FROM THE OFFICE OF PUBLIC AFFAIRS

Good evening and thank you for inviting me to speak here tonight. I'm pleased to have the opportunity to talk about how technology is rapidly changing the world of finance.

There may be no part of our economy that is more suited to delivery in electronic form than financial services. The Internet is rapidly changing the way Americans borrow money, the way they get insurance, the way they save their money and the way they invest it. The Internet can bring information on financial products to consumers in the comfort of their home or, increasingly, any place they may be at any time. Financial firms will be competing in ways they never have before. The potential for greater access, efficiency, competition, and innovation are tremendous.

Technology is creating tremendous opportunities for expanded access to financial services. The Internet creates a 24-hour marketplace for financial services. While just under 30 percent of all households in the U.S. had Internet access in 1999, this figure will most certainly grow significantly.

The most important financial decisions that Americans make - decisions about mortgages, life insurance, auto and home owners insurance, auto loans, investing their savings - can all be aided by the Internet. We have come from a world where consumers were much more reliant on their local bankers, insurance agents, and brokers. We are moving into a world where information can be obtained from a broad variety of sources through the Internet, presented in a way that helps consumers find the product that best serves them. American consumers and the economy at large stand to benefit greatly from the enhanced services and competition fostered by the Internet.

Consumers now are rapidly moving from using the Internet as an information-gathering tool to conducting transactions on line. Today, more than seven million Americans have on-line accounts to invest in the stock markets. Most other areas of Internet finance remain relatively small, however, and still have a great deal of growth opportunity.

Tremendous savings can be achieved in moving from paper to electronic information, enabling financial services to be provided at lower costs to consumers and business. Savings can be achieved both by improving productivity gains and by reducing the need for investments in physical assets. One consulting firm estimates that some transactions that cost $5.30 to do at a teller's window would cost as little as $0.09 on line.

Efficiency gains will also come on the institutional side, in business-to-business transactions. Institutional customers can gain greater access to dealer books electronically and equity and other underwriting may move on-line. New electronic communications networks (ECNs) also represent important opportunities for greater efficiency and competition in the trading markets.

While these developments represent enormous opportunities for financial service providers, they also bring very real challenges. New business models certainly will emerge. Operating margins may shrink just as the need to invest to stay competitive grows. Many of today's financial institutions may be encumbered by legacy systems, sales forces, and physical assets. In this environment, financial institutions will have to look very carefully at where they add value. Many institutions will adapt well. Others may struggle and no doubt some will not survive in their current form.

Financial institution regulators will have the challenge of keeping up with the changing business environment and of gauging how well institutions are coping. Regulators will have to recognize institutions that are not making the adjustment or are taking on excessive risk, possibly to compensate for shrinking profitability elsewhere.

While Internet access is greatly expanding, it is important that a gap not develop between those who have access to computers and those who don't. This "digital divide" threatens to become a factor in access to financial services. In the 21^st Century, computer access is fast becoming what access to running water and electricity was in the early 20^th Century -- basic utilities that we need to ensure everyone has to participate fully in the modern economy.

At Treasury, we have had significant success using new technologies. In some areas, we are ahead of the private sector.

Treasury runs one of the largest payment collection systems in the world, with more than $1.3 trillion or two out of every three dollars, of U.S. government revenue now collected electronically. Individuals can pay their taxes on line. More than three-quarters of all government benefit payments are now made electronically. So are almost sixty percent of payments to vendors.

We also are the world's largest issuer of smart cards. This year we will issue close to a quarter of a million smart cards at U.S. military installations throughout the world. We also are developing or testing a variety of new programs, including digital cash, secure Internet e-mail for the delivery of digital checks to vendors, and ACH debit authorizations over the Internet.

Sales of Treasury debt, both retail and institutional, also take advantage of new technologies. Auctions of Treasury securities are now entirely electronic, as the last paper bidders were recently moved to an Internet-based system. Consumers holding Treasury securities through the Treasury Direct program can make purchases or reinvest on line or through an automated phone system. Even Savings Bonds can now be purchased over the Internet.

I would like to turn now to four issues that are particularly relevant for the financial services industry: privacy, electronic signatures, payments systems, and trading market structures.

If electronic commerce is to live up to its full potential, consumers must have confidence in their ability to maintain their privacy, as well as other critical consumer protections. The ability to protect one's privacy is a core value that all Americans share.

The Administration has stressed the importance of industry leadership to create effective privacy protections through self-regulation. But there are several areas of such sensitivity that the government does have a role to play, and that is concerning medical information, children, and financial privacy.

Americans should not have to forgo participating in our modern economy to preserve their privacy. The challenge is to preserve the benefits of competition and innovation that information sharing and technology have brought while protecting the ability of consumers to preserve their privacy.

Last year, the President called for greater consumer privacy protections, including for the first time protections for personal financial information. We made significant progress toward greater financial privacy as part of the financial modernization bill. We believe that the requirements for clearly stated privacy policies, for consumer notices and for the right to opt out of third-party information sharing are important advances in privacy protections.

But more can be done to protect personal financial privacy. Consumer choice for sharing with third parties should be a floor, not a ceiling. The President has called on Treasury, in consultation with others in the Administration, to develop legislation to enhance consumer privacy, particularly within financial conglomerates. We are consulting with industry, consumer groups, and Congress to fulfill the President's mandate. Our objective is a balanced proposal that will both enhance privacy protection and allow financial institutions to provide quality services. We hope to finalize these proposals in the near term.

In a recent address, the President put two simple questions to business leaders:

• Do you have privacy policies you can be proud of?
• Do you have privacy policies that you would be glad to have reported in the media?

I believe that the question of consumer control over personal information will become even more pressing as technological innovation continues.

The Administration supports electronic commerce and has been working to promote its development wherever possible. The government has an important role to play in facilitating this progress. We need to make sure that our laws keep up with rapidly changing technologies and markets. The application of laws written before the Internet was even an idea can create uncertainty that is not in the interest of either business or consumers.

That is why the Administration is working with Congress on a critical step toward facilitating e-commerce through digital signature legislation. Two electronic signature bills, S.761 and H.R.1714, passed their respective Houses last year, and are on their way to conference. These bills would allow any contract that can be entered into in writing to be entered into electronically. We support this move to validate the use of electronic signatures and documents in place of paper.

The House version goes further, however, allowing electronic delivery of a broad range of records, disclosures, and notices that are now provided in writing. While this could be a very important step forward, we should not take this step unless we can continue to provide the consumer protections that Congress and the States have previously enacted.

A good digital signature bill will ensure that consumer protections in the electronic world are equivalent to those in the paper world. A bill that promotes both electronic commerce and consumer protection is in everyone's interest. But a bill that fails to preserve existing consumer protections will be counterproductive, creating legal uncertainty for businesses and driving consumers away from transacting on-line.

We believe that with some common-sense changes, we can achieve a good electronic signatures bill. We are looking forward to working with Congress, industry, and consumer groups to produce a win-win bill that will lower a barrier to electronic commerce.

One of the greatest opportunities of the Internet could be the payments area. Technology could ultimately provide us with the means to permit safe, secure on-line movement of money. Transferring money over the Internet could be paperless and therefore efficient. It could be authenticated and therefore free of fraud. It could allow for real-time transfer of funds and therefore eliminate credit risk. The challenge is how we get there. Many have tried, but their efforts have yet to gain acceptance.

Virtually all on-line payments today are conducted using credit cards. But credit cards have drawbacks that limit their use for broad Internet e-commerce. In many ways, credit cards are still creatures of the paper-intensive retail store environment for which they were created. The transaction cost is a 2-6% discount charged to the seller, making it an expensive payment mechanism. Credit cards can be used for consumer retail transactions and small corporate purchases, but not for most business-to-business payments or for person-to-person payments. Additionally, credit card fraud is much higher on the Internet than off-line. For a variety of reasons, many consumers continue to be reluctant to use their cards on-line.

The growth of electronic bill presentment and payment has been slow, as well. Estimates indicate that close to eight percent of all households used some form of on-line banking service last year, but less than 1% of consumer bills currently are viewed and paid on-line. Although several high profile efforts to develop consumer electronic bill payment systems have been launched, the market has not yet found a viable model. As an aside, I would note that, when electronic bill payment does grow significantly, as I believe it will, it will create many challenges for the U.S. Postal Service. Bills and bill payments represent the bulk of first class mail, one of the Postal Service's most important revenue streams.

The lack of a viable Internet-based payment tool for business-to-business commerce is perhaps even a more important issue today. In the business-to-business world, the number of paper invoices and the paper checks continues to grow at a steady pace in spite of the growth of electronic commerce. Part of the reason for this may be that no payment mechanism has yet been developed for the Internet that is both safe and secure and that can carry related transaction information along with the payment.

I believe the private sector will be able to find solutions to moving payments securely and efficiently on-line. When this occurs, it will make a significant contribution to the growth of e-commerce and the economy as a whole.

New technologies also are rapidly changing the way market professionals and investors trade in the markets for securities and derivatives. These developments are leading to changes in the structure of the markets themselves.

There already have been dramatic changes in the trading of equity securities. The proliferation of electronic communication networks (ECNs) and proprietary trading systems has expanded the ways that investors access the markets. ECNs now account for 30 percent of Nasdaq's trades. We supported the removal of Rule 390 by the New York Stock Exchange to promote similar market competition for listed securities. Increased market competition, however, may over time change the way investors participate in markets. The challenge will be to promote market competition and innovation, while at the same time ensuring vigorous quote competition among market participants.

New technologies also will allow for significant changes in the way derivatives can be traded. With important changes in existing law, the development of electronic trading networks could facilitate interdealer trading in the over-the-counter (OTC) derivatives markets. That is why, last fall, the President's Working Group on the Financial Markets called on Congress to remove current legal impediments to the development of electronic trading systems and clearing systems for OTC derivatives. These systems have the potential to enhance market transparency and efficiency and to reduce counterparty risks for participants. We are working with Congress to include these provisions in legislative proposals to reauthorize the Commodity Futures Trading Commission (CFTC) this year.

New technologies have the potential to dramatically change the world of finance though greater access, more efficiency, and increased competition and innovation. As we make the transition to e-commerce, however, we must find ways to promote access, privacy, and consumer protection.

Technology will lead to significant changes in the financial industry over the next ten years. Today, the U.S. financial industry is the strongest in the world. I am confident that it will find ways to innovate and adapt in this new world.