FROM THE OFFICE OF PUBLIC AFFAIRS

I am delighted to be with you today. We at the Treasury Department have an important community of interest with State Treasurers, and it is important that we continue to have open and forthright discussions about the many issues of mutual interest that we deal with.

Today I want to talk to you about our efforts to implement a law that was passed by Congress in 1996 that will have profound implications not only for the way in which the federal government makes its payments, but ultimately for the states as well. We call it EFT '99.

The law itself is disarmingly simple: It requires that beginning January 1, 1999, the federal government make all of its payments, other than tax refunds, electronically. To further this mandate it requires that all new recipients of federal payments (again, excluding tax refunds) who have bank accounts and who come on stream after July 26, 1996, receive their payments by electronic funds transfer (EFT).

The law also imposes some significant responsibilities on the Secretary of the Treasury. It directs the Secretary to develop standards and rules for hardship waivers from the mandatory requirements of EFT '99, and it further directs him to ensure that individuals who are required to receive their payments electronically have, for that purpose, access to an account at a financial institution at reasonable cost and with the same consumer protections as other account holders.

In September of 1997 we published for comment a proposed rule to implement EFT '99 that addresses many of the issues raised by the new law. During the comment period we held public hearings in four cities, and by the close of the period we had received over 200 written comments on our proposal. While time does not permit me to discuss all of the issues and comments, I would like to share with you our present thinking on two key issues: waiver policy and account access.

In considering waivers, we wanted to be responsive to two conflicting considerations: First, we recognized that there will be a great many perfectly legitimate reasons for exempting recipients from the requirement of mandatory EFT. A heavy handed implementation of the mandate could not only impose significant hardships on individuals, but could very quickly undermine the base of support for the program. On the other hand, excessive liberality in the granting of waivers could significantly vitiate the tremendous cost savings for the public that we expect from the implementation of EFT '99.

With these thoughts in mind, we proposed the following:

For individuals who became eligible for Federal payments before July 26, 1996 and who have an account at a financial institution, the requirement to receive payments by EFT will be waived if such a requirement would impose a hardship due to a physical disability or geographic barrier.

Individuals who do not have bank accounts, and who will be provided access to an account by Treasury, will have an additional basis for a waiver if using such an account would impose a financial hardship. In order to assure access to an account, we are providing a time-limited waiver for all such individuals, until the earlier of January 1, 2000, or the date on which Treasury determines that such an account is ready to be made available to them.

Federal agencies will not be required to use EFT when political, financial, or communications infrastructure does not support payment by EFT in certain overseas locations.

Finally, waivers will be available where a cost-benefit analysis does not justify making small or non-recurring payments by EFT and where EFT payments would conflict with military, law enforcement, or national security interests.

A great many of the comments we received in the rulemaking addressed the question of waivers, and we are giving careful attention to the scope of the waiver provisions in connection with the development of the final rule. I think it is safe to say that our guiding principle will be liberality. We do not want to cause disruption, inconvenience, or financial hardship to payments recipients, a great many of whom are seniors who are not familiar or comfortable with new banking technology. We firmly believe that in the future the population of payments recipients will be more and more comfortable with EFT, and that our long range objective of moving from paper to electronics will be realized in the fullness of time. This is borne out by our experience with those recipients who have newly come on stream since July 1996. Since that time over 85% of all new Social Security annuitants have signed up for direct EFT payments, reflecting a high degree of acceptance of the program.

We also face a daunting challenge in fulfilling our mandate to assure access to an account at a financial institution for all EFT recipients. The major challenge here is how to serve the "unbanked." We estimate that more than 10 million recipients of federal payments do not have bank accounts. How do we assure that these Americans will be able to realize the benefits of EFT?

The ideal, of course, would be a competitive marketplace in which financial institutions throughout the country offered low-cost electronic accounts that could be used to receive and access federal EFT payments. While we see some interest among banks in offering such an account, the availability of such accounts is not yet so widespread that we can rely solely on private initiatives to satisfy our mandate.

Accordingly, we propose to design such an account -- we call it the Electronic Transfer Account, or ETA -- and to engage a number of banks to offer the account in defined regions of the country. We will ask banks to bid on specifications that we will prescribe, and their bids will be framed in terms of the monthly fee they will charge recipients to use the ETA. While we have not yet fixed the design of the account -- and will not do so until we have given the public an opportunity to comment on a specific proposed design -- I think it is safe to say that it will be an all-electronic account that will receive only EFT deposits, and from which withdrawals can be made by debit card through ATMs or at points of sale. We expect that within the scope of the monthly service charge there will be a specified number of withdrawals that can be made without additional service charge. Beyond this we are still considering whether other features should be added.

Once again, we see somewhat conflicting pressures here. On one hand, the ETA has great potential to serve as a vehicle for introducing the unbanked to mainstream financial services. For this reason we have been urged to add other features of conventional bank accounts, beyond the basic functions of receiving and accessing payments, such as a means for making electronic third-party payments or a means for accumulating savings.

On the other hand, the more "bells and whistles" we add to the ETA, the greater the cost is likely to be for all ETA holders, including those who do not want anything beyond the basic function of the account. In addition, the more attractive we make the ETA, the greater the potential it has to draw existing accounts out of the private banking system. This could serve not only to stifle development of competitive alternatives, but would raise understandable concerns about competition from the federal government.

One thing has become eminently clear from the work we have done to date on EFT '99: there is a great need to educate the public about the enormous benefits of EFT. I firmly believe that as payments recipients come to appreciate the safety and convenience of EFT they will actively seek out suppliers of accounts that will meet their needs. To this end we have initiated an extensive public education campaign to communicate to our recipients the desirability of converting to electronic payments and to inform them about the ETA and their other choices under EFT '99.

We are urging banks to launch their own education efforts, because we believe there is an enormous untapped market out there, comprised of more than 10 million Americans who have a regular source of income, but for whom the costs of a conventional paper-based bank account are disproportionately high.

It also seems clear to me that the EFT '99 initiative has important implications for the states. You, as do we, make millions of payments each month -- salary payments, retirement and other benefit payments, vendor payments, and the like. As you well know, there are tremendous costs savings available from EFT. We estimate that the cost of making a paper payment is 43 cents, while an EFT payment costs only two cents. As the population of federal payments recipients becomes more and more accustomed to EFT as the result of our implementation of EFT '99, there will undoubtedly be spillover benefits for the states. EFT '99 not only provides an "ice-breaking" model for the states to adopt legislation moving their own payments programs to EFT, but as the ETA takes hold as a prototype for a basic electronic banking service, it will also offer a vehicle for the states.