FROM THE OFFICE OF PUBLIC AFFAIRS

Mr. Chairman and Members of the Committee, I thank you for the opportunity toappear before you today to discuss implementation of the law thatrequires the federal government to make its paymentselectronically by January 1, 1999. This new law, which excludesonly tax refunds, is of great importance to millions ofAmericans. I commend the Committee for the concern it has shownthat this law be carried out in a manner that truly benefits allfederal payment recipients. We share that concern, and we willkeep it foremost in our thinking as we move forward in ourrulemaking process.

This electronicfunds transfer (EFT) initiative--what we refer to as "EFT‘99"-- was enacted by the 104th Congress as part of theDebt Collection Improvement Act of 1996.

It includes fourdistinct elements:

After July 26, 1996, federal payments to newly eligible recipients who have bank accounts must be made by EFT.

Starting January 1, 1999, ALL federal payments -- again, other than tax refunds -- must be made by EFT.

Treasury is directed to ensure that all recipients who are required to receive payments electronically will, for that purpose, have access to an account at a financial institution at reasonable cost, and with the same consumer protections as other account holders at that financial institution.

The Secretary is authorized to grant waivers based on recipient hardship or where otherwise necessary.

Treasury was giventhese responsibilities because of its role as thegovernment’s bill payer. Last year, Treasury’sFinancial Management Service (FMS) issued over 850 millionpayments on behalf of non-defense agencies, including variouskinds of benefits, federal salaries, tax refunds,

vendor payments,grants and loans. Currently, 57% of our disbursements, or roughly480 million payments a year, are made by EFT, most through theDirect Deposit program, which uses the commercial automatedclearinghouses to transfer funds directly into a recipient’saccount. Sixty percent of all benefit payments are madeelectronically.

The goal of theDepartment of Treasury is to issue payments by a method that willprovide the best service to recipients, the lowest possible costto taxpayers, and the greatest amount of transaction security.Treasury has been issuing Direct Deposit payments for over twodecades, and our experience is that EFT is substantially moreconvenient, cost-effective, and secure than paper checks.

Electronic fundstransfer improves service to recipients because it is the mostreliable method for the delivery of payments. Recipients are 20times more likely to have a problem with a paper check than withan EFT transaction. Each year Treasury replaces over 800,000checks that are lost, stolen, delayed or damaged during delivery.Waiting days for a replacement check is an inconvenience andburden on recipients, especially those living on low incomes. Onthe other hand, misrouted EFT payments are never"lost," and are typically routed to the correct bankaccount within 24 hours. The new law could eliminate over 1million complaints annually associated with check payments.

EFT ‘99 willsave taxpayers money. While our disbursement centers areextremely efficient, the cost of issuing checks is approximately43 cents apiece, including postage, paper, and labor. Bycontrast, Treasury issues EFT payments at an average cost of just2 cents. We estimate that full implementation of EFT ¢99 will savetaxpayers approximately $500 million over 5 years in postage andcheck production costs alone. A substantial amount of thesesavings will accrue to the Social Security Trust Funds. Beyondthese direct savings, there are also savings realized byrelieving the payments system from the burden of paper processing-- savings that will ultimately be realized by consumers.

EFT ‘99increases transaction security and significantly reducesopportunities for crime. On average, 75,000 Treasury checks peryear are forged and fraudulently negotiated. These crimes aretraumatic for the victims, and they cost the financial industryas much as $70 million annually. In comparison, EFT payments areextremely secure.

Mr. Chairman,I’d now like to share with you some information about whoour federal payment recipients are and what these recipients havetold us about their preference for electronic payments. I willalso describe our efforts to provide low cost service to thoserecipients without bank accounts.

FEDERAL PAYMENTRECIPIENTS

Federal PaymentRecipients With Bank Accounts

Most federal benefitpayees -- 88%-- are recipients of Social Security Administration(SSA) benefit payments. Others receive payments from programsadministered by the Department of Veterans Affairs and theRailroad Retirement Board. SSA estimates that 91% of all SocialSecurity recipients currently have a relationship with afinancial institution, and therefore could presumably receivepayments by direct electronic transfer without undue hardship.Over 64% of all SSA benefit recipients already receive theirpayments by Direct Deposit.

Recipients whoreceive their benefits electronically praise its safety andconvenience. Among the reasons they have given for choosingDirect Deposit are these:

It is safer and more convenient than receiving a check in the mail and taking checks to the bank.

Their money is deposited on schedule even if they happen to be sick or out of town and thus unable to cash a check.

They are assured delivery.

Many banks offer fee-free checking for Direct Deposit.

SSA has seen therate of increase in Direct Deposit enrollment nearly triple thenormal growth rate since the legislation went into effect on July26, 1996. Clearly, more and more people are seeing the benefitsof receiving payments electronically.

Federal BenefitRecipients Without Bank Accounts

It is estimated thateighteen percent of all federal benefit payment recipients --approximately 10 million individuals -- do not have accounts witha financial institution. Fulfilling our mandate to assure thesefamilies access to an account at a financial institution, atreasonable cost, in order to receive electronic payments isperhaps the single most significant challenge Treasury is facingin the implementation of EFT ’99. The law provides adequatetime to address these issues carefully and ensures a smooth,well-planned transition for recipients and for payment-payingagencies.

ACCESS TO REASONABLECOST ALTERNATIVES TO CHECKS

Treasury has alreadyundertaken initiatives aimed at providing low cost alternativesto checks, including the development of a program called DirectDeposit Too. Direct Deposit Too is a model account, based ondebit card access with no minimum balance requirement, that hasbeen suggested to banks as a low cost alternative to traditionalchecking products. Treasury is considering other alternativesthat are being reviewed with the benefit of substantial consumeroutreach, consultation with the financial services industry, andresearch. Our objective is to balance the need for low costbanking services with the requirement for convenient access tofunds by those without bank accounts.

One of SecretaryRubin’s top domestic policy goals is to encourage thosewithout bank accounts to move into the financial servicesmainstream. Financial service providers offer many services thatare critically important, if not essential, to virtually allAmerican families. These may include access to federally insureddeposits, the opportunity to earn interest on deposits, theavailability of personal credit, and access to home mortgages.Some 40 million American households with incomes under $25,000need these services. The programs described earlier are anattempt to assist those without bank accounts to transition intothe traditional financial services world without sacrificingconvenience or low cost.

TREASURY PRINCIPLES

In implementing theprovisions of the statute, we believe the following principlesshould be observed:

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

Our objective should be to assure that we maximize private sector competition for the business of handling federal payments, so that recipients not only have a broad range of choice of payment services and service providers, but also that they receive their payments at reasonable cost, with substantial consumer protections, and with the greatest possible convenience, efficiency and security.

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

The EFT ‘99 program should, to the maximum extent possible, seek to bring into the mainstream of our financial system, those millions of Americans for whom the system is as a practical matter not presently available.

These principleshave and continue to serve as our guideposts as we move throughthe implementation process.

In our view,effective implementation of EFT ‘99 will depend on Treasurydeveloping strong working relationships with and understanding ofthe concerns of the various program agencies, consumer groups,the financial industry, and other interested parties.

Treasury has beenworking with the agencies to identify and resolve the majorissues confronting key stakeholders. Initial implementationfocused on agency education and awareness, as well as developmentof agency implementation plans.

In addition,Treasury has held numerous meetings with representatives fromconsumer interest groups, financial service providers, andfederal agencies to gather comments and discuss issues related tomandatory EFT implementation. Our outreach efforts to consumeroriented organizations began in earnest with a meeting that Iconvened this past November. Since July 1996, Treasuryrepresentatives have met individually with eight differentconsumer groups. Treasury also held an EFT ‘99 consumerbriefing and question and answer session, at which over 30consumer groups were represented. Also, Treasury representativesmet with 15 different financial service providers includingfinancial institutions as well as non-bank entities. Sincepassage of the Act, Treasury has contracted for two majorresearch studies related to the electronic payment mandate. Oneof the studies was a socioeconomic study designed to obtaininformation regarding the characteristics of federal benefitcheck recipients. The other study was designed to obtaininformation related to entities that might serve asintermediaries, payment methods, and needs for waivers that couldbe used in developing the regulations.

Another majorinitiative is our plan to conduct a comprehensive education andmarketing program to ensure that there is sufficient informationavailable to the public about the requirements of the mandatoryEFT legislation. A nationwide campaign will encourage checkrecipients to convert voluntarily to electronic funds transfer inadvance of the January 1, 1999 deadline. The campaign willuse the best vehicles available to relay our message, and it willinclude the use of inserts with check payments. Treasury includedsuch inserts in all federal benefit checks mailed in April ofthis year.

Treasury believesthat the success of the mandatory electronic funds transferprogram is dependent in large part on the involvement of thevarious affected parties in the rulemaking process. The interimrule we published on July 26, 1996, outlined the two phases ofthe conversion mandate and requested comments on both the interimrule and on issues related to implementation of the January 1999mandate. We received 29 comments from consumer organizations,trade associations, federal and State agencies, banks andnon-bank financial service providers, addressing such issues asthe definition of authorized payment agent, consumer protections,services for those without bank accounts, costs to recipients andthe need for waivers. These comments are being carefullyconsidered and will be addressed in the proposed rule, whichitself will invite additional comments.

As is apparent fromthis discussion, Treasury is confronted with a wide array ofissues and concerns that must be addressed in order tosatisfactorily implement the statutory mandate. I share yourconcern Mr. Chairman, that the price of the government making itspayments electronically not be the imposition of unreasonablecosts on the recipients of payments. The statute requires thatthis program be available at "reasonable cost" and wewill accomplish that goal. The task before us is formidable andwe are in the early stages of that process. We intend to workclosely with all interested parties to develop an implementationstrategy that, as best as possible, balances everyone’sneeds. In this regard, our current focus and most important taskis the development and publication of a proposed rule to solicitpublic comment and policy guidance on this payment program. Letme reiterate: this is a proposed rule; it will leave anumber of key questions unanswered; and we will actively seekinput from the public on the proposed rule. None of theseimportant issues have yet been finally decided.

CONCLUSION

In conclusion, Mr.Chairman, the Treasury Department believes that this legislativemandate provides an important opportunity for us to improve thequality of service that our customers want and need, and at thesame time to lower the cost to taxpayers of our payments systems.We plan to enhance access and choice for recipients. Benefitrecipients have told us that they want to be able to receivetheir payments at points that are easily accessible and thatincrease their safety and security if this can be done at areasonable cost. Our proposed regulation will attempt to addressthese needs. We welcome, encourage, and look forward to thepublic comments that we will receive on our proposal, and we lookforward to working with this Committee as we move forward.