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RESTRICTED - Policy
1. Sarah Graham From: Laurie Cairns PFD Sp Proj
2. Minister of State Date: 4 August 1999
Ce: Ministers
A Maughan Sp Adv
Elsbeth Johnson Sp Adv
Permanent Secretary
Peter Mathison BA CE
S Hickey PFD
D Stanton ASD
R Devereux DFS
V Gaskell BA Proj Dir
§ Graham PFD Sp Prof
H Reynolds BA BSB
M Philpott PFDIE
SSSC: INFORMATION ON THE JOINT. DSS 3A/POCL AUTOMATION PRCJECT
("HORIZON") AND THE BENEFIT PAYMENT CARD
Issue: There is an outstanding request for briefing from the Social Security Select
Committee (SSSC) on:
- Benefit Payment Card (BPC): Security Measures;
- the usage of ACT (Automated Credit Transfer) in the payment of benzfits and
the research that has been carried out in this area.
These were originally requested, before the Government had decided to reshape the
project and drop the BPC.
Officials therefore propose providing the SSSC with a note summarising the
Governments decision (announced on 24 May 1999) and taking the opportunity to
put our “gloss” on the proposed way forward.
Action required/Timing:
Are you content for the attached notes now to be sent? *’he SSSC Clerk is 1ow
pressing for us to produce the briefing notes.
Background
1. On 20 January 1999, with Secretary of State's approval, officials made a presentation to
an insormal session of the SSSC regarding developments in the joint DSS BA/POCL
Automation Project (DSS Benefits Agency/Post Office Counters Ltd) and the NIRS2
(National Insuraucs Recording System). Both projects involved: major contract: with
private sector comp«uies; huge amounts of money; considerable difficulties/delays. The
session was held infur:rally in Richmond House due to the commercial sensitivites
invelved. At the presentation the SSSC requested two briefiag notes, relevant to their
interests in the DSS BAs POCL Autoraation Project. The first «vas on the security
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aspects of the Benefit Payment Card (BPC) then a part of the project. The second was
on the usage of Automated Credit Transfer (ACT) in the payment of benefit and any
research that had been carried out in this area. The request for briefing is not unusual
and the convention is that we would normally provide it within two months.
The DSS BA/POCL Automation Project
2.
The DSS BA/POCL Automation Project was set up with the twin objectives of:
automating the Post Office Network; and replacing girocheques and orderbooks with a
plastic Benefit Payment Card. This was a PFI project with ICL as the main private
sector supplier. The project had suffered considerable delay and at the time of the
SSSC hearing we were in the middle Of very difficult negotiations with ICL and the
Post Office. The public sector had held ICL to be in breach of contract although ICL
rejected this. In addition there was considerable press speculation that the contract with
ICL would be cancelled. There were several hundred million pounds at stake and
litigation was a real pcssibility. It was finally agreed that we would dispense with the
BPC: and that from 2003 ve would move to paying almost a! benefit payments l'y
ACT, completion is due ‘n 2005. There are some claimants who can not have a bank
account, for example banrupts. An alternative me‘aod of paying will have to be found
for them. The Post Office automation is due to be compleved by 2001. In addition, the
Post Office will also enter into commercial arrangements with a number of high street
banks so that those people who wish to continue receiving their benefits at the post
office can continue to do so,
Secretary of State was sent a submission on 28 April 1999 with the briefing notes for
the SSSC. He decided to hold back producing the briefing notes for the SSSC due to
the sensitivity of negotiations concerning the DSS BA/POCL Automation Project. We
are now being pressed to produce the briefing notes and it is anticipated that a formal
approach/complaint will result if we do not respond soon.
Briefing notes for the SSSC
4.
The note on ACT usage and associated research simply pulls together information that
is already in the public domain. On the security aspects of the BPC the information is
now historical, as we have withdrawn all BPCs. However, it is suggested that the
SSSC should nonetheless be asked to treat the information on the BPC as confidential.
The security procedures described could well be used or developed to form the bases
for the proposed extension to the OBCS (Order Book Control System). In addition, as
the Post Office develop their banking strategy they may draw on the work/procedures
described in this paper.
Handling
There is no set procedure determining who should send briefing notes to the SSSC. As
officials were asked for the information it would seem appropriate that the notes are
sent to the SSSC's Clerk via the Department's liaison section.
When we pass the briefing notes to the SSSC, we consider that it would be helpful to
offer additionally a note setting out briefly from a DSS perspective, the key elements in
the Government's decision to derisk the project, drop the BPC and move to paying
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nearly all benefits by ACT. I have attached a note on these lines which, if you agree,
will be passed to the SSSC when we provide them with the briefing notes. The note has
been seen by DTI colleagues; and draws on text already agreed with them and HMT.
7. The original briefing notes were requested in January 1999. It would seem prudent to
explain the reason for the delay, namely, the sensitivity and timetable of the various
negotiations. (ICL and the Post Office completed their negotiations last week and have
signed a contract)
Next action
8. If you are content with the above, the briefing notes will be sent to the SSSC and the
committee will be advised of the confidential nature of the BPC briefing note etc.
Laurie Cairns, PFD Special Project
Rm 536 Adelphi, Ext!_GRO I
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Note on the usage of ACT in the payment of benefits and the
research that has been carried out in this area.
1.
The Government announced on 24 May 1999 that the DSS will
begin the process of making all benefit payments from 2003
via ACT and bank. The process will be completed in 2005.
The main reasons for this are:
® the huge savings to the welfare bill this will bring — saving
hundreds of millions of pounds in administration each year,
if everyone was paid by ACT;
¢ the potentially wider choice this could bring people, if their
benefit cash could be accessed via banks and ATMs, Post
Offices and other places that ‘hey might find convenient (as
Is now technicaily possible);
e the support this could give to broader ‘welfare to work’
principles and policies, by aligning more closely people's
financial management arrangements, whether or not they
are in or out of work (and minimising separate ‘benefit’ and
‘in work’ cultures).
2. Bank accounts can be seen as a first rung on the ladder: a
gateway to other products and services. At the very broadest
level, DSS is keen to support Ministers’ objectives of tackling
poverty, encouraging personal responsibility and maintaining
connections with the world of work. In addition, making
benefit payments via ACT fits in with the government's long-
term ambition to conduct as many as possible of its financial!
transactions with citizens via standard systems people use
anyway.
Research evidence
Extent and key features of financial exclusion
3. Elaine Kempson’s work for the Joseph Rowntree Foundation
(Kempson and Whyley, 1999) demonstrates that while access
to financial products and services has been expanding over
the past few decades, the spread has not been even. Some
households (estimated at around 7%) have no financial
products at all, while many more (up to 20%) have only one or
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two. These households tend to be concentrated in certain
geographic areas (especially in the 50 most deprived districts
and boroughs in England and Wales, and those living in
Scotland) and among lower income groups. Households
headed by a single parent are more likely to be financially
excluded than those headed by a couple. Adults In the oldest
and youngest age bands are least likely to have financial
products (but often for different reasons). Benefit recipients
are particularly likely to be financially excluded. Analysis has
demonstrated that this is not just because they have low
incomes — suggesting that there is something about the benefit
system Itself that encourages a cash culture.
Where people have acc#ss to oily one financial product, this
is usually a current account with either a bank or a building
society. Estimates of the proportion of British adults with a
bank account vary from 80-90%. Our best estimate (based on
data from the Family Resources Survey) of the proportion of
benefit recipients with accounts suitable for ACT is 80%,
although this proportion varies between individual benefits.
Much of the analysis of financial exclusion has been at
household level. It is also important to consider access to
products within households. A number of studies indicate that
women have 'ess access.to and controi over financial products
than men (see, for example, Goode et a/., 1998). A qualitative
study into the financial arrangements of 35 couples on
Jobseeker’s Allowance or Incorne Support has recently been
commissioned by DSS and will shed further light on this issue.
It is expected that the research findings will be published by
the end of this year.
A key finding from Kempson and Whyley’s work is that there is
a dynamic to financial exclusion, with more people on the
margins of exclusion than are currently excluded. While some
currently excluded groups may never have engaged with
financial products and services, others have done so in the
past. For example, around a third of those who do not have a
current account have had one in the past but closed it down.
Closing down an account is associated with key life-stages,
especially those associated with a loss in income: losing a job,
retirement and relationship breakdown. On the other hand,
some of those who do not currently have a bank account yet
are likely to have one in the future (Kempson & Whyley, 1998).
There are also likely to be changes over time and generations
as people become more comfortable with new technologies.
We cannot assume that all those who have a current account
and/or other financial products are ‘financially included’. A
very small proportion (fewer than one in twenty) of those with
bank accounts do not use them at all. Many others do not
have access to the full range of services and features that they
might like. .
Characteristics of those excluded:
8.
Most of the available evidence on the characteristics
associated with financial exclusion relates to bank accounts,
but there are also studies focusing on particular types of
insurance (e.g. access to home contents insurance) and on
pension provision.
The study by Kempson and Whyley for the British Bankers
Association (Kempson & Whyley, 1998) identified four key
sub-groups amongst those without bank accounts. These may
require different policy responses.
e the ‘opted outs’ (around 30% of those without current
accounts) who have had an account in the past but have
opted out (due to unemployment, etc) This is likely to be a
temporary state (although the longer the spell of
unemployment, the less likely they are to return to the
financial mainstream) and the individuals concerned do
have financial skills.
e the ‘not yets’ (8%) don't have one yet but expect to do so in
future: e.g. when older, when get job.
* ‘always outs’ (60% - but likely to be a higher proportion of
benefit recipients). These are divided between the older,
cash-only generation (25%) and the more chronically
socially excluded (35%).
* very few have actually been refused an account (2% of
those without one).
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10. The notion of exclusion is therefore complex: few people are
literally turned down by banks, but a larger number of people
do not have products because they feel there are no suitable
ones available to them and/or they are too expensive. The
research evidence suggests that those without bank/building
society accounts do consider themselves in need of at least
some financial services. Some already use other people’s
accounts (e.g. getting a friend to write a cheque) or resort to
un-regulated products. There appears to be considerable
unmet need for financial products (Kempson & Whyley, 1998).
Specific issues with respect to benefit recipients
11. Around 80% of benefit recipients already have an account
suitable for receiving benefit payments by ACT’. At present
33% of benefit vecipients elect to have their nenefit paid by
ACT, this is a lerge increase on the figure of 16% in 1993. For
some benefits the election of ACT as the preferred method of
payment has increased significantly. In the case of Child
Benefit 54% of new customers elect to have their benefit paid
by ACT and for Retirement Pensions the figure has now risen
to 49% whereas the figure for Income Support is 11%.
12. Combining the findings from Kempson & Whyley’s work for the
British Bankers Association (Kempson & Whyley, 1998b) with
analysis of Family Resources Survey data we can estimate
that:
e 33% of benefit recipients already elect to be paid by ACT
e a further 47% already have an account and are therefore ‘In
the market’
® around 13% don’t have an account (these are the ‘always
outs’ and those refused accounts)
e some 7% of benefit recipients overall (around a third of
those without accounts) may be in the market for opening
accounts and having benefit paid by ACT (they are the ‘not
yets’ and the ‘opted outs’)
‘i.e. current account or or other account with a bank or building society.
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Reasons for not having bank accounts
13. Attitudes Towards Methods of Paying Benefit (Thomas and
Pettigrew, 1999) was published in April 99 as part of the
Department of Social Security's in-house research series. The
research investigated claimants’ views of benefit payment
methods and frequencies of payment; and attitudes towards
places of delivery, specifically banks, building societies and
post offices. Methods of budgeting were also explored.
Focus groups and depth interviews were carried out in three
areas with claimants receiving a range of benefits.
14. The main findings of the study were.
¢ Ingencral, those ‘nat received benefits ir. cash tended to
budget in cash, often sn a weekly. basis. . Those who were
better off or in employment were more likely to budget using
banks or building societies, often on a monthly basis.
e People saw the advantage of order books as providing a
guaranteed amount of money on a guaranteed date.
¢ Automated Credit Transfer (ACT) was seen to have
advantages for security and anonymity. But there were a
number of reasons why people did not opt to use this
method of receiving benefits. These included the perceived
cost of running a bank account, concerns about reliability
and, in rural areas, the closure of local branches of banks,
and they were concerned that this would mean they would
only be able to withdraw whole pounds. Some claimants did
not want their money put into their bank account because
their accounts were overdrawn and the benefit would be
used by the bank to cover the overdraft.
e Some people suggested paying benefits through
supermarkets, train stations, petrol stations and housing
estate offices. Others suggested they would prefer ACT
payments through a building society or post office account
rather than a bank account. There was also support for a
plastic benefit card which could be ‘charged up’ at a post
office or Jobcentre and the money withdrawn through a cash
machine.
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45. The study also noted that the location of and distance to a
bank or Post Office were also issues which claimants
considered when they selected their method of payment.
There was a tendency to use whichever was closest to their
home.
Research gaps
16. We have some indications about why those with bank
accounts do not have benefits paid in, but this is a large group
and the issue could be explored further.
17. People’s reactions to ACT are likely to depend on the precise
details of proposed arrangements: e.g. what sort of other
help/encouragement is offered to set up a bank account,
transitional issues.
pss
July 1999
References
Goode, J, Callender, C and Lister, R (1998) Purse or Wallet?
Gender Inequalities and Income Distribution within Families on
Benefits, London: PSI
Kempson, E and Whyley, C (1998) Access to Current Accounts: a
report to the British Bankers’ Association, London: BBA
Kempons, E and Whyley, C (1999) Kept out or opted out?
Understanding and combating financial exclusion, York, JRF
Thomas, A and Pettigrew N (1999) Attitudes towards methods of
paying benefits, DSS In-house Report No 51, London: DSS
THIS INFORMATION IS PROVIDED TO THE SOCIAL
SECURITY SELECT COMMITTEE IN CONFIDENCE.
Benefit Payment Card (BPC): Security Measures
Introduction
1. The BPC was designed to help ensure the secure payment of
benefits, cutting the estimated remaining £100 million fraud
endemic in current paper based systems.
2. The card itself had various security features these include:
e the customers title and full name were excluded so that any
one finding tne card had no knowledge as to the first name
and sex of the card holder;
¢ one of the words on the card was deliberately misspelt so
that if the word was spelt correctly this would expose the card
as a counterfeit.
3. In addition the actual obtaining of the card by the customer from
the Post Office (PO) involved security measures:
e the customer had to produce a current and valid Pick Up
Notice (PUN) in order to pick up the card from the PO;
e in addition they also had to produce identification which the
PO deem appropriate. There is a list of acceptable
identification, which the PO holds.
Extended Verification Procedures
4. There were also security arrangements in place called
Extended Verification Procedures (EVP). EVP took place at the
PO. It offered additional and stronger Cardholder Verification
Methods associated with classes of customer or types of
transaction known to be particularly vulnerable to fraudulent
encashment. The application of EVP was invoked by one of
three parties:
e ICL Pathway ensured that the system invoked EVP in
certain circumstances, for example on the first issue of a
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Payment Card;
¢ DSS were able to select the criteria for the application of
EVP (to a maximum of 8% of all benefit transactions) to
protect high risk encashments, for example an encashment
at a post office other than that nominated by the customer
(known as foreign encashments);
e aPO counter clerk who was suspicious of the encashment
taking place in front of them.
5, The following circumstances could also invoke the EVP process:
e anencashment which required payment card details to be
keyed as a result of the fallure to read a card; _
¢ anencashrant which required manual procedures to be
used due to 2 failure of the card payment system.
Operation of EVP
6. The PO clerk had access via the system to certain information
only a genuine customer would be expected to know.
Questions for the clerk to ask the customer were generated
from this information. The questions and answers were taken
from three pieces of information: the customer's first name,
numeric date of birth and month of birth.
7. The customer could be asked up to three questions, depending
on whether correct answers were given. If the customer
answered two questions incorrectly, payment was refused and
the customer was advised to contact their local Benefits Agency
office.
DSS
July 1999
Draft: 04.08.99
POST OFFICE AUTOMATION AND THE PLANNED MOVE TO
PAYING BENEFITS BY AUTOMATIC CREDIT TRANSFER
INTO BANK ACCOUNTS: THE RESHAPED "HORIZON"
PROJECT
SUMMARY OF THE GOVERNMENT'S PLANNED WAY
FORWARD
1, The "Horizon" programme, as originally conceived, was a huge IT project
let under PFI principles and worth £1 billion at the time the contracts were
signed in May 1995. Under the programme, Post Office Counters Ltd
(POCL) and DSS (Benefits Agency) jointly contracted with ICL to achieve
two key objectives:
© the automation of the Post Office network; and
« the replacement of current paper-based methods of benefit payment
(Order Books and Girocheques), which would, when up and running,
secure an estimated £100 million per annum fraud savings.
2. Although the objectives of the programme remain valid, the project itself has
turned out to be over ambitious and was three years behind schedule.
Following very careful consideration by all the Ministers involved; and
lengthy and protracted negotiations between all parties, the project has been
significantly revised.
3. The Government's objectives have been to preserve the two key objectives of
the original project and, given the delays, find the best route forward:
© secure automation of the Post Office as early possible to support the
future business of the Post Office as envisaged in the recently announced
White Paper;
© to assure a safe, convenient, more modern and efficient way of paying
benefits consistent with what people want.
The Government is also keen to learn the lessons from the large IT projects,
such as Horizon, which it has inherited from the last administration. A
major concern has been to de-risk the project, both in the interests of people
receiving benefit, many of whom are among our most vulnerable citizens,
both financially and in other ways; and in the interests of tax payers who pay
for the welfare system.
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4, On 24 May 1999 the Government announced a new way forward, which will
achieve these objectives; and will also help support this Government's
determination to bring wider access to mainstream banking and financial
services for those people currently excluded, and to promote a modern Post
Office, able to continue to offer services through a national network of
outlets but also better positioned to compete for business in the market place.
5. The key elements of the planned way forward are that:
e the plans to automate the Post Office will go ahead, and should be
completed by 2001;
« the Benefit Payment Card has been dropped. This will simplify the
project and help assure Post Office automation. Given the delays to the
project, the Benefit Paymen’ Card technology was fast becoming
outdated;
e instead, nearly all benefit payments will “e made via ACT (Automatic
Credit Transfer, into bank accounts ste, ting in 2003 and completing by
2005. In the period up to 2003, arrangements for benefit payments will
continue as now, either at Post Offices or into bank accounts (34% of
customers are paid by ACT into bank accounts);
eit is the Government's intention that people who wish to continue to
collect their cash at Post Offices will continue to be able to do so, before
and after the change in 2003. The intention is that the Post Office will
introduce suitable banking technology and commercial arrangements with
banks to allow this to happen;
e for those relatively few people for whom a bank account may remain an
unsuitable option, special arrangements will be made.
6. The intervening period between 2001 and 2003 will allow the Post Office :
and DSS Benefits Agency to plan the transition smoothly and ensure that no
benefit recipient is put at a financial disadvantage.
Background tion:
The current paper-based methods of paying benefits have changed little since the
1940's and are very expensive; costs per transaction are:
- Girocheque/Order Book foil: 79p and 49p respectively
: Benefit Payment Card would have been 67p
. ACT around Ip
An ever-increasing number of people are opting to be paid their benefit via ACT
and bank accounts. Currently 34% of people choose to be paid this way. Around
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50% of new Child Benefit and Retirement Pensioners are opting for ACT payments.
The move to ACT is expected to save the welfare budget £400M per year once the
transition to ACT is complete.