FROM THE OFFICE OF PUBLIC AFFAIRS

This electronicfunds transfer initiative -- what we refer to as "EFT’99" -- includes four distinct elements:

• AfterJuly 26, 1996, all Federal payments (except tax refunds) to newly eligible recipients who have bank accounts, must be made by EFT.
• Starting January 1, 1999, all Federal payments, with the exception of tax refunds, must be made by EFT.
• Treasury is directed to ensure that all recipients who are required to receive payments 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 that financial institution.
• TheSecretary is authorized to grant waivers based on recipient hardship; for classes of checks; or where otherwise necessary.

Treasury was giventhese responsibilities because of its role as thegovernment’s chief disburser. Last year, Treasury’sFinancial Management Service (FMS) issued over 850 millionpayments on behalf of non-defense agencies, including varioustypes of benefits, Federal salaries, tax refunds, vendorpayments, grants and loans.

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 degree of transaction security.Treasury has been issuing electronic payments for over twodecades, and our experience is that EFT is substantially moreconvenient, cost-effective, and secure than paper checks.Attached to my written statement is a chart that shows thebenefits of EFT.

As the chart shows,EFT payments will save taxpayers money. The Government’scost for an EFT payment is only $.02, while check payments costthe Government $.43 each. We estimate that full implementation ofEFT ’99 will save taxpayers approximately $500 million over5 years in postage and check production costs alone. The chartalso shows a drastic decrease in payment inquiries and claimsunder EFT. Recipients are twenty times more likely to have aproblem with a paper check than with an EFT transaction. Eachyear Treasury replaces over 800,000 checks that are lost, stolen,delayed or damaged during delivery. Waiting days for areplacement check is an inconvenience and burden on recipients,especially those living on low incomes. Misrouted EFT paymentsare never lost, and are typically routed to the correct bankaccount within 24 hours. In addition, the chart shows that EFTincreases transaction security and significantly reducesopportunities for crime. On average, over 75,000 Treasury checksper year are forged and fraudulently negotiated. Forgeries,counterfeiting, and check alteration are non-existent with EFTpayments.

Mr. Chairman, Iwould now like to share with you the principles that Treasury isfollowing in implementing EFT ’99.

TREASURY PRINCIPLES

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

• Thetransition from a paper-based system to an electronic transfer system should be accomplished with the interests of recipients ranking of paramount importance.
• Ourobjective should be to assure that we maximize private sector competition for the business of handling Federal payments, so recipients not only have a broad range of choice of payment services and service providers, but also that they receive their payments at a reasonable cost, with substantial consumer protections, and with the greatest possible convenience, efficiency, and security.
• Allrecipients, 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.
• TheEFT ’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 principlesserve as our guideposts as we move through the implementationprocess.

ACCOMPLISHMENTS

Since the passage ofthe Debt Collection Improvement Act in April of 1996, Treasuryhas made significant progress in our implementation efforts. Wereleased an interim rule on

July 26, 1996,implementing the first phase of the conversion from check toEFT-- that applying to newly eligible recipients. This interimrule requested comment on the issues related to January 1999 EFTmandate. Treasury received a total of 29 comment letters fromvarious stakeholders, such as consumer groups, governmentvendors, financial institutions and other Federal agencies.Stakeholder comments were generally very supportive of themandatory EFT initiative and its implications for theirconstituents.

In addition toreceiving comments in response to the interim rule, Treasury hasundertaken extensive outreach efforts. These efforts includemeetings with various interest groups, including consumer groups,vendors, financial trade associations, and financial servicesproviders (including bank and non-bank entities.) Our outreachefforts to consumer organizations began in earnest with a meetingthat I convened last November. Treasury representatives have metwith 11 different consumer groups over the nine months since July1996. Treasury also held an EFT ’99 consumer briefingsession in April attended by over 30 consumer groups.

Treasuryrepresentatives have met with 17 financial services providerssince the publication of the interim rule. These providersinclude financial institutions as well as non-bank entities, suchas check cashers, automatic bill payers, and other financialservices providers. In addition, Treasury held an EFT ’99briefing session that was attended by a number of financial tradeassociations. In partnership with the Federal Reserve Banks andthe American Bankers Association, we have reached over a thousandfinancial institutions in nationwide seminars held since October1996. These seminars will continue through September 1997.

Treasury has alsobeen meeting with Federal agencies to develop EFT implementationplans. These meetings have enabled us to educate agencies on theprovisions of the Act and also have provided a forum for agenciesto inform us of any potential challenges to EFT implementation.We obtained additional feedback from interagency policyworkgroups that were formed to address major EFT conversionissues, such as international payments, disaster payments, andvendor payments.

In April of thisyear, we met with a group of government vendors to discuss theirconcerns regarding the EFT ’99 initiative. Since the passageof the EFT legislation, we have also worked closely with Federalagencies, the Federal Reserve, and financial institutions toidentify and address issues associated with converting vendorpayments to EFT. I will discuss these issues further in just amoment.

Treasury obtainedfurther insight into the issues associated with implementing theEFT ’99 initiative by contracting for two research studies.The studies were used primarily to obtain information regardingthe characteristics of Federal check recipients and to betterunderstand the needs of those recipients, including how best toeducate this population on the advantages of electronic payments.

We have seentremendous momentum in converting benefit check payments to EFT.The Social Security Administration, for example, has seen itsDirect Deposit enrollment rate nearly triple since thelegislation went into effect on July 26, 1996. This is the resultof the required use of Direct Deposit by newly entitledbeneficiaries, as well as an aggressive marketing campaign SSAhas developed with financial institutions to encourage theconversion to EFT. In addition, the EFT enrollment rate for othertypes of Federal payments has increased as well. From FY96year-end to mid FY97, the percentage of all Treasury disbursedEFT payments has increased four percent from 53 to 57 percent oftotal Treasury disbursements. Clearly, more and more people areseeing the benefits of receiving payments by electronic means.However, we realize that we have much more to do to reach ourgoals.

MAJOR ISSUES &CHALLENGES

The immediatechallenge we are facing is publishing a proposed rule toimplement the second phase of EFT ’99. Due to the farreaching implications of this rule and the many complex issuesinvolved, Treasury is considering all factors before publishingthe proposed rule. Our goal in this rulemaking process is todevelop policies that are simple, clear, and, most importantly,effective in dealing with the difficult issues associated withmandatory EFT. We anticipate a July 1997 release date with a90-day comment period for the proposed rule.

By far, the mostcomplex and controversial policy issue confronting us in ourefforts to implement EFT ’99 is how to meet the needs ofrecipients without bank accounts. Under the existing Federalpayment system, electronic payments may only be deposited intoaccounts at financial institutions. As a result, the populationof Federal payment recipients without bank accounts is currentlyprecluded from receiving the benefits of Direct Deposit.

Secretary Rubin hasmade it one of his highest priorities to encourage people withoutbank accounts to move into the financial services mainstream.Financial services providers offer many services that arecritically important, if not essential, to virtually all Americanfamilies. These may include access to federally insured deposits,the opportunity to earn interest on deposits, the availability ofpersonal credit, and access to home mortgages. Some 40 millionAmerican households with incomes under $25,000 need theseservices.

Many paymentrecipients without bank accounts have told us that the lack ofreasonably priced financial services currently prevents them frommoving into the financial mainstream. As a result, Treasury hasdevoted significant effort to increasing the availability of lowcost banking services. Treasury’s Direct Deposit Too programencourages banks to offer a reasonably priced basic account.Direct Deposit Too is a model account, based on debit card accesswith no minimum balance requirement, that has been suggested tobanks as a low cost alternative to traditional checking accounts.For recipients who are unable to obtain low cost financialservices through the private sector, Treasury is also developinga nation-wide electronic benefits transfer system.

We recognize thatsome recipients of checks will be unable to receive paymentselectronically because of their personal circumstances. In theproposed regulation, Treasury will solicit comments on thecircumstances under which a recipient may be waived fromreceiving payment electronically. We will take into considerationnot only geographic, physical, financial and mental barriers, butother compelling circumstances.

A major issueassociated with implementing the mandatory EFT requirement is howwe convert vendor payments to electronic funds transfer. Althoughvendor payments comprise only 2% of total Federal payments, theyrepresent a much larger percentage of non-benefit agency payments-- between 10 and 30 percent, depending on the agency.

Vendor EFTenrollment has increased approximately 60% from FY96 year-end tomid FY1997. However, the total percentage of vendor EFTparticipation is still only 26%. Historically, vendors have beenslow to enroll voluntarily in the electronic funds transferprogram. This is partially attributable to obstacles associatedwith disbursing electronic payments to vendors. One majorchallenge is that many vendors are not able to access theremittance information that is transmitted along with electronicpayments. As a result, when payments are credited to theiraccounts, it may be difficult for them to reconcile theiraccounts receivable.

This problem occursbecause many small to medium sized banks do not have the specialsoftware that is needed to translate to readable form theinformation that is transmitted with electronic payments. It isestimated that of the approximately 11,000 banks capable ofaccepting an electronic payment, fewer than a thousand cantranslate the remittance data into a readable form for theircustomers.

Treasury iscurrently working with other Federal agencies, financialinstitutions, and vendors to address these problems and developlow cost solutions. For example, we are talking with NASA andtheir vendors on a developing a pilot that will allow NASA’svendors to access remittance data through an FMS web site. Thesubstantial increase in the Government’s use of the IMPACcard, expansion of programs like the GSA Advantage program andpublication of the EDI Handbook and the Agency ImplementationGuide for CTX payments will further facilitate conversion toelectronic payments. We believe initiatives such as these andothers being done by other agencies will raise the level ofawareness of options available to vendors, thereby spurring amovement by vendors to EFT. In addition, Treasury is reviewingcurrent laws, such as the Prompt Payment Act, with the intentionof removing disincentives to using EFT.

PUBLIC EDUCATION

Now I would like todiscuss one of the most significant aspects of our plan toimplement

EFT ’99. Asidefrom our other implementation efforts, we plan to conduct acomprehensive public education campaign to ensure that there issufficient information available to stakeholder groups and thepublic about the requirements of the mandatory EFT legislation.

In FY 1997, Treasurywill provide informational services to financial institutions toensure that they are operationally prepared for handling theincreased demand for EFT services. In addition, we will continueour interaction with consumer groups, government vendors,financial trade associations, and other government agencies toensure that they are aware of the implications of the EFTlegislation, and that they are given ample opportunity to expresstheir concerns.

We will also rollout a nationwide public awareness campaign that will encouragecheck recipients to convert voluntarily to electronic fundstransfer in advance of the January 1, 1999 deadline.

Components of thiscampaign include messages to current check recipients about thelaw, about the safety and convenience of EFT, and about the wayto sign up for Direct Deposit. Another key aspect of thiscampaign is educating those check recipients without bankaccounts on how to maintain a bank account, including instructionon basic finances to help them make the best informed choices.

A grassroots publicoutreach effort will involve identifying hundreds of localcommunity organizations that will assist our efforts in reachingcurrent check recipients. I believe this grassroots effort iscritical to the success of converting current check recipients(both banked and unbanked) to electronic payments.

The public educationcampaign will use a variety of communications vehicles to reachrecipients, including television, radio, direct mail, and checkinserts. Treasury included Direct Deposit inserts in all Federalbenefit checks mailed in April of this year.

In summary, theobjectives of this campaign will be to partner with the privatesector and other Federal agencies; to educate consumers to makegood choices; and to minimize disruption to recipients whileadding value to the way they conduct their finances. Seamlesscoordination is a necessity if the public education campaign isgoing to succeed. Each governmental entity must work incollaboration with the other, providing reinforcement, assistanceand a shared set of objectives.

CONCLUSION

In conclusion, Mr.Chairman, the Treasury Department believes that this legislativemandate provides an important opportunity for us to provide thehigh quality of service that our customers want and need, and atthe same time to lower the cost to taxpayers. Benefit recipientshave told us that they want to be able to receive their paymentsat points that are easily accessible and that increase theirsafety and security if this can be done at a reasonable cost. Ourproposed regulations will attempt to address these needs. Wewelcome, encourage, and look forward to the public comments thatwe will receive on our proposal.

We look forward toworking with the Committee as we move forward on this initiative.