards transactions. The memory capacity of the terminals is sufficient to install
the processing software to support smart cards. A smart card reader2 will need to be
attached through one of the available ports because the existing card reader in the terminal
is a swipe style reader which reads only magnetic stripe cards.3 Having to use separate card
readers was considered by the experts as a disadvantage to retrofitting an enhanced terminal
to process magnetic stripe and smart card based transactions because it could lead to
confusion for the recipient and retail clerk.
Integrated Terminals, (e.g., Oki America OTT 2000 and Innovatron TPSCAM 1000)
Integrated terminals have all of the functionality of enhanced terminals and are equipped
with motorized card readers capable of processing both magnetic stripe and smart cards.
With 256k byte to 2 megabytes of RAM, these terminals offer fast processing for a variety
of check-out functions. Integrated terminals are currently being installed in the Dayton off-line
demonstration project in single-lane stores. The Innovatron TPSCAM 1000 is pictured
in Figure 3.
1 Cost data were gathered through telephone interviews with industry experts and
manufacturers during the Summer of 1993.
2 The cost of a basic smart card readers was provided by experts and manufacturers at
approximately $25, not including software development.
3 Magnetic stripe and smart cards are read differently. The magnetic stripe requires
a smooth swiping motion to pass by the reader, while the smart card requires a lock with
the reader while the card is being read. Motorized readers, similar to those found in ATMs,
are available to read both card types but are more expensive and have greater maintenance
requirements than non-motorized card readers.
19
'• ■' 'is;
.,'.;:i':'- V-..
•.^..
:
.■•,-.
.:•■•• • 'J
„_-•w
There were three primary
reasons for the change in the POS
platform in single-lane stores in Dayton.
First, the OTT 2000 is less expensive
than the configuration that was being
used in single-lane stores;1 second, the
availability of the motorized card reader
would reduce the number of times a
card was removed prematurely from the
reader; and third, the integrated
terminal eliminates the need for the in-lane
terminal to communicate with an
in-store host reducing the total transaction time. Also, the dual processing capability of the
terminal will allow it to be considered as the terminal device for accepting commercial debit
and credit transaction processing at these retailers.
- '":
Figure 3 - Innovation TPSCAM 1000 French terminal
Integrated Electronic Cash Registers. Integrated electronic cash registers (IECRs)
are full service, check-out terminals which provide on-line check authorization, on-line debit
and credit card processing, UPC scanning capability, and cash register functions. These
registers are essentially computer terminals with sufficient memory and processing capability
to maintain inventory and operating data files, and adequate ports to support a variety of
attachments. IECRs may be used in single-lane and multi-lane stores. In multi-lane stores
the registers are linked to a central computer for file management, pricing data, and debit,
credit, and check authorizations. IECRs range from $3,500 to $7,500 per register depending
on the functionality and memory capacity. Experts predicted that these terminals will be
the way of the future for large supermarkets.
1 The Dayton demonstration provided all participating retailers with a PC and LAN as
well as the modified Verifone terminal with card reader. The OTT 2000 consolidated all
of these functions into one unit and provided sufficient memory to be used in single-lane
stores. The EBT processor is currently developing an alternative solution for multi-lane
retailers that will also eliminate much of the above hardware. The DataCard 485IC is the
POS platform being considered and this terminal contains dual processing capability.
20
The requirements to retrofit IECRs to process both magnetic stripe and smart card
transactions is still under investigation. Most experts believed the process would be fairly
simple, requiring only the attachment of a smart card reader and the installation of the
software (the necessary port and memory is resident in the terminal).
Exhibit 1, POS Terminals, summarizes the four categories of POS terminals, their
capabilities and requirements to process magnetic stripe and smart cards.
Exhibit 1
POS TERMINALS
Terminals
Card
Type Limitations
Retrofitting
Requirements
Cost
New
Cost to Retrofit
(per terminal)
Basic
Terminal
Mag
Stripe
32k byte RAM;
3 ports
Smart card reader,
memory, software,
re-engineering.
$250 to
$330
S10O-S150 plus
interface software1
Enhanced
Terminal
Mag
Stripe
256k byte RAM;
5 ports
Smart card reader
and software.
$400 to
$700
Approx $25 plus
interface software1
Integrated
Terminals
Both N/A Fully equipped. $800 to
$1,000
N/A
Integrated
Cash
Register
Mag
Stripe
N/A Smart card reader
and software.
$3,500
to
$7,500
Approx $25 plus
interface software.1
N/A - Not applicable
1 The cost for interface software is dependent
functionality.
upon the terminal's exi ting capability and desired
Automated Teller Machines (ATMs)
EBT systems currently use ATMs to distribute cash benefits and can provide balance
inquiries for cash and non-cash benefit recipients. The existing ATM infrastructure poses
three considerations to the implementation of a hybrid system:
21
• the infrastructure may not be sufficient to support benefit distribution in every
location throughout the country;
• the cost ofATM transactions is typically higher than that of POS transactions;
and
• the existing infrastructure supports on-line, magnetic stripe processing only.
It should be noted that only the last consideration listed is unique to a hybrid system.
The other two are a part of the current EBT equation. Each of these considerations is
discussed below.
The infrastructure may not be sufficient to support benefit distribution in every location
throughout the country.
While ATMs are widely available in most areas, a variety of factors (e.g., safety of
users, vandalism) have limited their deployment in lower income areas and inner cities.
Financial institutions are addressing the factors surrounding this issue in order to improve
access. Deployment of ATMs in rural areas is also sometimes limited. In addition, a
number of EBT evaluation projects are examining recipient access to ATMs.
The cost ofATM transactions is typically higher than that ofPOS transactions.
ATM transactions may pass through several commercial networks in order to connect
with the card database or EBT host computer. Each of the networks charge a fee to
transfer the transaction and authorization information. In addition, the "owner" of the ATM
charges a fee for the use of the terminal and the value of funds distributed. While the
existing ATM infrastructure is far more extensive than that of the POS infrastructure, POS
systems tend to be more localized, with transactions passing through only one or two
networks. As more POS networks develop, the infrastructure may mirror that of the ATM
infrastructure causing prices to be more in-line with ATM transaction costs.
22
Off-line transactions do not require a communications link between the ATM and
the processor at the time of the transaction and may therefore bypass some of the network
processing charges (the "owner" fees would still apply). Off-line ATM transactions therefore
may be less expensive than on-line transactions. However, since most existing ATMs in the
United States are not equipped to process smart card transactions, the processing charges
for these transactions cannot be determined.1
The existing infrastructure supports on-line, magnetic stripe processing only.
As mentioned above, most existing ATMs in the United States are equipped to
process on-line, magnetic stripe transactions only. ATMs may be retrofitted to process both
magnetic stripe and smart cards; however, older ATMs with limited capabilities and
programmable memory may not be candidates for retrofitting.2 ATMs are currently
available from manufacturers which can handle smart cards and magnetic stripe cards.
It may be more cost effective to retrofit an ATM than it is to retrofit a POS terminal.
New ATMs range in cost from $15,000 to $45,000, depending on features and capabilities.
The cost to retrofit an ATM to accept and manage off-line transactions is approximately
$3,500, including software development.3 In addition, experts indicated that there are few
functional limitations to retrofitted ATMs. The maintenance and performance expectations
are similar to that of a newly purchased ATM with dual processing capabilities. Industry
experts reported that the incremental cost to purchase a new ATM with dual card capability
ranges from $1,000 to $3,000.
1 Pilot programs are testing the use of smart cards with ATMs, often with pre-paid or
stored value applications.
2 ATMs are expected to last at least seven years. However, many ATMs currently in
use are between 10 and 15 years old.
3 The cost differential to retrofit a POS terminal and an ATM is due in part to the
software modifications needed on each type of equipment and the complexity of the
ATM system in comparison to a POS terminal.
23
Another consideration in retrofitting ATMs to process both on-line and off-line
transactions is the ATM infrastructure. Existing networks and network agreements are
designed to process on-line transactions. The communications networks will need to be
examined to determine if existing capacities will be sufficient to handle batch transmissions.
Items which are sent in batch transmissions are generally received and stored, for
subsequent processing during a settlement period. This additional collection and storage
capability must be evaluated and accommodated by the respective network. Additional
communications nodes may also be required at the network in order to accommodate the
increased communications. Many off-line systems establish transmission times during typical
"off-peak" (low volume) transaction processing times to most efficiently control the
processing cycles. In addition, new network agreements will be necessary to link networks
and processors.
AVAILABILITY OF TRANSACTION PROCESSORS WHICH SUPPORT ON-LINE AND
OFF-LINE PROCESSING
Typically, transaction processors support either on-line or off-line processing. Most
experts believe existing processors will be willing to expand their processing capabilities to
include both processing alternatives. The technical requirements and configurations for on-line
and off-line processing centers are similar in hardware,1 telecommunications, and data
file management. However, conversations with two of the leading EBT processors indicated
that neither processor was currently planning to expand their current capability to include
both on-line and off-line processing. The processors would more likely develop a team
approach to support a hybrid system. This assessment does not preclude the entry of new
processors which may develop both applications.
1 The hardware requirements for an on-line system may be higher than those of an off-line
system because of the increased resource requirements during peak transaction periods.
Off-line systems avoid peak transaction periods by processing transactions in batch during
retailer settlement
24
THE IMPACT OF HYBRID EBT SYSTEMS ON THIRD PARTY PROCESSORS
Third party processors include retailers and network operators which receive and
route electronic transactions. Third party processors in the United States are primarily
configured to support on-line, magnetic stripe transaction processing.1 The capability of
these processors to support hybrid transaction processing and the potential impact hybrid
systems may have on third party processors is discussed in this section.
There are four basic areas of considerations: terminal deployment, software
development or licensing, telecommunications, and third party host capabilities.
Terminal Deployment - Point-of-sale terminals can be retrofitted to support
both on-line and off-line transaction processing (see this chapter, Availability
of Terminals Capable of Supporting Hybrid Systems). The primary
consideration or impact is the cost to retrofit existing terminals ($25 - $150
plus the cost of interface software to support the new processing technology)
or to deploy dual purpose terminals.
Software Development - The third party would be responsible for developing
or licensing the software to support the off-line transaction processing (e.g.,
read the IC chip card, store the transaction data, update, or write to, the card,
etc.). It should be noted that there are few operating standards for IC cards
and off-line transaction processing. Therefore, each off-line application may
require its own unique operating system and software.
Telecommunication Configurations - The dial-up and dedicated lines used to
support on-line transaction processing are usually sufficient to accommodate
off-line transaction processing. Therefore, existing telecommunication
configurations would not necessarily have to change in order for third party
processors to support both on-line and off-line processing. However, if off-line
transactions were transmitted directly to the EBT host while on-line
transactions continued to be transmitted to the third party processor, software
development would be necessary to program POS terminals or store
controllers to identify, sort, and route transactions to the appropriate
destination.
1 Third party processors may store magnetic stripe transactions for batch processing
at a later time. This process is referred to as off-line processing though it differs greatly
from the off-line processing of IC chip transactions.
25
• Host Capabilities - The capability of the third party host to store off-line
transaction data for batch transfer to the EBT host would need to be
developed.
Two approaches have been identified for integrating off-line processing with existing
on-line third party processors. The Off-line Processing Approach imitates the Dayton, Ohio,
off-line EBT system. Off-line card maintenance and issuance files are stored within the POS
terminal or store controller (i.e., personal computer). Off-line transactions would be
authorized at the POS terminal and uploaded to the EBT host during retailer settlement.
On-line transactions would continue to be transmitted to the third party host for real-time
authorization.
The second approach is modeled after on-line transaction processing. Off-line card
maintenance and issuance files are stored at the third party host. All transaction requests,
both on-line and off-line, would be transmitted to the third party host for authorization.
Off-line transactions would be authorized by the third party host based upon information
both on the card and in the card maintenance files. Off-line transactions would be stored
at the third party host for batch processing to the EBT host during third party settlement.
On-line processing would remain unchanged.
Off-line Processing Approach
The Off-line Processing Approach requires significant modification and enhancement
to on-line POS terminals and in-store configurations. POS terminal would require smart
card readers, read/write capability, and sufficient memory to support the application
software. In addition, store controllers or POS terminals with significant memory capability
would be required to receive and maintain card maintenance and issuance files. Transaction
processing would occur as described in Chapter 2, Off-line EBT.
The transmission of data at settlement between the retail store and the EBT host
may be accomplished in one of two ways: a direct connection between the retail store and
the EBT host or via third party processor involvement. To transmit directly to the EBT
host, a dial-up telecommunication line would suffice to provide access to the EBT host. On-
26
line transaction would be transmitted to the third party processor over either the same, or
different, dial-up facility or dedicated line (a dedicated line would send all transactions form
the retailer to one destination. To facilitate the selection of transactions for appropriate
transmission, the POS terminal would require the ability to identify and sort transactions
either by prompting users to select the type of transaction (e.g., current POS systems at
retailers often prompt shoppers to indicate debit or credit transactions) or identifying the
transaction type by the routing number on the benefit card (this option would require single
processing cards; on-line or off-line only).
Transmitting between the EBT host and POS terminal may be accomplished through
one of two methods. The first would be to bv-pass the third party processor and route
transactions directly to the EBT processor. To accomplish this, the third party processor
would be responsible only for deploying POS terminals with both on-line and off-line
processing capabilities. The retailer would be responsible for entering into an agreement
with the EBT host for off-line tr?nsaction processing services. The second method would be
to transmit transactions to the EBT host via the third party processor. The third party's host
system would require modification to receive, sort, and route batch transmissions to the EBT
host.1 The off-line issuance and not card files would be maintained at the POS terminal or
store controller, the third party prccessor would serve only to route these files between the
retailer and the EBT host. No addi ional service or processing would be provided by the
third party. An incremental fee would likely be applied by the third party for routing
transmissions.
On-Line Processing Model
The other approach to integrating off-line transaction processing with on-line third
party processors is to imitate on-line transaction processing. This approach requires less
extensive modifications to the POS terminals and in-store configurations, but would require
significant modification to the third party host. Each POS terminal would be retrofitted to
1 Sorting of off-line transactions would be necessary if multiple off-line programs are
accessed off-line.
27
include a smart card reader, read/write capability, and sufficient memory to support the
application software, but no additional memory or in-store PC would be necessary to
maintain the card maintenance and issuance files. Card maintenance and issuance files
would be maintained at the third party host. Transaction processing would require an on-line
communications link to the third party host. The host would receive the outstanding
benefit balance along with the transaction request. The third party would determine if the
card was listed on the host card file. If it was not, a temporary benefit account would be
established on the third party host. The third party would then post to this account any
staged transactions or benefit adjustments and approve the transaction based on the
remaining available balance. An authorization message would be transmitted back to the
POS terminal along with the transaction approval and benefit adjustments for update to the
benefit card. At the end of the settlement day, the third party would transmit the
transaction data to the EBT host.
Industry experts indicated that the approach and role of third parties would be
determined by the extent of off-line processing. If only a low volume of off-line transactions
are anticipated, third party processors would most likely participate in the deployment of
dual-processing terminals, but would probably not make the necessary modifications to their
operating systems to accommodate off-line processing. Therefore, off-line transactions
would need to be transmitted directly between the retailer and the EBT host. Third parties
could continue to be utilized for on-line transaction processing which would include hybrid
scenario number four, off-line security and on-line transaction processing, since the actual
transaction processing would occur on-line.
THE OUTLOOK FOR DEPLOYMENT OF SMART CARD BASED FINANCIAL
PROCESSING SYSTEMS
The existing infrastructure in the United States was developed to support on-line
transaction processing. To date, there has been no significant entry of smart card
technology to warrant changes in the infrastructure. However, interest in smart cards has
increased throughout the last decade and the application of this technology has been
adopted extensively in European countries. For example, as of 1991, the electronic funds
28
transfer (EFT)/POS network operated in France by the Groupement des Cartes Bancaires
(CB), of which nearly all retail financial institutions in France are members, had issued
approximately 20 million cards, of which approximately 12 million were integrated circuit
(IC) chip cards used for authorization. There are EFT/POS terminals installed at 250,000
retail outlets, of which 150,000 terminals are capable of reading both magnetic stripe and
IC chip cards.1 The number of these terminals continues to grow steadily.2 It should be
noted however, that there are a smaller number of financial institutions in France than there
are in the United States, and that the French government supported the development of the
off-line infrastructure.
Many experts believe there will be similar evolution to smart card technology in the
United States, in one form or another.3 However, in general, experts agreed that smart
cards would not make a significant entry in the United States until the 1997-2000 timeframe.
Earlier in this report, the term "smart card" was defined as a plastic card containing
an IC chip. The IC chip on the card can be programmed to perform specific functions.
Some are used as information storage devices (e.g., the French telephone cards), while
others are used to maintain current balance information which can be updated based on a
variety of conditions (e.g., the cards used in the Dayton off-line EBT demonstration). In this
section, we will examine the types of applications that may be deployed in the U.S.
1 Payment Systems: Strategic Choice for the Future, Hitachi Research Institute, Tokyo,
Japan, 1993.
2 Mr. Paul Trecasses, Director, Groupement Des Cartes Bancaires, reported at the First
Annual Meeting of the Smart Card Forum (September 30,1993) that all cards issued by CB
were IC cards.
3 The development of various associations (e.g., Federal Smart Card Users Association
Smart Card Forum) and the inclusion of smart cards as a major track in conferences, such
as SecurTech/CardTech, are indications of the increased interest and support for smart
cards.
29
The experts interviewed indicated that there were three areas that they believe will
drive the development of smart card applications. They were:
• pre-paid cards (open and closed systems);
• security; and
• government applications such as EBT or health cards.
Pre-paid Cards
Pre-paid cards describe a class of applications in which a card is substituted for cash.
While many pre-paid card applications utilize magnetic stripe technology (such as the
Washington Metro fare card), several financial institutions in the United States are currently
investigating or experimenting with the use of smart cards for this application. European
adaptation of smart card technology is extensive. Throughout France, almost all public
telephones require the use of a smart card rather than the input of coins. In fact, few public
telephones still accept coins. The telephone card is a "cheap" smart card containing only
a memory chip with no processing capability. Cards can be purchased at newsstands, in Post
Offices, or in many other retail outlets.
The cards can be purchased in several
different denominations. These cards are
either thrown away or recycled once the
value is used up. A more elaborate
application of pre-paid cards is known as
the "electronic purse." The use of the
electronic purse card is similar to the
telephone card, except that it contains some
processing capability which is used to Figure 4 - An example of a pre-paid smart card
provide PIN protection and it can be
replenished rather than discarded. Value can be added to the card at ATMs, POS devices
or through a home banking application. Both the telephone type card and the electronic
purse are being investigated by U.S.-based institutions.
30
CoreStates (which also operates the MAC ATM network in Pennsylvania, NewJersey
and several other states) has been very active in developing and testing pre-paid card
technology. While they have only issued cards to bank employees for use in internal
vending machines and other devices, they are planning on an extended demonstration in the
near future. The card has several perceived advantages:
• it projects a "high tech" image that is favorable to marketing campaigns;
• it has potential for increased earnings for the card issuer on funds used to
purchase the card while the funds remain unspent; and
• it is believed that some portion of the value on the card will never be used
resulting in increased income for the card issuer.
The value to the merchant is the reduction in costs associated with handling cash as
well as increased security. Vending machine theft could be significantly reduced. Similarly,
the value to the consumer is the reduced need to maintain pockets full of change, and
increased security and convenience. Eventually, it is believed, the need for cash could be
significantly reduced if cards could be replenished through a home banking application in
which the consumer could access their bank account from a terminal in their house and
transfer value from their account to the card on demand.
It was noted by the industry experts that most pre-paid card systems are "closed
systems" in which the card issuer is also the transaction acquirer. A closed system does not
require standard operating software to accommodate multiple types of smart cards or
readers and does not require interchange agreements with other card issuers or transaction
acquirers to effect funds settlement. While an open, pre-paid smart card system is certainly
possible, it would require that all terminals be able to read all smart cards (or that all smart
cards adhere to a standard operating system) and that interchange agreements be
negotiated. It is unlikely that either of these two requirements will be established within the
near future.
31
Security
Smart cards provide additional security features over the current magnetic stripe
cards.1 In France, the introduction of IC chip cards has resulted in increased security. It
is reported that "France is the only country with a declining card fraud rate, contrary to the
increasing world-wide trend." Groupement des Cartes Banc-'res reports that payments by
Carte Bleu (a common French credit type card similar to VISA) increased from 380 billion
French francs (FF) in 1990 to 475 billion FF in 1992. During this same period, fraud
decreased from 703 million FF to 533 million FF.2 For this reason, many of the experts
believe that in the future, the security features of smart cards may be used for identification
purposes on credit and debit cards, with the transaction completed on-line. However, due
to the limited use of smart cards in the U.S., the experts generally believed that PINs and/or
photos on magnetic stripe cards would be the next step for credit card security. And, while
most industry experts believed that smart cards currently provide better security than
magnetic stripe cards, alternatives for enhancing magnetic stripe card security are being
developed.3
1 Smart cards use a number of key encryption techniques to ensure that the card may
not be counterfeited or scanned and that all transactions are completed with the original
card and PIN. Magnetic stripe cards do not have sufficient memory to incorporate similar
encryption techniques and have proven susceptible to card fraud including counterfeiting and
scanning.
2 "Key Facts and Figures -1993", Groupement des Cartes Bancaires, Paris France. The
first smart cards were issued in 1986 and the decision to put smart cards into general use
was made in 1990.
3 Several industry experts identified Watermark Magnetics and HoloMagnetics as
alternatives for increasing security on magnetic stripe cards. Watermark Magnetics uses a
special magnetic code which is placed on the stripe during production. The magnetic
particles on the stripe are arranged into a specific pattern during processing; the stripe is
later encoded like a standard magnetic stripe card with the watermark code written to the
card for use as an encryption key. Existing magnetic stripe readers can read these cards;
however, the encryption feature can only be used with terminals designed to read and
interpret the code.
HoloMagnetics uses repeating patterns of holographic images which are encoded on
the card at the time of production. An optical scanner is used to read the code and
interpret the validity of the card. The magnetic stripes produced using holomagnetics are
32
Another application of smart cards in the U.S. could be to diminish the need for on-line
credit authorizations for credit card sales. Most credit card sales are authorized via a
communication link to a central database that verifies the validity of the card, checks against
a list of cards that have been reported lost or stolen, and validates that sufficient credit is
available to complete the purchase. In some instances, if the purchase value is small, the
sale may be authorized without central validation of the credit limit (commonly known as
sales below the floor limit). The floor limit is established based upon profiles of sales at
the merchant location. Smart cards could be used to store demographic information on the
cardholder such as credit history, average purchase amount, frequency of purchases and
other statistical data that could be used to provide a customized floor limit. Using this
technology, a smaller number of on-line authorizations would be necessary. There are two
limitations to the implementation of this application. First, on-line authorization of credit
sales is a relatively inexpensive transaction (less than $0.10 per transaction, and in some
cases, free), and second, there would be no current validation that the card has not been
reported lost or stolen resulting in somewhat higher risk. Therefore, it is more likely that
the primary application of smart cards in the POS infrastructure would be to increase
security through immediate PIN validation and elimination of easy counterfeiting. Using
the card as a device to minimize telecommunications is a potential add-on to this application
once the infrastructure (POS devices with dual capability) is in place.
The issue of fraud is of great concern to the credit card industry, where purchases
can be made without the use of PINs at POS devices, and without any identification through
mail order - often with delivery to another address. Experts agreed that the credit card
industry experiences much of its fraud through the merchants, and the exposure limit is
higher on credit cards than it would be in the Food Stamp Program where the maximum
dollar amount in a given month is relatively low.
visibly different than standard magnetic stripes and require additional equipment in the card
reader to interpret the stripe.
33
Government Applications
Several experts indicated that the driving force behind the adaptation of smart card
technology in this country could be the influx of government applications. They cited the
emergence of multiple applications by the Department of Defense, the off-line EBT
demonstration in Ohio, the WIC EBT demonstration in Wyoming and the potential for a
national health card. In addition, the report of the National Performance Review states
that:
"In the future, the concept of electronic government can go beyond
transferring money and other benefits by issuing plastic, "smart" benefit cards.
With a computer chip in the card, participants could receive public assistance
benefits, enroll in training programs, receive veterans servic , or pay for day
care. The card would contain information about the participant's financial
positions and would separately track their benefit accounts - thus minimizing
fraud."1
While a lack of standards (both technical and processing) and a high investment cost
are likely to mitigate against any large-scale government application, these demonstrations
and public statements serve to generate significant interest in private sector investment and
analysis. The Smart Card Forum, a recently formed consortium of major companies
associated with card technology, is planning major efforts to evaluate and foster the
application of smart cards in the United States.
THE COST CONSIDERATIONS OF IMPLEMENTING AND OPERATING HYBRID EBT
SYSTEMS
There are many cost factors which could affect the decision of which type of EBT
system to use. Chapter 5 explores the economics of the hybrid scenarios outlined within this
report; the cost implications are addressed below.
1 Vice President Al Gore, et al., CreatingA Government That Works Better& Costs Less,
Washington, DC, September, 1993, page 114.
34
A variety of issues affect the potential costs involved in establishing and maintaining
an on-line, off-line, or hybrid system. Depending upon the manner in which a hybrid system
is utilized, these costs could reach as high as twice the cost for using a single system. The
cost implications which factor into a decision for selecting to use a hybrid system include
telecommunications, terminal deployment and capability (existing and planned), transaction
fees, issuance files, training, number of systems and support requirements.
Telecommunications
The issues surrounding telecommunications encompass the use of dedicated or dial-up
lines to handle on-line transactions, sending batches of transactions (off-line) versus
individual transactions (on-line), and the reliability of the telecommunications system which
is operating in the EBT area. For example, if the existing telecommunications network
experiences outages or slowdowns at particular times of the day, the use of an on-line system
may not be practical with delays in authorizing transactions or system unavailability at times
of frequent usage.
POS and ATM terminal deployment
The existing infrastructure is an important facet in the selection of an EBT system.
In areas where on-line systems are not prevalent, using an off-line system may prove a more
cost effective solution since the benefit of piggybacking EBT transactions on an existing
network or infrastructure would not exist. In areas where on-line POS and ATM systems
already exist, and are widely available, an off-line system may not be a cost-effective system.
With the existence of an on-line system using magnetic stripe access cards, the selection of
alternative card access devices may not be practical without the need to retrofit or re-equip
card readers to handle additional types of cards (such as IC chip or optical cards).
Even without the possibility of installing new terminals or modifying existing
terminals to accommodat? different cards, it is possible that the existing infrastructure in the
region is not diversified enough to meet the accessibility and convenience requirements
35
associated with the electronic delivery of benefits. While utilizing the existing infrastructure,
there may be a need to deploy additional ATMs and POS to meet the EBT requirements
of the specific programs.
Transaction Fees
Fees associated with processing transactions must be reviewed for each type of system
and card access device prior to selection. Fees are currently associated with ATM and POS
transactions, and generally increase as a transaction passes through network switches on its
way to authorization. POS transaction fees tend to be lower than ATM fees, and retailers
may be able to negotiate lower fees based upon the volume of transactions which would be
processed over the system. In contrast, batch transactions also incur fees when the items
are sent at particular times of the day, however these charges tend to be
telecommunications-based, rather than POS-based. ATMs do not use off-line processing.
Issuance Files, Training, and Support
In an EBT system, each benefit program is responsible for creating issuance files and
delivering those files to the processor. A hybrid system could require the benefit program
to create and send authorization files to two different systems. When issuance files are
directed to two systems or processors, additional costs are incurred by t.ie program agency
to monitor and track authorization amounts, which system each recipient uses, and how
training is conducted for recipients. In addition, if one benefit program issues two different
types of cards to its recipients, card stock must be separately maintained and reconciled.
With two types of access cards, customer service will need to be prepared to handle
inquiries from retailers and recipients concerning either card.
36
Chapter 4
WHAT ARE FEASIBLE PROGRAM ALTERNATIVES FOR COMBINING ON-LINE
AND OFF-LINE TECHNOLOGIES?
Various models combining the use of both on-line and off-line technologies can be
conceived. In order to focus the discussion of feasibility with the industry experts, four
hybrid scenarios were developed. The four scenarios illustrate the range of potential ways
that an IC chip card and magnetic stripe card system could be expected to interface in an
EBT environment. As discussed earlier in this report, the four scenarios include:
• on-line or off-line EBT systems based upon geographic area;
•
•
one benefit program on-line and one benefit program off-line operating within
the same geographic area;
one benefit program accessed via on-line and off-line technology; and
off-line security and on-line transaction processing.
The discussions of these scenarios provided substantial data to support conclusions
regarding two issues of concern to the Food and Consumer Service (FCS). These issues are:
•
•
The impact of an expanded off-line EBT system on the achievement of
interstate compatibility for food stamp transactions.
The impact of an EBT system utilizing both on-line and off-line technology
on program management and/or costs.
This Chapter provides a more detailed discussion of each of the four scenarios and
discusses, where applicable, the conclusions that were reached by the experts regarding these
two issues in the context of each of the hybrid scenarios.
37
HYBRID SCENARIOS
Industry experts were contacted to discuss each of the above four scenarios, and while
the experts all agreed that each of the scenarios could be technically feasible using current
technology, some of the scenarios may not be practical or operationally feasible.
The current EBT systems have been implemented using magnetic stripe cards for on-line
systems and smart cards for off-line systems. The experts noted that on-line systems
could use either magnetic stripe or IC chip card technology.1 They also noted that many
current commercial credit card systems, using magnetic stripe technology, operate in an off-line
mode. Transactions are authorized using an in-store floor limit with the merchant
transmitting a batch of transactions to a central database at the end of each day. Even
transactions for which an on-line authorization is obtained (either via a terminal or via
phone) are stored at the merchant site for settlement (transmission to a host) at the end of
the day. Therefore, some of the distinction between on-line and off-line systems can be
muted when considered in the context of existing commercial systems.
Scenario 1: On-line or OfT-line EBT Systems Based Upon Geographic Region
In this scenario, recipients would be issued either a smart card or a magnetic stripe
card, based upon where they reside within a state. The smart card would be used to access
benefits through off-line transaction processing and the magnetic stripe card would be used
to access benefits through on-line transaction processing. Because this scenario uses two
distinct transaction processing approaches, there would be separate databases maintained
for those recipients accessing their benefits through the on-line system and those accessing
benefits through the off-line systems. Essentially, two EBT systems would be operating
independently in different locations witnin the state. Two EBTprocessors could be providing
1 The chip would contain similar information to the data contained on a typical
magnetic stripe. The terminal could read this information and use it to establish an on-line
connection to a central database.
38
the on-line and off-line processing, though the scenario would not preclude one EBT
processor from providing both processing systems.
All other operating characteristics that are identified with on- or off-line systems
would remain unchanged in this scenario. For example, benefit issuance information would
be provided by the state or local agency to the appropriate processor. In an on-line system,
the benefit information would be maintained at tu ventral host computer, while benefit
information in an off-line system would be loaded onto the recipient's card. In order to
replace benefits from lost or stolen cards, a duplicate database would be maintained at the
off-line system processor. This database would be updated following retailer settlement to
reflect all off-line transactions performed during that period.
All benefit programs within an area would be delivered in the same manner. The
decision of which areas provide benefits to recipients off-line, and which provide benefits
on-line would be determined by the state, based upon a review of each area's unique
circumstances. This scenario is envisioned for use in states where factors such as the
existing infrastructure (terminal deployment), existing telecommunications systems, or
natural geographical separations dictate that the recipients would be better served through
the use of the two processing capabilities. If one area has a dense deployment of terminals
that are used for processing debit and credit transactions, it would seem to make sense to
use this infrastructure. However, if another area in the same state is segregated from this
"on-line" area by a natural boundary (e.g., a mountain range, great distance, or both), an off-line
system may be a more appropriate solution.
There has been considerable discussion that off-line EBT may be better suited for
rural environments because of the lack of adequate, or poor quality, communications
facilities. Discussions with industry experts indicated that telecommunications capabilities
in rural and urban areas are not, in most cases, substantially different and that the decision
to implement an on-line or off-line system solely on this basis is not warranted.
Telecommunications advances within the past four years have reduced the possibility of rural
areas having less developed systems. Part of the reason for this has been the advent of
39
satellite and digital communications. Industry experts also pointed out that poor quality
telecommunications in rural areas may in fact be more detrimental to an off-line system
than to an on-line system. The example provided by one of the experts was that off-line
systems required a longer individual transmission period (to upload and download
information) than that required for an individual on-line transaction (a purchase), thereby
increasing the likelihood that the transmission would be affected by the poor quality.
While the communications capabilities of an area do not seem to warrant one system
over another, the experts noted that the cost of telecommunications may be a determining
factor in which type of EBT processing environment to deploy in a given area. An example
provided to us was the higher cost that could be incurred by an on-line system in a dense
urban area with thousands of recipients. An off-line system in this same area may result in
a lower telecommunications cost. Telecommunications costs represent a significant cost
issue which should be further examined.
Furthermore, some experts pointed out that the benefit of an off-line system was the
avoidance of on-line telecommunications as well as network fees, and that an off-line system
may be more cost-effective in areas in which high transaction volumes could be expected.
They believed, therefore, that an off-line system may be more cost-effective in dense urban
areas in which many on-line transactions would be transmitted over existing commercial
networks incurring network interchange fees and that, in addition, the higher volume of
transactions could serve to mitigate the higher card and terminal costs of an off-line system.
They believed that an on-line system could be more cost-effective in rural areas in which
low transaction volumes are expected and in which a terminal may be more likely to directly
connect to the host rather than to a commercial network.
Drawbacks
There are two main drawbacks to this scenario. The first is that it could limit the
areas in which recipients can access their benefits. The limitation on access to benefits is
caused by the incompatibility of the two systems as well as the lack of interchange standards
40
between EBT systems. This is similar to the situation that exists now for recipients who are
in EBT areas who desire to shop in non-EBT areas. To a certain extent, any inconvenience
to the recipient has been partially relieved by the creation of what has become known as
a "border store." These are stores that are not within the official EBT area (i.e., state,
county, etc.), but are equipped with EBT terminals. However, in this scenario, it would be
necessary to equip "border stores" with equipment capable of reading and processing both
magnetic stripe and smart cards. This equipment could allow recipients living in the "off-line
are'" to shop in the "on-line area" and recipients in the "on-line area" to shop in the
"off-line area." This could be accomplished through retrofitting the terminals or by
deploying integrated terminals in the border area.
As an alternative to equipping border stores, manual transactions by out-of-area
retailers could be allowed. Retailers in an off-line area accepting transactions for an on-line
area recipient could be relatively sure that the funds are available in the recipient's account
by obtaining authorization through a telephone call to the recipient's EBT host. Off-line
transactions, on the other hand, would be authorized against the host database which may
not reflect the current available balance held on the card. Therefore, the retailer would be
at risk of accepting a transaction with insufficient funds remaining in the recipient's account.
Notwithstanding the above discussion, when one state has two different operating EBT
environments, it may be able to include within the vendor contracts a reciprocal agreement
between the processors whereby the two would allow retailers from outside their processing
area to initiate manual transaction processing. Paper routing, liabilities, and settlement
processing would be controlled by the reciprocal agreement. Absent this cooperative
agreement, "within" state border stores would need to be established with both on-line and
off-line capabilities which route the transaction back to the appropriate processor.
The second drawback is that implementation of two dissimilar systems will result in
higher costs than implementation of a single system and most likely will exceed the
implementation costs of two similar systems. Most experts indicated that dual EBT systems
could result in higher overall development and operating costs than if one system were
deployed. This would especially be true with two processors since the economies of a single
41
host computer system, one customer service area, retailer help desk, and other
administrative functions could not be combined. Retailer training costs could increase if
retailers were required to follow separate procedures based upon card type, processing
manual transactions for each "out of area" recipient. Also, implementation of the dual
system will result in higher terminal costs than a full on-line system.
Advantages
Interviewees cited as advantages the ability to piggy-back on an existing POS
infrastructure, and to use the most cost-effective delivery method for benefit distribution and
redemption.
Scenario 2: One Benefit Program On-line and One Benefit Program Off-line Operating
Within The Same Geographic Area.
This scenario requires a multi-benefit program environment, where one program
would be available to recipients through an on-line system (using magnetic stripe access),
while another benefit program would be available through an off-line system (using an IC
chip card). Recipients eligible to participate in both benefit programs would receive one
benefit card with an IC chip and a magnetic stripe. Recipients eligible to receive benefits
supported by the magnetic stripe would receive a card with a magnetic stripe only.1
However, recipients eligible to receive benefits supported by the IC chip would receive a
card with both a magnetic stripe and an IC chip. Industry experts believed all IC cards in
this scenario should include a magnetic stripe for the following reasons: 1) the incremental
cost of adding the magnetic stripe to an IC card is nominal; 2) If the recipient later
qualifies for the second program, a new card would not need to be issued; and 3) recipients
on both programs would require a card containing both technologies. Therefore,
administrative procedures are somewhat simplified by not issuing a third type of card with
only an IC chip to recipients on the one program.
1 Participants would identify the program from which benefits should be taken at the
time of purchase, as they do today.
42
If a benefit recipient with a magnetic stripe card later became eligible for a program
supported by an IC chip, the recipient would be issued a new card with both an IC chip and
a magnetic stripe. If a recipient originally participating in a benefit program supported by
an IC chip became eligible for a program supported by the magnetic stripe, the magnetic
stripe on his or her existing card would be encoded with the appropriate information for the
new program. No additional card issuance would be required.
All other operating characteristics that are identified with on- or off-line systems
would remain unchanged in this scenario. For example, benefit issuance information is
provided by the state or local agency to the appropriate processor. In an on-line system, the
benefit information is maintained at the central host computer, while benefit information
in an off-line system is loaded onto the recipient's card. In order to replace benefits from
lost or stolen cards, a duplicate database is maintained at the off-line system processor. This
database is updated following retailer settlement to reflect all off-line transactions
performed during that period.
Drawbacks
Many of the issues identified by the industry experts associated with this scenario are
similar to those that would be encountered in any multi-program EBT system. These issues
include:
• Coordination of card issuance across programs. Which agency would be
responsible for card issuance? Could a single agency manage all card
issuance even if different offices were responsible for eligibility
determination? In a hypothetical example, if a recipient receiving SSI benefits
were issued a magnetic stripe card and then visited a state welfare office to
receive food stamp benefits, would the Food Stamp Program issue a new card
with a stripe and chip to replace the previously issued card?
• Coordination of card replacement and card management. Which agency
would be responsible for issuing replacement cards? Which program would
bear the costs of the new card? Would the cost of the card be allocated
according to the technology used?
43
• The use of a dual purpose card at a POS terminal would likely require the
initiation of two or more transactions, one for each program benefit accessed,
as the EBT systems currently handle multiple benefit transactions.1 The
number of transactions would increase if cash benefits were accessed through
both technologies, and benefits accessed through the first technology (e.g.,
magnetic stripe) were depleted, resulting in one magnetic stripe cash
transaction and one IC chip cash transaction.
None of the above issues was viewed to be insurmountable; however, these issues are
complicated by the use of multiple technologies. For example, if all programs were using
a magnetic stripe card, then the issue of which program issues the card is less complex.
Similarly, if all programs utilized a chip card, then the question of cost allocation is less
controversial since proportional costs could be allocated across programs without
consideration of which program is using which technology.
Most experts believed that implementation and operation of the system depicted in
this scenario would be significantly more complicated if more than one EBT processor were
used. Areas such as card issuance and control, error resolution, and customer service would
be significantly affected. Almost all interviewees indicated that dual EBT systems could also
result in a higher overall development and operating cost than if one EBT system were
deployed. This was especially true if two different EBT processors were used, thereby
foregoing any economies that may have been gained from using a common host computer
system to process both on- and off-line transactions, the use of one customer service
function, retailer help desk, and other shared administrative functions. The use of two
different benefit delivery systems would require additional retailer and recipient training.
Training may be provided as a joint effort of the benefit programs, to ensure that retailers
and recipients understand the procedures to follow under each type of program.
1 In current EBT systems, two transactions are processed when recipients make
purchases with food stamp and cash benefits. Although not used in the current EBT
demonstrations, experts indicated that it is possible to handle both purchases with a single
transaction for authorization.
44
The apparent consensus of the experts was that there was no technical reason why
two technologies could not coexist on the same card. However, there would be little, if any,
linkage between the two technologies, other than sharing a common plastic carrier. As
discussed in the next section, they felt that the advantage of this commonality was in the
merging of card issuance and management procedures but that a potential disadvantage was
that if the card was lost, the recipient would be precluded from obtaining benefits from all
programs rather than a single program associated with a particular card. This was
acknowledged as a potential disadvantage to any EBT program that combined multiple
programs on a single card. They also noted that this scenario would require installation of
terminals that would accept either technology. They summarized the disadvantages by
suggesting that this scenario required issuance of cards with both technologies to a large
proportion of the population, installation of smart card capable terminals in almost all POS
locations, and building and management of two host processing systems. They therefore
believed that this scenario, other than sharing POS terminals, was analogous to building two
separate EBT systems and incurring all the costs associated with this activity. They believed
that a commitment to one technology or the other would result in lower overall costs to the
government.
Advantages
Most of the experts agreed that this hybrid scenario makes the best use of the
existing POS and ATM infrastructure and provides the flexibility, from a national
perspective, to allow certain programs (such as WIC) to be tailored to the issuing area. The
established ATM systems utilize local, regional or national network infrastructures to deliver
cash. Ultimately, there could be EBT operating standards and processor agreements that
would allow the use of any magnetic stripe EBT card to access cash benefits at any ATM
or POS device in the country.1
1 Before nationwide EBT could be provided for the Food Stamp Program, procedures
would need to be developed to ensure that transactions made outside of the recipient's
processing area were made at authorized food retailers.
45
Experts also believed that this scenario, depending on which programs were delivered
on- and off-line, provided retailers with the most flexibility. For example, if all benefits
were provided on-line except WIC, the number of retailers or vendors which would need
a tern inal that could read an IC chip would be limited to the number of WIC vendors,
likewise, from a program perspective, WIC EBT requirements could be determined on a
state-by-state basis, and not carry with it any national ramifications.1
Scenario 3: One Benefit Program Accessed Via Both On-line and Off-line Technology
In this scenario, one benefit program (e.g., food stamp benefits), or benefit account,
could be accessed through both on-line and off-line technologies interchangeably. The
method of access for on-line transactions would be through the use of a magnetic stripe and
for off-line transactions an IC chip would be used. There could be one EBT processor for
the benefit program supporting both the on-line and off-line processing. Each recipient
would receive a plastic benefit card that had an IC chip and a magnetic stripe. In addition
to a recipient's account balance, the IC chip would contain all the necessary data to
interface with the POS device. The magnetic stripe would not contain an account balance.
Off-line transactions would be authorized and posted to the benefit balance maintained on
the card while on-line transactions would be authorized and posted to the account balance
maintained at the central database.
Recipients would continue to shop at authorized retailers and bring their selections
to the check-out lane for purchase. If the retailer was operating in an on-line environment
the benefit card would be "swiped", the PIN and transaction amount would be entered, and
an on-line connection to the host computer would be made. Assuming the correct PIN was
entered at an authorized retailer terminal and sufficient funds were in the recipient's
account, the purchase would be approved. If the purchase was approved, the recipient's
balance would be updated at the host computer and the transaction would be placed in a
pending file, to be included in the retailer's next settlement.
1 Discussion is limited to WIC EBT requirements and not WIC nationwide regulations.
46
If the recipient shopped at a retailer with off-line capability only, the benefit card
would be inserted into the POS device's card reader, the PIN and transaction amount would
be entered, and the balance on the card would be read by the retailer's POS device. If
approved, the amount of the purchase would be deducted from the available balance on the
card. The transaction amount would be stored on the retailer's system and during
settlement the transaction information would be uploaded to the EBT processor's host
computer.
During settlement, on-line transactions that were posted to the balance maintained
on the host would be aggregated by recipient and downloaded to retailers who processed
transactions in an off-line environment. These transactions would be posted to the IC chip
the next time the recipient used the card at an off-line retailer.1 As stated above, during
settlement, the off-line transactions maintained on the retailer's system would be uploaded
to the EBT host for updating of the EBT host computer balance.
Drawbacks
Several drawbacks to this scenario were identified by the experts. First, there was
a major concern that this scenario, if implemented as presented, would provide too much
exposure to excess benefits being provided to recipients. There was too much opportunity
for a recipient to use the entire amount of the benefit maintained on both the host database
and IC chip database prior to settlement updating.2
1 Downloading the net on-line activity to be loaded to the card could allow the recipient
to overdraw the benefit account. For example, if a recipient were to use the card at an off-line
retailer immediately prior to the download, the on-line balance would be greater than
the balance on the IC chip.
2 There are a number of design approaches which could limit this exposure, such as the
uploading of off-line transactions (to the host) and downloading of on-line transactions (to
the retailer) at the time of the next on-line transaction. The effectiveness of this approach
is dependent on the frequency of updates between the card balance and the host. However,
assurance of eliminating all overdrafts can only be achieved by updating the balance on the
card and the host with each transaction. If this strategy was implemented, there would be
little difference between the on- and off-line transactions and the state would incur the
telecommunications costs of an on-line system combined with the card and terminal costs
47
The second drawback cited was the effort that would be needed to reconcile the
account balances maintained on the two databases. Reconciling the benefit account balance
is complicated under this scenario. On-line transactions access the account balance that is
maintained at a central database, reducing the available funds. Off-line transactions are
uploaded to the processor during settlement each day, and are posted against the available
balance in the benefit account. Likewise, the dollar amount of the day's on-line transactions
is downloaded (with the hot card information) to retailers so that it can be posted to the
appropriate recipient's smart card balance at the time of the next transaction. In addition,
new issuances are downloaded to retailers so that the funds may be posted to the recipient's
smart card balance.
A third drawback mentioned was the potential size of the database of downloaded
on-line transactions that would need to be maintained at each off-line retailer.
Theoretically, all on-line transactions, or daily aggregated transaction totals, would need to
be maintained for all recipients regardless of whether the recipient would ever conduct an
off-line transaction. It was recognized by those interviewed that fine-tuning the design (e.g.,
"expiration" of balances maintained on the IC chip of an active on-line user) could mitigate
this potential problem.
A fourth drawback stated was the higher cost that could result from developing a
system capable of both on- and off-line processing and supporting the reconciliation effort.
The industry experts identified a potential variation of this scenario that would, to
a limited extent, resemble plans for prepaid cards in the commercial sector. This variation
would provide the recipient with the capability to move funds between the chip and the on-line
host. If the recipient was visiting a retailer (or geographic area) equipped with off-line
terminals, they could visit a location with a terminal capable of reading both technologies
and initiate a funds transfer transaction. This transaction would result in a debit to the host
of the off-line system.
48
database balance and a credit to the card balance. The card balance could then be used
to authorize purchases at the off-line retailer. This strategy would ensure that recipient
overdrafts could not occur and that the sum of value on the card plus the value in the host
database would not exceed the total value of the recipient "account".
When a card is reported lost or stolen, the account balance at the central host
computer would be blocked, leaving the chip balance exposed. Depending upon the cost-benefit
of handling hot card files to block the exposed chip balance, the hot card files could
be downloaded to the retailers within the region.1
Retailers will be able to select the type of system that best meets their needs. Large
grocers may select an on-line system which would handle credit and debit card transactions,
while small convenience stores may be more attracted to a system which would interface
with a stored value debit card.2 Recipients would be trained on transferring value to the
smart card and monitoring their account balance. The processor's central host computer
would maintain a balance (accurate to within a 24-hour period) which could enable benefit
replacement in the event of a reported lost or stolen card.
The major drawbacks to this variation of the scenario include the requirement of
more sophisticated recipient training as well as advanced planning by the recipient to
anticipate the type of equipment or transaction that would be required by particular
retailers. Elimination of this advanced planning would require that all retailers have on-line
access to the host database to allow the recipient to transfer funds on demand. However,
this feature would require an on-line transaction to occur before the off-line transaction
1 This issue becomes more critical as EBT sites expand. Downloading hot card
information to all retailers at which a participant might shop may not be cost-effective.
Alternatively, hot card files could be downloaded to retailers in an area where a large
percent of transactions occur, reducing the exposure.
2 Stored value cards are expected to become available within the next 2-3 years,
providing a replacement for cash, predominantly where transaction purchase amounts have
a low dollar value. Experts have indicated that within a stored value card, account balances
can be segregated and transaction processing can be restricted by retailer (i.e., FNS
transactions could be restricted to FNS authorized food retailers only).
49
could be completed which would cause additional check-out time and additional
telecommunications expense. The experts could identify no reason why the recipient would,
in this scenario, use the option to transfer value to the chip.
Advantages
The single advantage cited by experts for this hybrid scenario is that it provides the
maximum flexibility in retailer equipment. Retailers offering on-line POS applications, such
as debit or credit card purchases, would already have magnetic stripe card readers. The
benefit programs could be accessed by piggy-backing on the existing equipment. Where
smart card readers exist, the program information could be accessed through the balance
on the card. Retro-fitting equipment would not be an issue since this scenario allows the
recipient to use the system which is available at the retailer.
Scenario 4: Off-line Security and On-line Transaction Processing
All program recipients would be issued benefit cards with an IC chip containing
limited memory capacity. The recipient's identification and security information would be
maintained on the IC chip embedded on the card, along with routing information to direct
the transaction authorization to the processor. No magnetic stripe would be necessary.
Benefit data would be maintained at a central database for on-line authorization and
transaction processing. This scenario is considered a hybrid because of its use of both on-line
and off-line processing. This discussion focuses on a single benefit program with
benefits provided by one card. Multi-program delivery of benefits is not addressed within
this discussion.
The EBT system functions as an on-line system, but draws on the security features
of smart cards. Many of the experts considered this alternative to be the direction that the
credit and debit card industry may pursue in order to reduce the incidence of fraud. In the
current direct debit and credit systems, PINs are used when cash is obtained from an ATM
50
and the POS terminal; PINs are not used for credit card transactions where signatures serve
as a form of identification.
Each recipient would be issued a card at the state or local agency. The recipient
would select a PIN which would be encoded on the smart card, and verified at the retailer
through the use of encryption techniques. In order to perform a transaction at a retailer,
the recipient would present his or her card, insert it into the smart card reader, and enter
his or her PIN. Once the POS terminal had verified that the correct PIN has been used,
the terminal would read the chip and connect to the processor for authorization of the
purchase amount. When the purchase was authorized by the processor, the central database
would be updated to reflect the purchase. Using smart card technology for PIN validation
would eliminate the need for host validation of the PIN and would therefore result in
somewhat lower telecommunications costs. Currently, telecommunications costs may be
incurred if an incorrect PIN is entered even if all other aspects of the transaction are
correct. Manual transactions would be authorized based upon the value of benefits
available in the recipient's host computer balance.
Drawbacks
According to our experts, the biggest drawback of this scenario is that in order to
provide benefits in this scenario, all authorized retailers need to have POS devices able to
read .>mart cards (although read/write capability is not necessary), as well as the ability to
conduct on-line transactions. On-line transactions processed for debit and credit cards are
based upon magnetic stripe cards, and the EBT system developed under this scenario would
not be able to fully piggy-back on existing POS systems. However, since the chip in this
scenario is used solely to authenticate the card and cardholder, the transaction could be
completed via traditional on-line communications if the retailer was not equipped with a
smart card reader. Therefore, to offset this drawback, it may be appropriate to issue benefit
cards which contain both an IC chip and a magnetic stripe. The magnetic stripe could be
used for out-of-state (or out of EBT region). This approach would, however, defeat the
purpose of this scenario, i.e., increased security.
51
Advantages
The major advantage to this scenario is the authentication process available with the
use of smart cards. This authentication ensures that the card is the original card since the
chip contains a unique identifier which can be linked to the cardholder's PIN. Smart card
manufacturers and system developers claim that this authentication process could virtually
eliminate the possibility of fraudulent card counterfeiting in which the information on
magnetic stripe cards is read and copied to a duplicate card. Card counterfeiting is a
serious problem in the debit and credit card industries, but has not yet been a problem in
EBT card systems.
Since this scenario is an on-line system transaction processing system, operating
procedures for manual transactions, hot card files, and benefit issuance would not be altered
from the existing on-line EBT systems. Some modification to the host-based software would
be required to remove the authorization process. Dual authorization could remain (first at
the card level and then when the transaction is processed by the host), but would be an
unnecessary step and could result in an increase in the overall time it takes to complete a
transaction. This would negate a side benefit of performing authorization at the POS
device: reduced telecommunications costs as a result of a shorter transmission times and
local PIN verification.1
If the commercial credit and/or debit card industries were to endorse chip card
technology to reduce fraud and promulgate standards for chip card terminals and processing,
then it would seem prudent for Program agencies to conduct a cost-benefit analysis to
determine if the reduced potential for fraud warranted the increased costs of the technology.
1 It is reported in Hitachi, op. cit., that the use of IC cards in France has reduced
communications costs because it is no longer necessary to perform on-line authorization.
52
Chapter 5
THE ECONOMICS OF A HYBRID SYSTEM
The economics of a hybrid system can be discussed in terms of design, development,
implementation, and operations. The ultimate cost of any system will be largely dependent
upon the scale of the system which includes variables such as the number of recipients, the
number of terminals, and the number of cards. The examination of a hybrid system adds
other design considerations that will have a significant impact on the final cost of the system.
This chapter presents, in general terms, key hybrid system design considerations and
the impact that the decisions could have on the cost of the system. Included is a projection
of the potential system costs associated with each of the four hybrid scenarios discussed in
the previous chapters.
DESIGN CONSIDERATIONS AND THEIR IMPACT ON COST
When designing a hybrid system, many of the considerations are extensions of design
choices familiar to either an on-line or off-line system. In these cases, a design issue
includes the number of terminals to be deployed. The hybrid design requires determining
how many of each type of terminal (dual card capability, basic terminal - magnetic stripe,
or enhanced, etc.) should be deployed.
A discussion of some of these design considerations and how each impacts costs is
presented below.
• If all retailers were equipped to process both off-line and on-line transactions,
then each retailer would require a communications line specifically to transfer
the on-line data. This same line could be used to transport off-line data in
batch mode. However, retailers equipped only to accept off-line transactions
may not require the installation of a separate communications line and could
use an existing phone line to send the off-line end-of-day settlement
transactions to the host.
• If all recipients were expected to be able to access benefits in either an on-line
or off-line mode, then each recipient would require a card containing
53
both a magnetic stripe and an IC chip. A less expensive alternative would be
to issue IC chip cards only to those recipients expected to utilize the off-line
system. In Chapter 4, various implementation scenarios were presented. In
one scenario, certain geographic areas would be equipped with an on-line
system, while other areas would be equipped with an off-line system. It is
conceivable that only those recipients in the off-line area would be issued
smart cards. However, this approach would limit the ability of this group of
recipients to shop in the on-line areas. In another scenario, recipients
participating in the Food Stamp Program would be issued smart cards while
those participating in a cash program would be issued magnetic stripe cards.
Recipients participating in both programs would be issued a dual purpose
card. The cost of adding a magnetic stripe to a smart card is small ($0.10 or
less); the cost of adding a chip to a magnetic stripe card is significant
(approximately $5.00). Therefore, it would not be cost effective to issue
participants receiving only cash benefits a card that contain* an IC chip as
well as a magnetic stripe since the IC chip would not be usea
An integrated off-line/on-line host system might be able to share some
equipment and some functionality. For example, both on-line and off-line
systems require a "back-end" batch process to update recipient and retailer
accounts, produce the transaction records for retailer credit, and produce
reports. These functions could be shared across both systems. Some
administrative functions such as training and customer service could also be
shared. Similarly, many of the on-line systems and the off-line system in
Dayton, Ohio, utilize similar host computers. While the existing host
computers may not be sufficient in terms of functionality or capacity to
accommodate both systems, enhancement of these existing devices may be
more economical than purchase and operation of separate units for each
system.
The type of smart card utilized in the system will directly impact costs. The
broad definition of smart cards includes many different cards with varying
memory capacity and processing capabilities. These cards range from simple
memory cards used to store and transport data, to sophisticated computer chip
cards with internal operating systems, expanded memory and built-in software.
Cards at the low end of the range could cost as little as $1.00 each while cards
at the upper end could cost $10.00 or more a piece. Currently, cards are
generally discussed in terms of the following three categories:
Simple memory cards. These cards contain a simple EEPROM
(electronically erasable programmable read only memory) serial
memory chip ranging from 2k bits up to 4k bits. They provide no
security at the card level and are used primarily as portable data files.
Protected (personalized) memory cards. These cards contain an
integrated processor and EEPROM memory chip ranging from 416 bits
to 896 bits. They will accommodate PIN and password protection and
54
have a unique internal serial number. They are generally used in pre-paid,
electronic purse (stored value), and security applications.
Microprocessor (computer) cards. These cards are the most
sophisticated cards, containing processing and memory capability. The
EEPROM memory ranges from 16k bits up to 64k bits. The card can
provide high security including internal encryption/decryption and key
management This is the type of card used in the Dayton off-line EBT
demonstration.
The memory and processing capabilities of cards continue to increase even
while costs decrease. It is likely that, in the future, buyers of smart cards will
be able to either obtain cards at lower cost or obtain cards with enhanced
capability at the current cost In addition, at quantities over 1 million cards,
the per card costs are significantly reduced. Estimates provided by vendors
are speculative, but indicate that a 40 percent reduction in cost could be
expected. The relationship between cost volume, and card type is illustrated
in Figure 5.
Relationship of Card Capability and Volume to Price
$30.00
1u
&iu
$1.00
Small Volume
(leu man 1,000)
High Volume
(Over 1 Million)
Simple
Memory
Personalized
Memory
Computer
Cards
Figures
55
Design, Development and Implementation Costs
Little direct information is available on the costs to design, develop and implement
a hybrid system. However, estimates of these costs can be imputed based upon the actual
costs to design, develop and implement an on-line system and similar costs for an off-line
system.
System Design and Development Costs
The cost to design and develop the Dayton off-line system were approximately $2.3
million.1 Adjusting these costs to include unbilled overtime costs results in costs of
approximately $2.47 million. Similar costs for on-line systems are as follows:
• Reading, PA - $1.78 million (adjusted to 1992 dollars) for the original system
(not including Phase C enhancements).2
• New Mexico - $919,318 (adjusted to 1992 dollars), of which $546,994 is
attributed to FSP.3
• Minnesota - Approximately $139 million, of which $1.17 million is attributed
to FSP.4
Cost Estimate for FSP-only System in New Mexico and Minnesota. The design and
development costs for Minnesota did not include the costs for the original cash-only EBT
system. By estimating that the FSP costs in Minnesota would represent the same percentage
of total costs as the New Mexico program (i.e., approximately 59%), Minnesota cash
program costs (in 1992 dollars) were increased to $799,731. To estimate the cost to design
1 Gary L. Glickman, et al., The Impacts of the Off-line EBTDemonstration on the Food
Stamp Program, Phoenix Planning & Evaluation, Ltd., Rockville, MD, April, 1994.
2 John A Kirlin, et al., The Impacts of the State-Operated Electronic Benefit Transfer
System in Reading, Pennsylvania, Abt Associates Inc., Cambridge, MA, February, 1990.
3 John A. Kirlin, et al., The Impacts of the State-Initiated EBT Demonstrations on the
Food Stamp Program, Abt Associates Inc., Cambridge, MA, June, 1993.
4 Ibid.
56
and develop a FSP-only system for New Mexico and Minnesota, it was assumed that 20
percent of the total cash program costs were fixed system costs. Under this assumption, the
cost of a stand-alone FSP system was approximately $621,500 in New Mexico and $1.33
million in Minnesota. The average on-line, FSP-only system costs for the two locations is
$975,750.
Normalizing the Off-line System Costs. The average on-line EBT system costs as
shown above were approximately $975,750. The original Reading system costs were $1.78
million or 1.82 times higher than the two subsequent on-line demonstration systems. While
not necessarily indicative of what would happen with costs of off-line systems, it can be
speculated that a percentage of the higher costs in Reading was due to the system being the
first experimental project of its kind. It is reasonable to assume that a similar percentage
of the Dayton system costs are due to that system being the first experimental project of its
kind. Using the percentage from the Reading project, the design and development cost of
the next off-line EBT system would be approximately $1.36 million.
Implementation Costs
For the purpose of this analysis, implementation costs include store set-up costs and
initial training for retailers and recipients. Implementation costs are highly affected by the
number of participating recipients and retailers. Because the characteristics of the recipient
population and retailer base in the four food stamp EBT project areas (Dayton, Reading,
New Mexico, and Minnesota) vary, as well as the circumstances surrounding each
implementation (e.g., Minnesota FSP recipients required far less training than those in other
locations because many had already participated in the earlier AFDC EBT system), it is
difficult to draw any conclusions based upon the implementation costs for these sites.
However, data on the costs of retailer POS implementation and retailer and recipient
training can be used as a proxy to develop implementation cost estimates for a hybrid
system. Implementation costs (in 1992 dollars) for the four demonstrations are provided in
Exhibit 2.
57
Exhibit 2
DEMONSTRATION SITE IMPLEMENTATION COSTS
Demonstration Site Total Implementation Costs
Dayton, Ohio $1.11 million
Reading, Pennsylvania $900,000
New Mexico $660,346
Minnesota $686,936
Store Set-up Costs. Store set-up costs include those costs incurred to install and wire
POS terminals, telecommunication lines, and other field equipment necessary to support
POS transaction processing at the retail location.1 Installation charges for a POS terminal
should be the same for both on-line and off-line terminals. The average installation cost
for grocery stores, convenience stores, and consumer goods and other stores are estimated
at $300 per lane.2
Training Costs. Retailer training costs are estimated at $60 per lane for on-line
transaction processing based upon typical costs in a commercial POS system.3 Retailer
training for on-line or off-line processing in a mature system should be similar. Recipient
training in the Dayton demonstration totaled approximately $210,500 for 11,000 recipients
or $19.14 per recipient. It is assumed that recipient training in a mature on-line or off-line
system is comparable. State training costs depend upon the state's involvement in the EBT
1 Terminal costs are not included in the implementation costs of an EBT system but
are amortized and included in the per case month operating costs of the system.
2 Gary L. Glickman, et al., The Business Casefor Retail POS, Electronic Funds Transfer
Association, Herndon, VA, December, 1992.
3 Ibid.
58
system. Because each demonstration project has been implemented and managed
differently, a general cost estimate of state training is not available. Therefore, state
training costs are excluded from our implementation cost estimates.
Operating Costs
Based on data provided in The Impacts of the State-Initiated EBTDemonstrations on
the Food Stamp Program and 77»e Impacts of the Off-line EBT Demonstration on the Food
Stamp Program, the probable cost of operating either system, assuming a population of
approximately 20,000 recipients, is $3.73 per case month for an on-line system and $4.30 per
case month for an off-line system. Where necessary, adjustments to these per case month
costs for terminal and card costs were made using the information provided below.
Terminal Costs
The cost of terminals vary by EBT system:
On-line EBT system. Our research found that 80 percent of all deployed on-line
terminals fall into the "basic terminal" category ranging in cost from $250
to $300. The rest of the on-line terminals fall into the "enhanced terminal"
category, ranging from $500 to $700. The average cost of an on-line terminal
is approximately $340. Small stores with low transaction volume tend to
purchase the less expensive terminals, while larger stores with higher volumes
and more sophisticated systems tend to purchase the enhanced terminals.
Off-line EBT system. The average cost of an off-line EBT terminal is
npproxunately $860. This figure was derived from the average cost to modify
an "enhanced terminal" ($825; estimates ranged from $700 to $950) and the
average cost of an "integrated terminal" (approximately $900).
59
Card Costs
The cost of a magnetic stripe card including embossing, printing and personalization
is estimated at $0.80 per card. The cost of a smart card capable of meeting the needs of
an off-line system is estimated at $5.00 per card.
Telecommunications Costs
While there are a number of additional cost elements which comprise the total
operating costs of an EBT system, telecommunications costs appear the most misunderstood.
The telecommunications requirements of an on-line and off-line EBT system differ only in
the frequency with which data must be exchanged between a POS terminal and the EBT
host computer; the hardware and software requirements for this data exchange remains
constant for both systems. As previously mentioned, both dedicated and dial-up
telecommunications lines can accommodate on-line and off-line transaction processing.
Described below are some of the criteria for determining the most cost effective
telecommunications environment for a retail store.
The ongoing telecommunications cost for either an on-line or off-line EBT system
is determined by the number and type of telecommunications lines deployed at a retail store
to support EBT transaction processing. Several variables, such as the number of check-out
lanes equipped with POS terminals, the POS transaction volume, and the ongoing costs for
the lines, must be considered in order to determine the most cost effective configuration for
a retail store.
At a minimum, each store will require one telephone line. In some situations,
especially in supporting off-line EBT applications, the same line used by the store for
normal telephone service may be used.1 In multi-lane stores, one line may suffice through
1 In an off-line EBT environment, the retailer may choose how frequently data will be
transmitted between the store and the EBT host computer, usually with a minimum of one
data transmission per 24 hour period which may take place in the off hours when the
60
the use of an in-store controller. A controller acts as a central traffic