Md. welfare system soon to be 'paperless' Independence cards may cut fraud

January 20, 1993|By Laura Lippman | Laura Lippman,Staff Writer

It's the beginning of the month -- "check day" in the parlance of the state's welfare recipients -- and the lines are forming in Mondawmin Mall.

But not at the check-cashing counter in B&B Liquors. The line is at a nearby Maryland National Bank automated teller machine, where welfare recipients with "Independence" cards mingle with bank customers with "Most" cards. Only someone who knows the distinctive red-and-blue design of the Independence cards could pick out the welfare recipients.

With more than three-quarters of its clients on line in this electronic banking system, Maryland is just weeks away from becoming the nation's first "paperless" welfare state.

But a recent proposal by the Federal Reserve Board threatens to open Maryland's program to unexpected costs and abuses, while derailing electronic benefits transfers (EBT) in other states.

The change -- a recommendation that these welfare accounts be safeguarded much in the same way credit card holders are shielded from theft and misuse -- is the first major snag in what otherwise has been an atypically smooth reform movement.

The Independence Card has been a smash with clients, state and federal officials, welfare advocates and merchants -- with the notable exception of check cashing outlets, who are losing a significant segment of their business.

"All it's doing is making it easier for everyone," said David Kass, a policy associate at the American Public Welfare Association and an expert on electronic benefits.

'I like it'

"I like it," said Belinda Kinsey, 37, as she withdrew only $100 from her monthly allocation of $359. "You don't have to wait in long lines, you don't have to wait for the mailman. Plus, I don't spend as much. I just take out what I need."

For Ms. Kinsey, the primary appeal is certainty. On the second day of each month, her welfare benefits appear in her account. No worry about the mail, or theft. A separate account holds her food stamps, which the grocery store can access simply by whisking her card through a point-of-sale terminal.

For the state, it's a chance to cut fraud while cutting costs. There are no checks to be stolen, and no paper food stamps to be sold. It is still possible to cheat -- a client could "sell" a card and its password, for example -- but it's much more difficult.

"When we first started out, we said EBT would eliminate fraud, we now say it will reduce fraud," said Karen Walker, who oversees the program for the Department of Human Resources.

But that changed when the Federal Reserve Board threw Regulation E into the mix.

Regulation E is the law behind the small print on your credit card contract, the assurance that no consumer will be responsible for charges above $50 if a card is reported stolen or missing within two business days.

On Jan. 6, the Federal Reserve Board unanimously proposed to extend this same protection to welfare clients, rejecting a staff proposal to limit the regulation in this case. According to news reports, Board Governor Lawrence B. Lindsey said it would be "hypocritical" to do otherwise.

States will have 90 days to respond to the change, and intense lobbying is expected on the issue.

But Maryland and New Mexico, the only other state with a system close to completion, have more at stake because they cannot retreat from their multimillion-dollar investments in electronic benefits. Maryland has invested $37 million in its six-year contract with Deluxe Data Systems Inc., the Wisconsin firm that runs the system, reimbursing banks and point-of-sale terminals for transactions.

The fear is that Regulation E will result in fraudulent claims of loss and theft, forcing the states to reimburse some unscrupulous clients. Any potential savings from the paperless system could be wiped out, according to state officials, if a compromise cannot be reached.

"This could open the system to a lot of abuse and fraud," lamented Ms. Walker, who said the state remains committed to EBT, but now must prepare a "worst case scenario" on how this could affect the department's budget.

Each month in Maryland, about 5 percent of the Independence Cards are reported missing or stolen. Currently, the state has no obligation to replace benefits, although it may in some cases. But if Regulation E is applied, the state would have to replace missing benefits unless it could prove a theft claim was fraudulent.

How would someone make a fake claim? It's not that hard, officials said. All someone has to do is pass their card and PIN number along to someone else, let that person clean out his or her account, then report the missing funds later.

Other hurdles for the card

While Regulation E is the biggest hurdle yet for the Independence Card, there have been other problems.

Over the past year, as clients were added to the data base, the computer crashed several times. State officials said Deluxe Data has solved the problem, in part by distributing benefits over a staggered schedule.

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