The social services minister, Anne Ruston, admitted during a Senate committee hearing there was a loophole with the cashless debit card which still allows people to buy alcohol.

The government says the card, which quarantines up to 80% of a welfare recipient’s payments for use at selected stores, has led to a reduction in violence and harm related to alcohol consumption, illegal drug use and gambling.

But on Thursday night, the Senate community affairs legislation committee heard that some merchants outside the trial sites, such as “cafes, restaurants, cafeterias, diners and soda fountains”, could bypass the card’s restrictions under the “merchant category code” system.

The code system allocates a number to merchants so they are able to charge items to the card and prohibits the purchase of certain items or services – such as alcohol or gambling – from “declared” outlets based on what is known as their merchant category code.

The loophole is the “eating places and restaurants” category code, which includes places that have alcohol on the menu and are not on the government’s blocked list – meaning they can still charge alcohol purchases to the cashless welfare card, using the code 5812.

Ruston described the code system as “a very technical question” and offered the senators, including Labor’s Malarndirri McCarthy, a “full technical briefing on the issues”.

McCarthy then asked: “Does the merchant category code 5812 enable me to buy alcohol on my CDC?”

Ruston replied, “At the moment, yes” but said the system would soon be replaced with a more “granular” means of blocking purchases at the product level.

The government said it had spent $3.4m on a product-level blocking trial that departmental officials told the committee was “working so far”.

It has spent $50m over five years on trails of the cashless debit card, with expenditure increasing every year since then. In 2015-16 it allocated $10.9m to the trial, and spending increased every year to 2018-19, when it allocated just over $16m on the card’s rollout.

The card is operated by Indue and is currently being trialled in Ceduna in South Australia, East Kimberley and the Goldfields in Western Australia and Hervey Bay in Queensland.

Indue currently blocks merchants rather than products. It provides a list of banned merchants, most of which are pubs and bars in the trial areas.

The government says the card is automatically accepted at about 900,000 businesses across the country, including Australia Post and big retailers where alcohol is sold, such as Woolworths and Coles. But cardholders have complained about having their cards declined at retailers that do not primarily sell these banned goods.

The federal government is pushing for a nationwide rollout of the controversial policy. But critics say the card causes stigma, makes it harder for people on low incomes to buy secondhand goods and is difficult to exit.

The government has set aside $128m to transition all Northern Territory welfare recipients from the current income management system, the Basics card, to the cashless debit card, if the enabling legislation is passed next month.

However, independent senator Jacquie Lambie says “the government has a problem” with the rollout of the card, after her fact-finding visit to the Northern Territory and Western Australia over the summer.

Lambie visited several remote Aboriginal communities to “get a view from the ground on how the card is functioning, before voting on the government’s proposed changes for its future”, she said. The real aim should be “to get people off the card altogether”.

“That doesn’t happen if there aren’t the jobs. And you don’t get people who’ve been unemployed for a generation into a job if you don’t invest in them,” she said. “We’re on a hiding to nothing if we’re not building up their skills and confidence. All we’re doing is changing what it’s like to be on welfare.”