As I watched the local evening news several weeks ago, one particular story caught my attention. A local convenience store owner had been arrested for the repeated abuse of the Supplemental Nutrition Assistance Program (SNAP), formerly known as the food stamp program. The store owner allowed SNAP recipients to exchange their electronic benefit transfer (EBT) cards for such items as cigarettes and alcoholic beverages, charging a premium of anywhere from 25 to 50 percent of the items' values. This type of SNAP fraud is known as "trafficking." Another form of trafficking fraud occurs when the program recipients sell their cards on the black market in exchange for cash. These cards are then reported as lost or stolen, so recipients receive a replacement card.
Upon performing an Internet search on this topic the next day, I was surprised to discover that SNAP trafficking is actually a $300 million-a-year problem. According to a 2011 report of the USDA Food and Nutrition Service, trafficking diverted an estimated $330 million annually from SNAP benefits, or about one cent for each SNAP dollar redeemed. Interestingly, this figure is down significantly from earlier reports published by the USDA. In 1993, trafficking resulted in more than $800 million of fraud, or nearly four cents per SNAP dollar redeemed. Since the first report, the trafficking rate has fallen, leveling off at its current rate of 1 percent. Still, fraud levels for this EBT program are significantly higher than for general purpose credit and debit card cards.
The main reason for this decline has been the electronification of the old food stamp program. During the mid to late 1990s, some states began replacing food stamps with EBT cards. And since June 2004, all states have used EBT cards to distribute SNAP funds.
Though taking this program from paper payments to plastic payments has dramatically reduced trafficking fraud, fraud is still an issue at 1 cent per dollar redeemed—so much so that the USDA recently proposed a new rule that would allow state agencies to deny replacement cards to recipients who make four replacement requests over a 12-month period.
The USDA's proposed rule is currently open for comment through July 30. I encourage anyone with thoughts or ideas on this particular rule and on trafficking fraud in general to make their voice heard and provide feedback to the USDA. The SNAP EBT fraud rate, which is substantially higher than credit and debit card fraud rates, is the burden of all taxpayers. What else can or should we do to further tackle this particular payments fraud?
By Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed