Bank Mutual Fund Report: December 2, 1996 Consumer Bankers Association Adopts Privacy Guidelines The Consumer Bankers Association has adopted a set of voluntary "best practice" privacy guidelines that it will offer members for use in structuring their own consumer financial privacy programs. This is becoming especially important as banking regulators continue to scrutinize banks' sales practices of investment products and insurance. In a related announcement, CBA said that it has scheduled an information workshop for Dec. 9, where member banks will discuss the implementation of privacy guidelines and other steps that can be taken to improve customer privacy protection. In adopting the guidelines, CBA stressed that customer confidentiality is a long-standing and essential principle of banking; but it noted that developments in technology have made it easier for financial institutions and other companies to collect, store and analyze data relating to their customers. The guidelines are intended to help member banks keep their privacy policies in step with these advances in technology. "Our director of government relations, Marcia Sullivan, worked closely with a committee of Board members for more than a year to design these guidelines," said Joe Belew, president of the Consumer Bankers Association. "All of us are proud that their efforts have put our industry in the forefront of the drive to keep pace with technology in protecting consumer privacy." "We worked closely with privacy, marketing, and database experts to give our industry this blueprint for consumer privacy," said Pam Flaherty, a member of CBA's Board of Directors and a senior vice president of Citibank. "We are confident that these guidelines will enable our members to continue delivering top-quality service and choice, while maintaining the trust of consumers." The announcement of the new guidelines was welcomed by experts who study issues surrounding consumer privacy. "I applaud CBA for taking this first, industry-wide step to further protect customers' privacy," said Alan Westin, professor of public law and government at Columbia. "These guidelines should give consumer bankers a solid foundation on which to base their future privacy protections, especially as they move toward new consumer financial products such as smart cards, money cards, and Internet banking." The CBA workshop on customer information is being conducted in partnership with the Washington law firm of Morrison & Foerster. The one-day session will be attended by retail bankers, compliance managers and database marketing managers of the member banks. "Consumer privacy concerns are an understandable result of the advent of virtual information systems," said L. Richard Fischer, a partner with Morrison & Foerster and author of "The Law of Financial Privacy," adding that, "this is clearly the time to champion such industry-wide guidelines." Houston Chronicle: Sunday, December 1, 1996 Gtech Loss 'Significant'; Penalties Light in Welfare Card Launch BY POLLY ROSS HUGHES Persistent problems with the Lone Star card -- widely credited for cutting food-stamp fraud -- could have cost the company behind it $ 7 million in penalties had state officials not let it off the hook. Despite losing a ""significant'' amount of money during the first year of operation, Transactive Corp., a subsidiary of the controversial lottery operator Gtech Corp., insists that Texas' Lone Star card for welfare and food stamp benefits is a model of success. Likewise, Comptroller John Sharp last month sent out a press release calling the statewide launch a year ago "a successful experiment in welfare reform. '' But a box full of documents obtained under the Public Information Act tells the darker side of what Texas Department of Human Services spokeswoman Jessica Shahin calls the ""yin-yang'' of government contracts. The Lone Star card is the nation's first grand-scale system to issue welfare benefits through a private technology company. The card, which resembles a credit card, replaces food stamps at the grocery store and can be used to withdraw welfare benefits. Use of the card could be expanded to include unemployment insurance, child support collections and other government payments. Texas is also the first and largest state planning to privatize the screening of welfare applicants. State officials intend to arrange a much larger, $ 2 billion contract with a private company to handle that job. But a look behind the scenes of the Lone Star card could prove helpful as the state moves toward more public-private partnerships. The history of the contract shows what can happen when the state tries to do too much too quickly with too little money. Just as the statewide start-up was about to begin, problems with the card's help line for retailers and customers were so bad that DHS officials cut off payment to Transactive for three months. "The Lone Star Help Desk continues to function at an unacceptable level,'' Bob Ambrosino, DHS' director for the project, wrote to Transactive officials at the time. "One thing is quite clear. Transactive is not providing the level of service promised in the contract. '' To make matters worse, the start-up months were marred by several system shutdowns and technical glitches that made it impossible to process Lone Star sales electronically. Several grocers complained of lost sales, and customers went home with less food as a result. Grocers could ring up $ 50 with handwritten vouchers, but only if they got approval via the help line. If they couldn't get through, they could ring up sales of no more than $ 25 -- "extremely risky transactions subject to fraud,'' Ambrosino said. Complaints rolled in. Among them: A grocer in Midland said he tried unsuccessfully all day to get through to the help line. ""He stated the phone rings and rings -- he literally let it ring over 100 times -- and no one picks it up,'' reports say. The Lone Star system shut down for 10 days near Christmas at Big B Food Store in Karnes City, but the help desk repeatedly advised the owner to unplug the machine and try again later. This didn't work. When the grocer finally asked to speak to a supervisor, the help desk hung up on him -- twice. In San Antonio, a retailer said he tried for five months to get a terminal installed. He called the help desk four times seeking the equipment and each time was told it would arrive in a week. It never did. DHS itself complained of several breaches of the contract terms, including Transactive reports that were habitually late, inaccurate and sometimes incomprehensible. ""This was an extremely ambitious project. It had a very short time frame,'' Ambrosino said in a recent interview. "The complexity, the size and the time frame all added to the risk. '' The other obstacle was skimpy funding, stemming from federal and state requirements that the Lone Star card system had to cost the same as the old paper food stamp system. The contract is worth about $ 224 million over seven years. Three bids were made for the contract, coming from Transactive, Deluxe Data Systems with EDS, and Citibank with Lockheed Martin. "All three vendors had a problem with the fact that we had a limited amount of money,'' Ambrosino said. "The bids all came in too high and we had to start all over. '' In the second round, Transactive prevailed. "Absolutely, no question, hands down, it was the best bid,'' Ambrosino said. "It provided the most services for the amount of money that was available. '' One of Transactive's promises that proved decisive in winning the contract, records show, was a superior help line. The outcome of the bidding drew formal protests from Deluxe Data Systems, which argued that Transactive's lack of experience should have disqualified it. Since awarding the contract, DHS officials have documented more than $ 7 million in fines they could have assessed because of Transactive's mistakes, but the agency never did so. Ambrosino said his contract management team chose instead to hold the possibility of penalties over Transactive as an incentive to improve while the system was relatively new. He also said that DHS withheld $ 6 million in payments to the company during the statewide start-up as an alternative to actual fines. As the company made improvements, DHS reinstated the held-up payments in early 1996. However, last week, after inquiries from the Houston Chronicle, DHS decided to fine Transactive $ 345,300 for foul-ups occurring in May, June and July. Assessing the damages had been recommended as early as Oct. 8 in an internal memo to Ambrosino from Hank Dembosky, DHS' Lone Star contract manager. Nearly half of the fine is related to an AT&T network failure on July 11, a problem that set off a chain of negative reactions. Retailers again had to process Lone Star sales manually but couldn't get quick enough authorizations, resulting in lost sales and "associated inconveniences. '' Finally, with a flood of retailers dialing the help line for authorizations, calls from cardholders with questions were abandoned. The fine includes $ 60,000 for slower system response times than the federal government requires, a failure that has occurred every month since the Lone Star card went statewide. Additionally, there is a penalty of $ 135,300 for late or inaccurate reports. Meanwhile, Transactive reported "significant'' losses for the fiscal year ending in February 1996 and predicted more losses to come in the current fiscal year. Parent company Gtech's most recent annual report points to investments exceeding $ 61 million for electronic benefits systems to support its business in Texas and start-ups in Illinois and Mississippi. Transactive received $ 24 million from Texas in the state's fiscal year that ended in August, said Shahin, the DHS spokeswoman. Gtech's report to stockholders says Transactive plans to increase sales, cut costs and line up more business in other states. If the plan fails to turn the losses around ""within a reasonable'' time, the company would consider a joint venture. Failing that, Gtech could be required to recognize a loss on part of its Transactive investment. Transactive is betting on a dual strategy to make its start-up investments pay off, said company spokesman Marc Palazzo. First, it is banking on the Texas contract as a selling point for winning similar contracts in other states. Transactive also hopes to snare more business should Texas expand the government benefits it distributes through the Lone Star card. Transactive won't say how much of its Lone Star investment went toward solving major problems. But Ambrosino said he believes the company was forced to pour millions into perfecting the system. "Certainly there have been problems that have developed during the implementation of this system,'' said Palazzo. ""This is a new system. In a project of this size those issues are to be expected. I think the program is working, and that is the bottom line. ''