FROM THE OFFICE OF PUBLIC AFFAIRS

It is a pleasure for me to be here today to address NACHA on the Federal government's implementation of the EFT '99 mandate. The timing could not be better: just two days ago the Treasury Department published its Notice of Proposed Rulemaking for EFT '99, and I am delighted to be able to discuss our new proposed rule with you.

EFT '99 will present both challenges and opportunities, and the Federal government will require the energetic assistance of the private sector to assure that the transition to electronic payments is successful. I want to discuss today the role of industry in promoting not only EFT '99, but electronic payments generally. But first let me summarize our proposed regulation.

As you well know, EFT '99 requires that all of the government's payments, other than tax refunds, be made electronically starting January 1, 1999. In fact, the law also sets up an interim program under which all new recipients of federal payments coming on stream after July 1996 must receive their payments electronically if they have a bank account. Experience under the interim program has been very encouraging. Over 85% of all new Social Security annuitants are receiving direct EFT payments, reflecting a high level of acceptance of the program.

The new law imposes a number of responsibilities on the Treasury Department: among other things, to define key terms in the law; to adopt rules for waivers from the requirement of mandatory EFT in cases of hardship; and to assure that all individuals required to receive payments electronically have, for that purpose, access to an account at a financial institution at reasonable cost and with standard consumer protections.

Throughout the rulemaking process, we have worked with various consumer and public interest groups, provider groups, financial institutions, and interested trade associations -- including NACHA -- to understand their needs and to determine what the EFT transition will mean to them.

In developing EFT '99 policies, we have been guided by four principles:

• The transition to EFT should be accomplished with the interests of recipients being of paramount importance.
• Our policies should maximize private sector competition for the business of handling Federal payments, so that recipients not only have a broad range of payment options, but also receive their payments at reasonable cost, with substantial consumer protections, and with the greatest possible convenience, efficiency, and security.
• Recipients, and especially those having special needs -- the elderly, individuals with physical disabilities, and those living in remote or rural communities -- should not be disadvantaged by the transition to EFT.
• The EFT '99 program should bring recipients without bank accounts into the mainstream of the financial system.

Broadly speaking, we faced four key issues that required resolution:

• What types of entities should be permitted to maintain accounts into which electronic government payments may be made?
• Who should be permitted to receive payments in such an account as a representative of the beneficial owner of the payment?
• Under what circumstances should we waive the requirement for EFT?
• How do we perform our obligation to assure recipients access to an account at a financial institution at reasonable cost?

Who Can Maintain Accounts To Receive Electronic Transfers?

Two key factors influenced our thinking on this question: First, the new law itself defines the term "electronic funds transfer" as an instruction to a "financial institution" to credit or debit an "account." Thus, the law seems to us clearly to contemplate the establishment of a deposit relationship. Under the Glass-Steagall Act, deposits may only be received by entities that are subject to regular examination by banking authorities and that publish periodic detailed reports of condition. Second, Federal EFT payments will be made primarily through the ACH network, and only depository institutions are eligible to receive ACH transfers.

In light of these factors, Treasury's proposed rule provides that electronic payments will, with one exception I will come to, be transferred only into accounts held at institutions that are either federally insured or eligible to apply for federal insurance -- banks, thrift institutions, credit unions and agencies or branches of foreign banks.

I want to emphasize that this aspect of the proposed regulation relates only to the nature of the entity that may be the immediate transferee of Federal funds. It does not preclude entities other than financial institutions -- non-bank payments service providers -- from linking with financial institutions, or independently offering to recipients who hold accounts at financial institutions, to provide additional or ancillary payments services relating to EFT deposits.

Who Can Hold Accounts in a Representative Capacity?

The new law contemplates that recipients may designate "authorized agents" to hold accounts on their behalf for the purpose of receiving EFT payments. The challenge for us is to determine what content to give to this term.

Our principal concerns in this context arise from the fact that there is no existing general Federal standard governing the conduct of entities that might act as agents for the purpose of receiving payments, nor any general Federal mechanism for overseeing and regulating the conduct of such entities. Thus, were we to interpret this term broadly, we might be facilitating broad scale abuse of payments recipients. Unscrupulous individuals, attracted by the lack of controls and standards, might see the opportunity to prey on the elderly and infirm by holding out to act as their "agents" for the receipt of payments. Yet clearly there are many situations in which recipients are not able to manage their own affairs and need the help of someone who can act in a representative capacity.

Our proposed rule addresses these concerns by limiting the definition of "authorized payment agent" to those representative payees or fiduciaries who are appointed or selected to act in a representative capacity under regulations of the various program agencies having payments responsibilities, such as Social Security, Veterans Affairs, and the Railroad Retirement Board. These agencies have a long history of administering systems for the appointment and governance of such representatives for beneficiaries who are legally incompetent, under age 18, or incapable of managing or directing the management of their benefit payments. Indeed, over 6 million Social Security beneficiaries, including 4 million children, regularly receive payments through representative payees, and the Social Security Administration has well-established standards and reporting requirements for such representatives.

Other than in the case of authorized payment agents appointed under such programs, the proposed rule has only one other exception to the requirement that payments be made to an account at a financial institution held in the name of the recipient. Where a payment is to be transferred to an investment account established by an SEC-regulated broker-dealer -- under a "sweep" arrangement, for example -- the payment may be made initially into an account held in the name of the broker or dealer, so long as the account and all associated records are structured so that the recipient's beneficial interest is clearly identified and individual deposit insurance coverage is protected.

When Should the Requirement for Mandatory EFT Be Waived?

In considering the subject of 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 many recipients from the requirement of mandatory EFT. A heavy handed implementation of the mandate could not only impose significant hardship on individuals, but could very quickly undermine the base of support for the program. We are mindful that many individuals and organizations concerned about the impact on recipients will be carefully evaluating our proposal to ensure that we take seriously the legitimate concerens of those now receiving checks. On the other hand, excessive liberality in the granting of waivers could significantly vitiate the tremendous cost savings for the public that we expect EFT '99 to generate.

Our very positive experience with the interim program also led us to the preliminary view that it might be reasonable to draw distinctions between new payments recipients, who have not become accustomed to receiving checks from the government, and existing recipients, who might suffer hardship if their existing patterns of conduct had to be changed.

Taking these considerations into account, we have proposed the following:

• For individuals who became eligible for Federal payments before July 26, 1996 and who have an account with 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 addition, the mandatory EFT requirement will be waived for all such individuals until the earlier of January 1, 2000, or the time when Treasury makes such an account available to them.
• Federal agencies will not be required to use EFT when the 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.

How Can Treasury Assure "Unbanked" Recipients Access to an Account at Reasonable Cost?

In many ways the greatest challenge to us in the new law is presented by Congress' mandate that we assure that "unbanked" recipients have access to an account at a financial institution, at reasonable cost and with conventional consumer protections, in order to receive their payments. We would be ecstatic if this mandate were made academic by a proliferation of attractive products developed and offered by the private sector for unbanked payments recipients. But that has not happened, and while many institutions are making plans in this regard we have decided that we cannot take the risk of waiting to see what develops. Accordingly, we will be designing an Electronic Transfer Account -- or "ETA" -- and initiating a competitive procurement to engage financial institutions to offer such an account in defined geographic areas. We will also provide that in states in which there are Electronic Benefit Transfer programs up and running, unbanked recipients may, at their option, elect to receive their payments through such a program.

There are many difficult and complex issues involved in developing the ETA, and we are already in the process of analyzing these issues. Our preliminary view is that the ETA should be an all-electronic, debit card-based account, held at a federally insured depository institution acting as our agent, for which the recipient would be charged a fixed minimum monthly fee. But beyond that we have nothing but questions. How should the account be structured? What services should it offer? How do we assure a reasonable cost? What types of access points should be required? How do we define the appropriate geographic areas in which to solicit bids, and how do we assure adequate coverage of the defined geographic area? How do we design the ETA to be attractive to unbanked recipients, but not so attractive that it undermines the ability or incentive of the private sector to develop competitive alternatives? What role, if any, should non-bank providers of payments services be afforded with respect to the ETA?

We are soliciting comment on all of these questions, and others, in the rulemaking proceeding.

I said earlier that EFT '99 offers both challenges and opportunities to industry. Let me first discuss the challenges.

The Federal government cannot alone ensure a smooth transition to an electronic payments environment. An EFT mandate for government payments can ultimately succeed only if the public is willing to accept it, and the effort to achieve that acceptance should not be viewed in a narrow context. It must be part of a much broader effort both to educate the public about the enormous benefits of electronic payments and to wean payments recipients away from their accustomed reliance on paper. This is not just a task for us; we urgently need the active assistance and cooperation of the private sector. To be sure, some industry groups, such as the American Bankers Association, are planning education initiatives. But let me be quite candid: much more is needed. Industry response to EFT '99 has been disappointing so far. I have heard far more in the way of complaints about the possible costs of EFT '99 for banks than about the need to change public opinion about electronic payments. I also find, to my great surprise, that almost 18 months after the EFT '99 law was enacted, there are some bankers who have never even heard of it, and many who have only the vaguest idea of what it is about. More important, the level of awareness among the public is infinitesimal, and those who do know about it probably read some scare story, the thrust of which was "Guess what your government is about to do to you!"

The stakes here are enormous. EFT can be a great success or it can be a disappointing failure. If we do it well, and EFT '99 is a success, we will have made a major stride in moving the economy towards an efficient electronic payments environment. However, if we fail to get our message across, and EFT '99 is a failure because the public will not accept it, we run the risk support for the program will disappear and that Congress will respond by eliminating mandatory EFT. The result will be a severe setback to electronic funds transfer.

Therefore, today I am challenging as all sectors of the industry who have a stake in the transition to electronic payments to make a major commitment of resources -- starting immediately; a commitment not only to become aggressively involved in EFT '99 and to help us transform the Federal payments system to electronic delivery, but to educate the public generally about the benefits of electronic payment. This is not a task that should be left to individual banks that are trying to market their own products; it is an institutional challenge that should be responded to on a broad base by the entire payments industry. What is needed is nothing less than a major advance in the public's level of acceptance of EFT.

Let me identify some specific areas where concentrated effort is needed:

Changing the Attitudes of Check Recipients

The transition from paper checks to EFT will undoubtedly be traumatic for many recipients. It will be a major change in the way in which they handle their financial transactions. In fact, most people who currently receive Federal checks already have bank accounts and could transfer to direct deposit relatively easily. This is strongly suggested by our experience under the interim program since July 1996 with new recipients having bank accounts. Nevertheless, many are reluctant to switch to direct deposit for a variety of reasons, including unfamiliarity with the new technology, concerns whether their payments will "be there," and a general feeling of security with the tangible comfort of a check. If EFT is to succeed, the industry needs to do a far more aggressive job of education and promotion with check recipients.

Meeting the Needs of Government Vendors

By January 1, 1999, the Federal government will be making more than 40 million payments a year to businesses primarily through ACHs. However, many financial institutions do not have the capability to transmit debit information with EFT payments. As a result, business customers have difficulty reconciling lump sum payments with individual invoices. Treasury has formed partnerships with private industry to establish alternative methods to transmit this information electronically to vendors, including voice response systems, electronic fax, fax-on-demand, e-mail, and Internet access to payment information. Reasonable cost is also a concern, and obtaining the information electronically should not be more expensive for the vendors than receiving it on a check stub.

Because many banks are unable to transmit remittance data, many vendors are reluctant to convert to EFT. While more than 80 percent of the dollar value of vendor payments disbursed by Treasury are made by EFT, this represents only about 20 percent of the number of such payments. Converting those small and medium sized vendors who do not bank with institutions capable of providing remittance data at reasonable cost is a distinct challenge.

The payments industry needs to make this a priority, and we applaud NACHA's recognition of the need to address this important issue.

The Special Challenge of the Unbanked

One of the most socially significant challenges of this legislation is to encourage millions of currently unbanked persons to become part of the mainstream financial system. At present, ten million Federal benefit recipients -- one of every six, or 18 percent of the total number of recipients -- do not have an account at a financial institution. Instead they rely on banks, check cashers, pawn shops, money transfer agents, or local merchants to cash their payroll or benefit checks, frequently at high cost -- and even after they cash their checks, they have no convenient way to pay their bills or to accumulate savings. The challenge is to provide low cost accounts for these individuals.

In the past, policy makers and social activists have thought about "lifeline banking" in the context of a paper-based system. The objective has been to provide a low-cost means of cashing checks and maintaining checking accounts. Financial institutions, who understand only too well the costs of processing paper payments, have understandably resisted the idea that they should provide subsidized banking services. It is time to radically change our thinking about these questions. If we properly design electronic products -- if we can capture for the benefit of the presently unbanked the advantages of electronic payments -- it should be possible to provide "lifeline" banking services not only without subsidy, but on a profitable basis.

Let me again be frank here. The challenge of the unbanked is a daunting one, to which the private sector has not devoted sufficient attention and resources. Mainline financial institutions have been too willing to abandon unbanked payments recipients to fringe providers, and have not focussed on means to capitalize on new technologies to serve an under served segment of the American public.

Just who are the "unbanked"? As one might expect, the unbanked tend to be younger and to have lower incomes than recipients with bank accounts, and they are more frequently members of a racial or ethnic minority. While only about 8 percent of VA beneficiaries and 15 percent of Social Security retirement and survivor benefits do not have bank accounts, more than half of all SSI recipients are unbanked. Surveys show that while there are a variety of reasons that payments recipients do not have bank accounts, the predominant reason is that they do not have sufficient income to be able to afford the costs of conventional accounts. Over 80 percent of unbanked recipients know that their payments can be directly deposited into a bank account, but those features of Direct Deposit that we all know to offer great benefits have not been sufficient in themselves to induce the unbanked to open accounts for this purpose. It is a troubling paradox that many of these individuals are nevertheless willing to pay high fees to non-bank providers of payments services in order to cash their checks and make the few basic third-party payments they must make each month.

EFT '99 offers an unprecedented opportunity to address the needs of the unbanked. But there are two essential tasks that must be confronted: First, the industry must develop innovative and attractive electronic accounts that will meet the basic needs of unbanked payments recipients. This is the task that confronts us as we prepare to design the Electronic Transfer Account. Second, the industry must make a strong effort to educate the unbanked population about the benefits of such an account. The fears that people have about doing business with banks -- concerns about cost, about privacy, about hostile reception -- must be overcome by the devotion of resources to education.

Moreover, this should not be viewed as just another social obligation that government is trying to impose on a banking system already burdened with regulatory requirements. It should be approached as a matter of enlightened self interest. There are more than 10 million American citizens who are regular recipients of governmental payments who have a need for basic banking services -- principally a safe and convenient means of holding and accessing their funds. Many are already paying high prices for payments services. If the banking system can meet this need in a cost effective way -- and EFT holds out the prospect of making that a reality -- millions of new customers can be brought into the system, and these customers, once accustomed to dealing with banks in a user-friendly environment, can ultimately become a market for a variety of other products and services that are offered by mainstream institutions.

Treasury is developing a nationwide education and marketing program to promote the benefits of EFT '99. We will be strongly encouraging check recipients to convert voluntarily to EFT, stressing all of the benefits of Direct Deposit. Plans for this campaign were developed by a joint industry-government marketing committee, in which NACHA participated. The campaign will continue throughout 1998, and will involve print, TV, and radio public service advertising. We will also be developing promotional materials for use by financial institutions, consumer organizations, and other groups.

But the education and marketing challenge for the industry should be even broader than this. EFT '99 is really just a subset of the larger issue of electronic payments generally, which is itself subsumed in the far broader topic of electronic commerce. It is not enough, in this exciting environment, to leave it to individual competitors to promote their own proprietary products. We must all be working to develop even greater public comfort with and acceptance of new applications of a rapidly developing technology. As new generations of computer literate youngsters graduate into the everyday world, debit cards, computerized home banking and electronic presentment should be as natural to them as paper checks were to us. And while time will ultimately bring about enormous changes, we must not ignore those millions of Americans who did not grow up with computers, who may never have used an ATM, and who are intimidated by the prospect of having to adjust to new ways of handling their affairs.

We fully expect that our new rulemaking proposal will create anxieties in some segments of the recipient population, and we want to allay those concerns by being liberal in granting waivers. We really do not want to cause inconvenience and hardship for people. But we need your help.

I therefore urge the private sector to involve itself aggressively in the task of educating the public about the benefits of EFT. Implementation of EFT '99 is a monumental task that needs to involve all stakeholders in the process; the government cannot do this job alone. I encourage all of you to take up this challenge, and I am sure that the leadership of NACHA shares with me the conviction that if we pursue these objectives together the public will realize the enormous benefits that will result from our initiative.