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[alzheimer@juno.com (Ronald Raygun Remailer)]

 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. ''