FROM THE OFFICE OF PUBLIC AFFAIRS

Chairman King and Members of the Subcommittee, thank you for the opportunity to appear before you today to discuss Treasury's efforts to implement the Electronic Funds Transfer (EFT) requirement of the Debt Collection Improvement Act of 1996 (the Act). The Act requires the Federal government to issue most payments, except tax refunds, via EFT after January 1, 1999 and gives the Secretary of the Treasury the authority to prescribe regulations and to grant waivers from the requirement to receive payments electronically. The Act also directs Treasury to ensure that recipients required to receive payment electronically will have access to an account at a financial institution at a reasonable cost and with the same consumer protections as other account holders at the same financial institution. We have had considerable success in implementing the statute.

I commend the Subcommittee for its interest in carrying out what we refer to as the "EFT 99" program, in a manner that benefits all Federal payment recipients and American taxpayers. We share these interests as we proceed through the implementation process. In implementing EFT 99, we have been guided by four principles:

• The transition from a paper-based system to an electronic transfer system should be accomplished with the interests of recipients ranking of paramount importance.
  

• Private sector competition for the business of handling Federal payments should be maximized.
  

• All recipients, and especially those recipients having special needs the elderly, individuals with physical, mental, educational or language barriers, those living in remote or rural communities should not be disadvantaged by the transition to electronic payments.
  

• The EFT 99 program is an opportunity, to the maximum extent possible, to bring into the mainstream of our financial system those millions of Federal payment recipients who currently do not have bank accounts.

In implementing the EFT 99 program, we have consulted extensively with all stakeholders and especially the Congress and believe that this consultation has been instrumental in developing a successful program.

EFT 99 Implementation Progress--Achievements to Date

As a result of the Act and Treasury's public education and outreach programs, we are seeing significant progress in the conversion of check payments to EFT. In FY 1998, Treasury's Financial Management Service (FMS) issued more than 860 million payments on behalf of non-defense agencies, including benefit, salary and vendor payments as well as tax refunds, grants, and loans. Sixty-eight percent of the FY98 payments, not including tax refunds, were made electronically. Today, almost three-quarters (73%) of these payments are being made electronically, compared to 55% made electronically in FY95. Since FY95, total Treasury-disbursed check volume has decreased by 110 million checks resulting in significant recurring savings to the government.

Federal benefit, salary, and retirement payments are being made by EFT in impressive numbers today: more than 75% of SSA and Veterans Administration benefit payments, 90% of Federal retirement payments and 97% of all Federal salary payments are made by EFT. Additionally, newly eligible SSA beneficiaries are signing up for EFT, through the Direct Deposit program, at a rate of slightly more than 90%. The percent of vendor payments made electronically since FY 1995 has grown from 10% to 50%, with many agencies making more than 80% of their vendor payments electronically.

On September 25, 1998, Treasury published a final rule in the Federal Register (31 CFR Part 208 (EFT rule)) prescribing the implementation of the EFT 99 program effective January 2, 1999. The EFT rule was issued after consideration of the testimony received at four public hearings around the country and the 212 comment letters received from financial institutions, consumer and community based-organizations, Federal payment recipients, and other key stakeholders. The EFT rule establishes the circumstances under which waivers are available for payment to recipients, provides the requirements of accounts to which Federal payments may be sent by EFT, and sets forth the responsibilities of Federal agencies and recipients under the regulation. The regulation also provides that any individual who receives a Federal benefit, wage, salary, or retirement payment is eligible to open a low-cost Treasury- designated account, called an Electronic Transfer Account (ETA ), at a financial institution that offers such accounts. Additionally, Treasury remains committed to working with interested States to combine federal EFT payments with State Electronic Benefits Transfer programs. I will be discussing the ETA in more detail later in my remarks.

The EFT rule emphasizes recipient choice through an accommodative waiver policy formulated for the purpose of minimizing hardships to Federal payment recipients. While we view the program as an opportunity to bring as many people as possible into a relationship with a depository financial institution, we wanted to ensure that any individual receiving a Federal payment may invoke a hardship waiver based on the recipient's assessment of his eligibility and continue receiving a check. Treasury is confidant that this approach will support the goals of the program as more and more individuals become familiar with EFT over time. Indeed, the widespread utilization of EFT by Social Security recipients and other Federal benefit recipients already indicates the general acceptance of EFT by the public.

One of the most important considerations in implementing EFT 99 is to ensure that Federal payment recipients, particularly recipients of Federal benefit, salary, and retirement payments, are aware of and understand their options and choices under the program. Federal agencies are required under the EFT rule to notify current check recipients of their option to have their Federal payment deposited into an account at the financial institution of their choice, wait for the availability of the ETA if they have no account, or invoke a hardship waiver and continue to receive a check. We continue to work closely with the major benefit agencies; Social Security Administration, Veterans Administration and Office of Personnel Management, to ensure that this information is available. Agencies are not authorized to withhold, suspend, or delay a payment if a recipient does not respond to a request for a waiver notification under the rule. We are ensuring that full disclosure of these options is being made.

We continue to work closely with the Federal Reserve and organizations such as National Automated Clearing Housing Association (NACHA) to expand the flexibility for corporations to receive payments electronically including innovation such as FedLine EDI. We believe these efforts will support increased utilization of EFT for vendor payments

Public Education

Treasury has committed extensive resources to an innovative grass roots approach to public education.

We have conducted extensive market research to learn more about recipients of Federal payments, and we are using that information to develop an effective, nationwide public education campaign. Studies were conducted on the characteristics of Federal check recipients, on the needs of those recipients, and on how best to educate this population on the advantages of electronic payments. One such study, which utilized focus groups around the country, tested various EFT 99 messages that could be used in the public education campaign. We recognize that a key to the success of EFT 99 is providing clear and easy to understand information to stakeholder groups and the public about available options.

Treasury has undertaken extensive outreach efforts including meetings with various interest groups, such as consumer and community-based organizations, government vendors, financial trade associations, and financial services providers. We have placed a heavy emphasis on consumer and community organizations in our public education efforts, as these groups represent and interact directly with payment recipients on an ongoing basis. We have established partnerships with literally hundreds of local community organizations to assist us in our efforts to reach current check recipients. I believe this grassroots effort is critical to the success of converting check recipients to electronic payments.

Components of the public education campaign include messages to current check recipients about the program to convert to EFT payments, options available under the EFT rule, the safety and convenience of EFT, and how to sign up for Direct Deposit. Another key aspect of the campaign is helping those check recipients make the most informed choices by educating them on basic financial literacy, such as how to obtain and maintain a bank account. Agencies are notifying payment recipients that they have choices: they have the option to open an account at a financial institution of their choice, to wait for the availability of the ETA if they do not have an account at a financial institution, or to invoke a hardship waiver and continue to receive a check. Recipients will continue to receive a check unless and until they provide to the paying agency banking information required for an EFT payment. We do not want to force recipients into choices that are not right for them, and this message will be key to the campaign and included in any literature that we distribute.

Whatever choice is made, recipients' payments will continue to be made on time and without interruption. I would like to emphasize that no payment will be withheld or delayed for any reason related to the implementation of EFT 99, and that any Federal payment recipient who does not sign up for Direct Deposit will continue to receive his or her benefits by paper check.

Additionally, Treasury continues to meet with Federal agencies to assist them with EFT implementation issues. Treasury also maintains an ongoing dialogue with agencies through well attended interagency policy workgroups that were formed to address EFT conversion issues.

In summary, we will continue to work closely with the grassroots community, the private sector, and other Federal agencies to educate consumers so that they can make well informed choices and to minimize disruption to recipients of Federal payments.

ETA Status

One of the most complex and challenging issues confronting us in the EFT 99 program is how to meet the needs of the millions of Federal payment recipients who do not have an account at a financial institution. Treasury is committed to exploring ways to provide greater access to financial institutions for consumers. In response to the requirement that Treasury ensure access to an account to those who are required to have an account to receive electronic payments, Treasury is currently designing the ETA , which can be offered by any federally- insured financial institution that chooses to offer the account under the terms prescribed by Treasury.

Secretary Rubin is committed to providing opportunities to those individuals without an account at a financial institution to join the financial services mainstream. Financial institutions offer many services that are critically important to many families in America including access to mortgage, business, and other loans. Individuals establish personal credit by maintaining an account at a financial institution. We consider the ETA to be an important stepping stone to more full service banking relationships while providing a safe, reliable, and low-cost alternative to recipients who receive and cash checks. Our efforts to implement the ETA are well underway, but significant work remains.

On November 23, 1998, Treasury published in the Federal Register for a 45-day public comment period proposed ETA features. The ETA , as proposed, will be available to all recipients of Federal benefit, salary, wage, and retirement payments at reasonable cost and with comparable consumer protections available to other account holders at the financial institution offering the account. Under the proposal, the ETA would accept only electronic Federal payments; be subject to a maximum price of $3.00 per month; have a minimum of four cash withdrawals per month included in the monthly fee; allow point-of-sale transactions; require no minimum balance; and provide a monthly statement. Treasury proposes to compensate financial institutions for each account established. The account may be offered only by federally-insured depository institutions and may not involve linkages between the depository institution and a payment service provider (e.g. check casher).

Treasury took extensive steps to seek public comment on the proposal through use of the Internet and by ensuring that every financial institution in the country and Members of Congress were provided a copy of the ETA Notice. The Notice was posted on the Financial Management Service website (www.fms.treas.gov.) along with other information related to the ETA . FMS received 198 comment letters in response to the notice. The comments were received primarily from financial institutions, financial institution trade associations, and consumer and community-based organizations. Others submitting comments included Federal agencies, Federal payment recipients, non-financial institution trade associations, and non- financial institution payment service providers.

The majority of comments on the proposed ETA features were generally supportive of Treasury's efforts to design a low-cost account for those recipients without accounts at financial institutions in order to transition them more fully into the financial services mainstream. However, the comments reflected divergent views on some proposed ETA features, including account eligibility, the set off prohibition, the monthly fee, the number of cash withdrawals, methods of access, and the monthly statement. Comments were also divided on the question of whether to allow financial institutions the option of offering additional features at an additional cost, if any, to the recipient, and whether compensating financial institutions for one-time set-up costs would incent them to offer the ETA .

Comments on ETA Features

Comments from consumer and community-based organizations were particularly supportive of the proposed requirement that no eligible recipient could be denied an ETA by an ETA provider and of the level of consumer protections on the account. Consumer organizations were divided on the reasonableness of the $3.00 monthly fee. In addition, a majority of these commenters felt that the minimum of four cash withdrawals should be increased.

Comments from financial institutions indicate that they are concerned about the potential for a heightened risk of offering the ETA relative to other accounts offered by financial institutions. The particular concerns cited by financial institutions include: inability to control the risk of loss by screening applicants prior to opening an account; the lack of discretion to close accounts; and how to manage the account's financial exposure.

In evaluating the comments received, Treasury is considering measures that would mitigate risk to financial institutions that offer the ETA while remaining cognizant of the need to ensure that the account remains available to individual federal payment recipients and that costs to recipients and consumer protections on the account remain substantially unchanged.

Comments on Additional, Optional Features

Treasury also solicited comments on whether Treasury should allow ETA providers to offer three additional features at the option of the financial institution and at an additional fee, if any, to the recipient. The features are interest payments on account balances, deposits of other electronic funds, and pre-authorized ACH debit capability for recurring bill payment.

Most commenters believed that interest paid on the account would be too little to be meaningful. A majority of comments supported allowing additional non-Federal deposits into the ETA . Approximately half of both large and small financial institutions, and most consumer organizations, commented that other electronic deposits should be allowed, citing enhanced utility to the recipient and the inability of some financial institutions to distinguish between types of deposits. Comments were divided over whether Treasury should allow ETA providers to offer ACH debit capability. Supporters of the feature pointed to increased utility to the recipient, including lower bill paying expenses. Financial institutions and consumer organizations that opposed the inclusion of this feature pointed to the potential for fraud against the account holder and the increased potential for overdrafts and erroneous transactions.

Compensation to Financial Institutions

In addition to seeking comment on proposed basic and optional ETA account features, Treasury sought comment on whether the proposed compensation of $12.60 for each ETA opened would incent financial institutions to offer the account, and whether the proposed compensation should be paid for ETAs opened by recipients with existing accounts. Treasury derived this compensation amount with the aid of independent financial analysis. There was concern expressed by many financial institutions over the adequacy of this compensation to fully cover their account setup costs.

Financial institutions commenting on the question of compensation for existing account holders indicated that the compensation should not depend on whether the customer is currently "unbanked" or has an account already, pointing out that the costs of opening an account are the same in either circumstance. Consumer organizations also favored not distinguishing, for compensation purposes, between recipients who have and do not have existing accounts.

ETA Next Steps

Our analysis of the public comments is well underway, and we are striving to strike a balance between ensuring that a large number of banks will offer the account and ensuring that the objective of providing a low-cost account with full consumer protections is achieved. At this time, we estimate that the final ETA account features will be released this spring. As we finalize the attributes, we are aggressively working to obtain commitments from financial institutions to offer the ETA . We currently estimate that financial institutions will begin enrolling in the program beginning early this summer with the ETA being available to recipients in late summer of this year. Our public education program for recipients and financial institutions will be critical to the success of the ETA .

Conclusion

In conclusion, EFT 99 implementation is proceeding very successfully. Implementing the EFT 99 program provides us an important opportunity to deliver the high quality of service that our customers deserve, to help to bring federal payment recipients into the financial mainstream and at the same time to lower the cost of government to American taxpayers.

Thank you, once again, for the opportunity to report on the progress of EFT 99. I will be glad to answer any questions the Subcommittee may have.