FROM THE OFFICE OF PUBLIC AFFAIRS

Remarks of The Honorable John D.Hawke, Jr., Under Secretary of the Treasury for Domestic Financeto the Bank Administration Institute's Symposium of PaymentsSystem Strategy Mayflower Hotel, Washington, D.C.

Introduction

It is a pleasure for me to be here today to address the BankAdministration Institute's Symposium on Payments System Strategy.The timing could not be better: just last week the TreasuryDepartment published its Notice of Proposed Rulemaking for EFT'99, our new mandate for electronic delivery of Federal payments,and I am delighted to be able to discuss our new proposed rulewith you.

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

EFT '99 requires that all of the government’s payments,other than tax refunds, be made electronically starting January1, 1999. In fact, the law also sets up an interim program underwhich all new recipients of federal payments coming on streamafter July 1996 must receive their payments electronically ifthey have a bank account. Experience under the interim programhas been very encouraging. Over 85% of all new Social Securityannuitants are receiving direct EFT payments, reflecting a highlevel of acceptance of the program.

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

Throughout the rulemaking process, we have worked with variousconsumer and public interest groups, provider groups, financialinstitutions, and interested trade associations to understandtheir needs and to determine what the EFT transition will mean tothem.

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

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.

 

Key Issues in the Rulemaking

Broadly speaking, we faced four key issues that requiredresolution:

What types of entities should be permitted to maintainaccounts into which electronic government payments may be made?

Who should be permitted to receive payments in such an accountas a representative of the beneficial owner of the payment?

Under what circumstances should we waive the requirement forEFT?

How do we perform our obligation to assure recipients accessto an account at a financial institution at reasonable cost?

Who Can Maintain Accounts To Receive ElectronicTransfers?

Two key factors influenced our thinking on this question:First, the new law itself defines the term "electronic fundstransfer" as an instruction to a "financialinstitution" to credit or debit an "account."Thus, the law seems to us clearly to contemplate theestablishment of a deposit relationship. Under the Glass-SteagallAct, deposits may only be received by entities that are subjectto regular examination by banking authorities and that publishperiodic detailed reports of condition. Second, Federal EFTpayments will be made primarily through the ACH network, and onlydepository institutions are eligible to receive ACH transfers.

In light of these factors, Treasury’s proposed ruleprovides that electronic payments will, with one exception I willcome to, be transferred only into accounts held at institutionsthat are either federally insured or eligible to apply forfederal insurance -- banks, thrift institutions, credit unionsand agencies or branches of foreign banks.

I want to emphasize that this aspect of the proposedregulation relates only to the nature of the entity that may bethe immediate transferee of Federal funds. It does not precludeentities other than financial institutions -- non-bank paymentsservice providers -- from linking with financial institutions, orindependently offering to recipients who hold accounts atfinancial institutions, to provide additional or ancillarypayments 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 behalffor the purpose of receiving EFT payments. The challenge for usis to determine what content to give to this term.

Our principal concerns in this context arise from the factthat there is no existing general Federal standard governing theconduct of entities that might act as agents for the purpose ofreceiving payments, nor any general Federal mechanism foroverseeing and regulating the conduct of such entities. Thus,were we to interpret this term broadly, we might be facilitatingbroad scale abuse of payments recipients. Unscrupulousindividuals, attracted by the lack of controls and standards,might see the opportunity to prey on the elderly and infirm byholding out to act as their "agents" for the receipt ofpayments. Yet clearly there are many situations in whichrecipients are not able to manage their own affairs and need thehelp of someone who can act in a representative capacity.

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

Other than in the case of authorized payment agents appointedunder such programs, the proposed rule has only one otherexception to the requirement that payments be made to an accountat a financial institution held in the name of the recipient.Where a payment is to be transferred to an investment accountestablished by an SEC-regulated broker-dealer -- under a"sweep" arrangement, for example -- the payment may bemade initially into an account held in the name of the broker ordealer, so long as the account and all associated records arestructured so that the recipient’s beneficial interest isclearly identified and individual deposit insurance coverage isprotected.

When Should the Requirement for Mandatory EFT BeWaived?

In considering the subject of waivers, we wanted to beresponsive to two conflicting considerations: First, werecognized that there will be a great many perfectly legitimatereasons for exempting many recipients from the requirement ofmandatory EFT. A heavy handed implementation of the mandate couldnot only impose significant hardship on individuals, but couldvery quickly undermine the base of support for the program. Weare mindful that many individuals and organizations concernedabout the impact on recipients will be carefully evaluating ourproposal to ensure that we take seriously the legitimate concernsof those now receiving checks. On the other hand, excessiveliberality in the granting of waivers could significantly vitiatethe tremendous cost savings for the public that we expect EFT '99to generate.

Our very positive experience with the interim program also ledus to the preliminary view that it might be reasonable to drawdistinctions between new payments recipients, who have not becomeaccustomed to receiving checks from the government, and existingrecipients, who might suffer hardship if their existing patternsof conduct had to be changed.

Taking these considerations into account, we have proposed thefollowing:

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 ispresented by Congress' mandate that we assure that"unbanked" recipients have access to an account at afinancial institution, at reasonable cost and with conventionalconsumer protections, in order to receive their payments. Wewould be ecstatic if this mandate were made academic by aproliferation of attractive products developed and offered by theprivate sector for unbanked payments recipients. But that has nothappened, and while many institutions are making plans in thisregard we have decided that we cannot take the risk of waiting tosee what develops. Accordingly, we will be designing anElectronic Transfer Account -- or "ETA" -- andinitiating a competitive procurement to engage financialinstitutions to offer such an account in defined geographicareas. We will also provide that in states in which there areElectronic Benefit Transfer programs up and running, unbankedrecipients may, at their option, elect to receive their paymentsthrough such a program.

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

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

A Challenge to the Industry

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

The Federal government cannot alone ensure a smooth transitionto an electronic payments environment. An EFT mandate forgovernment payments can ultimately succeed only if the public iswilling to accept it, and the effort to achieve that acceptanceshould not be viewed in a narrow context. It must be part of amuch broader effort both to educate the public about the enormousbenefits of electronic payments and to wean payments recipientsaway from their accustomed reliance on paper. This is not just atask for us; we urgently need the active assistance andcooperation of the private sector. To be sure, some industrygroups are planning education initiatives. But let me be quitecandid: much more is needed. Industry response to EFT '99has been disappointing so far. I have heard far more in the wayof complaints about the possible costs of EFT '99 for banks thanabout the need to change public opinion about electronicpayments. I also find, to my great surprise, that almost 18months after the EFT '99 law was enacted, there are some bankerswho have never even heard of it, and many who have only thevaguest idea of what it is about. More important, the level ofawareness among the public is infinitesimal, and those who doknow about it probably read some scare story, the thrust of whichwas "Guess what your government is about to do to you!"

The stakes here are enormous. EFT can be a great success or itcan be a disappointing failure. If we do it well, and EFT '99 isa success, we will have made a major stride in moving the economytowards an efficient electronic payments environment. However, ifwe fail to get our message across, and EFT '99 is a failurebecause the public will not accept it, we run the risk supportfor the program will disappear and that Congress will respond byeliminating mandatory EFT. The result will be a severe setback toelectronic funds transfer.

I want to challenge all sectors of the industry who havea stake in the transition to electronic payments to make a majorcommitment of resources -- starting immediately; a commitment notonly to become aggressively involved in EFT '99 and to help ustransform the Federal payments system to electronic delivery, butto educate the public generally about the benefits ofelectronic payment. This is not a task that should be left toindividual banks that are trying to market their own products; itis an institutional challenge that should be responded to on abroad base by the entire payments industry. What is needed isnothing less than a major advance in the public's level ofacceptance of EFT. BAI, as an organization already deeplyinvolved in educational efforts, is ideally suited to take aleadership role in such an effort.

Let me identify some specific areas where concentrated effortis needed:

Changing the Attitudes of Check Recipients

The transition from paper checks to EFT will undoubtedly betraumatic for many recipients. It will be a major change in theway in which they handle their financial transactions.

In fact, most people who currently receive Federal checksalready have bank accounts and could transfer to direct depositrelatively easily. This is strongly suggested by our experienceunder the interim program since July 1996 with new recipientshaving bank accounts. Nevertheless, many are reluctant to switchto direct deposit for a variety of reasons, includingunfamiliarity with the new technology, concerns whether theirpayments will "be there," and a general feeling ofsecurity with the tangible comfort of a check. If EFT is tosucceed, the industry needs to do a far more aggressive job ofeducation and promotion with check recipients.

Meeting the Needs of Government Vendors

By January 1, 1999, the Federal government will be making morethan 40 million payments a year to businesses primarily throughACHs. However, many financial institutions do not have thecapability to transmit debit information with EFT payments. As aresult, business customers have difficulty reconciling lump sumpayments with individual invoices. Treasury has formedpartnerships with private industry to establish alternativemethods to transmit this information electronically to vendors,including voice response systems, electronic fax, fax-on-demand,e-mail, and Internet access to payment information. Reasonablecost is also a concern, and obtaining the informationelectronically should not be more expensive for the vendors thanreceiving 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 80percent of the dollar value of vendor payments disbursed byTreasury are made by EFT, this represents only about 20 percentof the number of such payments. Converting those small and mediumsized vendors who do not bank with institutions capable ofproviding remittance data at reasonable cost is a distinctchallenge.

The payments industry needs to make this a priority.

The Special Challenge of the Unbanked

One of the most socially significant challenges of thislegislation is to encourage millions of currently unbankedpersons to become part of the mainstream financial system. Atpresent, ten million Federal benefit recipients -- one of everysix, or 18 percent of the total number of recipients -- do nothave an account at a financial institution. Instead they rely onbanks, check cashers, pawn shops, money transfer agents, or localmerchants to cash their payroll or benefit checks, frequently athigh cost -- and even after they cash their checks, they have noconvenient way to pay their bills or to accumulate savings. Thechallenge is to provide low cost accounts for these individuals.

In the past, policy makers and social activists have thoughtabout "lifeline banking" in the context of apaper-based system. The objective has been to provide a low-costmeans of cashing checks and maintaining checking accounts.Financial institutions, who understand only too well the costs ofprocessing paper payments, have understandably resisted the ideathat they should provide subsidized banking services. It is timeto radically change our thinking about these questions. If weproperly design electronic products -- if we can capturefor the benefit of the presently unbanked the advantages ofelectronic 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 theunbanked is a daunting one, to which the private sector has notdevoted sufficient attention and resources. Mainline financialinstitutions have been too willing to abandon unbanked paymentsrecipients to fringe providers, and have not focussed on means tocapitalize on new technologies to serve an under served segmentof the American public.

Just who are the "unbanked"? As one might expect,the unbanked tend to be younger and to have lower incomes thanrecipients with bank accounts, and they are more frequentlymembers of a racial or ethnic minority. While only about 8percent of VA beneficiaries and 15 percent of Social Securityretirement and survivor benefits do not have bank accounts, morethan half of all SSI recipients are unbanked. Surveys show thatwhile there are a variety of reasons that payments recipients donot have bank accounts, the predominant reason is that they donot have sufficient income to be able to afford the costs ofconventional accounts. Over 80 percent of unbanked recipientsknow that their payments can be directly deposited into a bankaccount, but those features of Direct Deposit that we all know tooffer great benefits have not been sufficient in themselves toinduce the unbanked to open accounts for this purpose. It is atroubling paradox that many of these individuals are neverthelesswilling to pay high fees to non-bank providers of paymentsservices in order to cash their checks and make the few basicthird-party payments they must make each month.

EFT '99 offers an unprecedented opportunity to address theneeds of the unbanked. But there are two essential tasks thatmust be confronted: First, the industry must develop innovativeand attractive electronic accounts that will meet the basic needsof unbanked payments recipients. This is the task that confrontsus as we prepare to design the Electronic Transfer Account.Second, the industry must make a strong effort to educate theunbanked population about the benefits of such an account. Thefears 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 socialobligation that government is trying to impose on a bankingsystem already burdened with regulatory requirements. It shouldbe approached as a matter of enlightened self interest. There aremore than 10 million American citizens who are regular recipientsof governmental payments who have a need for basic bankingservices -- principally a safe and convenient means of holdingand accessing their funds. Many are already paying high pricesfor payments services. If the banking system can meet this needin a cost effective way -- and EFT holds out the prospect ofmaking that a reality -- millions of new customers can be broughtinto the system, and these customers, once accustomed to dealingwith banks in a user-friendly environment, can ultimately becomea market for a variety of other products and services that areoffered by mainstream institutions.

The Challenge of Public Education and Marketing

Treasury is developing a nationwide education and marketingprogram to promote the benefits of EFT '99. We will be stronglyencouraging check recipients to convert voluntarily to EFT,stressing all of the benefits of Direct Deposit. Plans for thiscampaign were developed by a joint industry-government marketingcommittee. The campaign will continue throughout 1998, and willinvolve print, TV, and radio public service advertising. We willalso be developing promotional materials for use by financialinstitutions, consumer organizations, and other groups.

But the education and marketing challenge for the industryshould be even broader than this. EFT '99 is really just a subsetof the larger issue of electronic payments generally, which isitself subsumed in the far broader topic of electronic commerce.It is not enough, in this exciting environment, to leave it toindividual competitors to promote their own proprietary products.We must all be working to develop even greater public comfortwith and acceptance of new applications of a rapidly developingtechnology. As new generations of computer literate youngstersgraduate into the everyday world, debit cards, computerized homebanking and electronic presentment should be as natural to themas paper checks were to us. And while time will ultimately bringabout enormous changes, we must not ignore those millions ofAmericans who did not grow up with computers, who may never haveused an ATM, and who are intimidated by the prospect of having toadjust to new ways of handling their affairs.

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

I therefore urge the private sector to involve itselfaggressively in the task of educating the public about thebenefits of EFT. Implementation of EFT '99 is a monumental taskthat needs to involve all stakeholders in the process; thegovernment cannot do this job alone. I encourage all of you totake up this challenge, and I particularly urge BAI, which hasserved the banking industry so well, to take on this challenge. Iam sure that the leadership of BAI shares with me the convictionthat if we pursue these objectives together the public willrealize the enormous benefits that will result from ourinitiative.

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