Getting Organized on Prepaid EBT Benefits Fraud

David Johnson
Senior Vice President, Emerging Commerce Products
Posted on December 22, 2016

Getting Organized on Prepaid EBT Benefits Fraud


Taking coordinated, cross-agency steps to close benefit loopholes

Wasting taxpayer’s hard-earned money is much more than just corrupt behavior; benefits fraudsters actively keep much needed sustenance from those who most need it most. The good news is benefits fraud is declining. In fact, the USDA estimates only one percent of its $74 billion Supplemental Nutrition Assistance Program (SNAP) is lost to fraud, waste and abuse.

While that’s certainly a small percentage, it still amounts to $750 million in waste – money that could feed those in need.

Fortunately, Electronic Benefits Transfer (EBT) has gone a long way to crack down on fraud. However, misuse remains widespread, and it’s up to regulatory authorities to take the necessary steps to eradicate it.

Stealing from the poor

One of the common ways people defraud benefits systems is through open collusion of merchants and cardholders. Benefit holders sell their EBT cards to merchants for cash – around 50 cents on the dollar –  and the unscrupulous merchants then use the cards to restock their own shelves for resale, swindling the government out of millions each year.

Such merchants are essentially enablers of cardholder fraud. It is a reciprocal relationship – there is no cardholder fraud without compliant merchants. That’s why the response needs to address both merchants and cardholders simultaneously. However, in the United States, the various authorities at the federal and state level act haphazardly, with little interdepartmental cooperation. Understandably, there is some overlap and redundancy, and the various federal and state organizations have different perspectives, aims and targets. The responses to benefits fraud also varies enormously by state, and we find that the prepaid card transaction processors themselves are rarely, if ever, involved or consulted in the process.

With two fraudulent targets to aim for, the United States needs to get organized at the federal and state levels in order to divide and conquer.

Call in the Feds

At the federal level, the focus needs to remain on the merchants that enable the EBT scams. The prosecuting attorneys currently require a significant level of proof, which can blunt enforcement by the Office of the Inspector General. Consequently, the office often lacks the teeth to enforce strong and decisive punitive actions, fines and prison time for swindlers.

Strict penalties and arrests, and a more cohesive approach from federal regulators, could severely discourage merchants from operating future benefits scams Ultimately, law-breaking merchants need to face the reality that they will be shut down and forced to repay all fraudulent income, if they continue breaking the law.

States of Play

Authorities at the state level are better equipped to tackle EBT cardholder fraudsters – after all, they distribute the prepaid cards to citizens. The first step is to ensure that all those applying for benefits are genuinely in need of assistance and that their circumstances are as claimed. Some states already take the issue seriously, but diligence varies state-to-state. A coordinated, consistent response and process across state lines is vital.

Take a look at Florida. After a major initiative to stamp out benefits fraud, they claim 100 percent accuracy on justified applications for EBT cards, with over 90 percent using the efficient online channels for applications. They now claim their cost per eligibility transaction has dropped from $30 to $7. With such dramatic differences, why are other states not following suit?

Get Tooled Up

As the federal government and state regulators gear up to tackle EBT fraud, they should not ignore the elephant in the room. The prepaid card processors themselves are the silent partner that can provide both parties with vital expertise, data analysis and tools to assist in the identification of frauds and scams, as well as evidence for prosecutions.

Benefit card processors are always watching, logging every transaction, and have the technology to identify and resolve benefits fraud. They also maintain centralized systems that collect massive amounts of financial and demographic data – all available in real time. Potentially dishonest transactions can be flagged instantly, utilizing the research tools and expertise that can quickly detect fraudulent patterns.

A Cooperative Nationwide Approach

Combatting fraud effectively demands a multi-pronged approach, with the federal government going after fraudulent merchants while the states identify EBT cardholder abuse. To achieve this effectively, the EBT processors can provide the much needed data and analysis to both investigation teams. That way, all three parties can work more closely, with clearly demarked boundaries of operation, in order to increase cooperative interaction and present a unified and consistent response.

States need to be more cooperative and open to information-sharing procedures that can catch large-scale scams. Too often, they operate as isolated fiefdoms, playing into the hands of the criminally minded. Which fraud database is being employed? Can the system catch state-to-state fraudsters? What solutions are already in place to reduce fraud?

The onus is primarily on the states to solve this, but they are handcuffed by the less than ideal relationship with federal authorities. By working together, all the organizations have the tools to automate and greatly increase fraud prevention at the state and federal levels.

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David Johnson
Senior Vice President, Emerging Commerce Products

DJ is the Product Division Lead over Loyalty, Prepaid, EBT – Government and Merchant Products. DJ joined FIS in 2007 and has over 20 years of payment industry experience with roles in product development, strategy, consulting and business development. Before FIS, DJ managed Online Banking and Bill Pay for a Top 15 US bank. DJ earned his MBA from Emory University and a degree in Finance from the University of Florida.