The Supplemental Nutrition Assistance Program (SNAP) has undergone significant modernization efforts since its creation in the 1960s—including the introduction of Electronic Benefit Transfer (EBT) payment cards in the 1980s to replace paper vouchers and coupons. EBT payment cards allow an individual on SNAP to purchase eligible food items at authorized retail stores, such as a convenience or grocery store.

When they were introduced, according to USDA, EBT cards helped cut back on food stamp fraud by creating an electronic record of each food stamp transaction, making it easier to identify any violations. The rate of trafficking (such as trading food stamps for cash) went from nearly 4% in the 1990s down to 1% after EBT was fully implemented.

Recently, however, there have been prominent reports in the media about a new type of fraud that has emerged within SNAP: EBT skimming. As criminals exploit the vulnerability of EBT payment cards, efforts are underway to transition to more secure chip technology.

This transition is moving fast in some places and could lead to system failures if retailers haven’t done the work to be ready for this new transition. All companies should look at where they are in the process of getting ready for EBT chip cards—and may need to work with their state(s) to make sure the states don’t force the transition before retailers are able to support it.

How Did We Get Here?

Skimming is not unique to EBT cards. For many years, thieves have illegally installed devices on ATMs, point-of-sale (POS) terminals or fuel pumps to capture card data and PIN numbers to make unauthorized purchases or steal from a victim’s accounts. The FBI estimates that skimming costs more than $1 billion each year.

With the adoption of microchips and other features like tap technology to make payment cards more secure, it’s gotten harder for criminals to steal an individual’s debit or credit card information. Instead, they’ve now turned their attention to targeting individuals on SNAP who are already struggling financially.

EBT cards are attractive to bad actors because they can easily access benefit funds. Currently, no EBT cards are chip-enabled (more on this later). In one fell swoop, a criminal can cash out the entirety of an individual’s SNAP and other public assistance benefits right after their accounts receive monthly funding from the state. EBT cardholders do not receive the same level of protection that holders of common credit and debit cards normally do, and as a result, they may not be reimbursed fully or at all for benefits lost to criminals. This, in turn, can add to existing financial hardships.

This transition is moving fast in some places and could lead to system failures if retailers haven’t done the work to be ready.”

Transitioning to Chip Cards

In mid-2023, USDA began meeting with food retailers, payments industry stakeholders, anti-hunger advocates and representatives from state and local governments to discuss a transition to chip-enabled EBT cards, called the “Chip Card Industry Forum”. According to USDA, modernizing EBT to include chip cards would be an important step to enhance SNAP benefit protection, because chip cards are harder to copy to steal SNAP account information. At the time of this writing, only two states (California and Oklahoma) are planning for an EBT chip migration, although it is possible that more states will soon follow. California plans to be the first, with a target of implementation by summer 2024.

Sounds straightforward, right? After all, don’t we already have POS systems that can accept chip-enabled credit and debit cards? Unfortunately, it’s not that simple.

Unlike credit or debit cards, each state contracts directly with an EBT processor, such as Conduent or FIS. These processors act as the network between the merchant’s gateway or acquirer and the individual states. This closed-loop system uses a different set of specifications than ordinary credit and debit cards, which means that new standards must be written for EBT cards to be able to work with existing chip technology. USDA’s group of stakeholders is currently working in partnership with the Accredited Standards Committee X9 Inc. to create new specifications to accommodate chip cards and update the existing payment standards.

California attempted testing earlier this year by creating production cards with the updated EBT chip specs and trying them out at live retailer locations. The tests were only intended to show that the chip-enabled cards would be able to fall back to magnetic stripe processing, but in their test of 100 retailers and ATMs, roughly 40% of their test transactions failed. Some terminals immediately rebooted, some crashed completely and some entered a so called “death loop” of swipe card, insert card, swipe card and so on.

These results show that many SNAP retailers’ systems may be negatively impacted if they are not chip ready, and SNAP customers may have no other choice but to pivot to another form of payment or abandon their groceries altogether. To date, California has not reported any additional data as a result of more widespread testing of production cards. NACS is concerned that if more time is not given to do state-wide testing, retailers will not be ready to accept EBT chip cards, resulting in chaos in many stores and leaving SNAP customers unable to access their funds to purchase food.

What You Need to Know

The Merchant Advisory Group advises that retailers test their point-of-sale terminals to see how they will react to an unknown application (referred to as Empty Candidate List or ECL), which is what communicates with the chip card. Merchants should test their payments system to understand how it will be impacted when a chip card is presented and may need to work with their IT teams, acquirers, gateway providers or POS manufacturers to correct any issues.

In California, the state plans to issue cards with dual interface capabilities, meaning they will also be NFC (tap)-enabled. The state of Oklahoma hopes to be right behind California, with plans to issue chip cards in 2025.

Given the push for quick adoption, all retailers (especially those in California and Oklahoma) are encouraged to contact their processor or acquirer to request test cards to begin testing internally. If your processor is unable to supply test cards, FIS can provide them directly by contacting [email protected].

At the time of this writing (early July 2024), California has not yet mailed out its new EBT chip cards, although it continues to maintain that the cards will be issued during the summer. The state also has not yet set a firm deadline for when SNAP retailers’ POS terminals must be upgraded in order to accept EBT chip and tap technology.

NACS and the Merchant Advisory Group hosted a webinar in July for SNAP retailers, during which they gave an update on California and Oklahoma’s transition to EBT chip cards and what retailers need to know to update their payments systems to accept these new cards. For access to the webinar recording or more information about the EBT chip card migration, reach out to Margaret Hardin Mannion, NACS manager of government relations, at [email protected].