FROM THE OFFICE OF PUBLIC AFFAIRS

Chairwoman Roukema and Members of the Subcommittee, thank you for the opportunity to appear before you today to discuss the Treasury Department's progress in implementing EFT '99, the law that requires the Federal government to make its payments by electronic funds transfer (EFT) after January 1, 1999. This Congressional mandate, which excludes only tax refunds, will have far reaching implications for the millions of Americans who receive government payments. I commend the Subcommittee for the interest it has shown in carrying out this legislation in a manner that truly benefits all Federal payment recipients.

The Department's approach to implementing EFT '99 has been characterized by outreach to all affected parties. We have met with interested organizations throughout the country; we held public hearings in four cities, all of which were very well attended by a diverse audience; and over the course of a 90-day comment period on our proposed implementing regulation, which was published September 16, 1997, we received and have analyzed over 200 comment letters. We are keenly aware that the many stakeholders in this process have important views to share, and we have made every effort to hear those views. I will discuss more about our outreach and public education efforts later in my remarks.

Today I will address some of the major elements of our work on EFT '99, and in the course of my testimony I will respond to the questions that have been raised by the Subcommittee.

Implementation Status

As you know, EFT '99 has four key elements:

• After July 26, 1996, all Federal payments (except tax refunds) to newly eligible recipients who have bank accounts must be made by EFT.
• After January 1, 1999, all Federal payments, again with the exception of tax refunds, must be made by EFT.
• The Secretary of the Treasury is directed to assure 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 from the requirement of mandatory EFT where the conversion from paper checks would impose hardships, or where waivers are otherwise necessary.

  As I stated before the full Committee last September, four principles serve as our guideposts as we move through the implementation process:

• The transition from a paper-based system to an electronic transfer system should be accomplished with the interests of recipients ranking of paramount importance.
• Private sector competition for the business of handling Federal payments should be maximized, in order to ensure that recipients not only have a broad range of payment services and service providers from which to choose, but also that they receive their payments at a reasonable cost, with substantial consumer protections, and with the greatest possible convenience, efficiency, and security.
• All recipients, and especially those having special needs -- the elderly, individuals with physical, mental, educational or language barriers, those living in remote or rural communities -- should not be disadvantaged or caused hardship 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 Federal payment recipients who currently do not have bank accounts.

  The goal of the Department of the Treasury is to issue payments by a method that will provide the best service to recipients at the lowest possible cost to taxpayers, while maintaining the greatest degree of transaction security. Treasury has been issuing electronic payments for more than two decades, and we believe there are compelling advantages to this means of payment delivery. Not only does EFT provide significant cost savings for the government -- paper payments cost us 43 cents apiece, while electronic payments cost only 2 cents -- but EFT is substantially more secure and, for most recipients more convenient, than paper checks. In FY 1997, Treasury's Financial Management Service issued more than 850 million payments on behalf of non-defense agencies, including benefit, salary and vendor payments as well as tax refunds, grants and loans. Today, over two-thirds of nontax payments are made electronically.

  The evidence is strong, moreover, that electronic direct deposit has a wide degree of acceptance among payments recipients. Of payments disbursed by Treasury, 95% of Federal salary and allotment payments, about 80% of OPM retirement payments, 70% of Social Security's OASI payments, and over 65% of Veterans' Administration and Railroad Retirement Board payments are already being made by EFT. Moreover, 85% percent of all new Social Security recipients are signing up for EFT. We are seeing the same progress with respect to other types of government payments. For example, the number of vendor payments made electronically since FY 1996 has grown by 120 percent. These numbers give us great confidence for the future, because they strongly suggest that there is an increasing level of comfort with and acceptance of EFT among Americans, and they strongly indicate that time will take us closer and closer to the goal of an electronic payments environment.

  Status of EFT '99 Efforts

  Since the passage of EFT '99 in April 1996, Treasury has made significant progress in its implementation efforts. We published an interim rule that was effective July 26, 1996, and we are currently drafting the final implementing rule, which will be published this spring.

  The major issues that have emerged in our rulemaking concern the scope of the waiver provisions, and the structure and availability of the Electronic Transfer Account (ETA), which is the means by which we propose to fulfill our mandate to assure the availability of a reasonable cost account. We are giving serious consideration to all of the comments we received, and I am providing the Subcommittee today with a detailed summary of the comment letters.

  Waiver Provisions

  In our proposed rule, we indicated that waivers from the requirement of mandatory EFT would be available, among other reasons, for individuals who certify that EFT would impose a hardship because of a physical disability or geographic barrier, or, in the case of an individual who does not have a bank account, that EFT would impose a financial hardship. We also proposed to draw a distinction between recipients coming on stream after July 1996 (the date of our interim regulation implementing the requirement that all new recipients with bank accounts receive payments by EFT) and those who were receiving Federal payments before that date.

  Many of those providing comments urged us to extend waivers as well to individuals with mental disabilities and literacy or language barriers, and questions were raised as to the appropriateness of a distinction between existing and new recipients with respect to the availability of waivers. We are giving the most careful consideration to all of these comments, and I think it is very likely that we will not only expand the scope of waivers, but will work to simplify the procedures for invoking waivers.

  Let me elaborate on our thinking in this regard, because we believe it is critically important that the Congress understand and share our approach. There is an obvious tension between realizing the long-range objectives of EFT '99 -- maximizing both the cost savings to the government and the benefits of increased security and convenience for recipients from the move to electronic payments -- while avoiding disruption, hardship, inconvenience and apprehension on the part of payment recipients. We are very purposefully attempting to resolve this tension by giving primacy to the interests of recipients, while laying the groundwork for full implementation of EFT over the long term. We have a strong conviction that even with a liberal waiver policy the transition to EFT will come about quite effectively in the fullness of time, as more and more citizens become familiar and comfortable with new electronic payments technology and recognize the benefits of EFT.

  Electronic Transfer Accounts

  At present electronic payments may only be deposited into accounts at financial institutions. The most complex issue confronting us in implementing EFT '99 is how to meet the needs of the approximately 10 million Federal payment recipients who do not have accounts at financial institutions. While there are many reasons why these individuals do not have bank accounts, the overwhelming reason is that the overall cost of a conventional bank checking account is disproportionate to their financial resources. The rapidly developing environment of electronic banking, with its sharply reduced costs for all participants in the payments system, presents the prospect of offering unbanked recipients a means of enjoying basic banking service at a very low cost. Our objective is to realize this prospect.

  While we are still in the process of formulating the ETA, there are several considerations that are currently guiding our thinking about how we fulfill our mandate to assure the availability of a reasonably priced account for Federal payments recipients:

• We intend to create an Electronic Transfer Account that will be offered by federally-insured financial institutions selected, initially at least, through a process of competitive bidding in defined regions of the country. We will prescribe a uniform design for the account. We are presently exploring a process by which smaller institutions, such as community banks and credit unions, which may not have the capacity to offer the ETA throughout one of the defined regions, could elect to become providers of ETAs within the communities they serve under substantially the same terms as those fixed in the competitive bidding process. No institution will be required to offer ETAs, however.
• 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. Today 30 states have operating EBT systems -- 16 statewide.
• The ETA will be designed principally to provide a low-cost means of receiving and accessing Federal payments. The account will be offered to recipients at a basic monthly service charge that will be determined in the competitive bidding. Recipients who may find even this charge to be a hardship will be entitled to a waiver that will allow them to continue to receive checks.
• While the ETA is being designed principally for recipients who do not have their own bank accounts, we are exploring ways to avoid disadvantaging those Federal payment recipients who were previously unbanked and who may have signed up for accounts being offered in anticipation of EFT '99 taking effect even before the ETA became available. In this connection we are keenly sensitive to the need to strike a proper balance between offering a useful account to those who need it, and avoiding the creation of disincentives to the private sector to provide competitive and innovative alternative electronic banking products. We believe it is of great importance that financial institutions develop their own approaches to serving the needs of payments recipients in an electronic environment.

  A major question for us is what features we should design into the ETA beyond the basic ability to receive and access Federal payments. Our primary objective, of course, is to keep the cost of the account as low as possible, while making it attractive to unbanked payment recipients. In this regard, we recognize that if we were to add additional features the basic cost of the account could be increased for all recipients, including those who have no need for or interest in the additional features. This could raise issues of cross-subsidization among ETA holders, which would be of great concern to us. It may be, however, that there are some features that can be added at only modest incremental cost -- perhaps on a pay-per-use basis -- that would help to encourage unbanked recipients in the financial services mainstream, and we are giving careful thought to these. Our current thinking is that at least the following features would be included within the basic monthly charge for the ETA:

• unlimited receipt of Federal electronic payments;
• debit card access, with some specified number of free ATM withdrawals and unlimited point-of-sale purchases, including cash-back;
• no minimum balance requirement;
• on-line balance inquiry;
• one free replacement card per year; and
• toll-free access to customer service, 24 hours a day, seven days a week.

  We plan to develop a proposed ETA structure in March and then publish it for public comment for 30 days. After evaluating the comments, we will determine the final design of the account and then initiate the process of competitive bidding.

  Implementation Time Frame

  The Subcommittee has asked that we address the question whether we will be able to meet the January 1, 1999 deadline for full implementation of EFT '99, and if not whether we will be requesting legislation to delay the effective date.

  Let me assure the Subcommittee that we have been working hard to realize the objective of a January 1, 1999 effective date, and we presently see no reason to legislate a change in that date. For many millions of payments recipients who have bank accounts, the transition to EFT should not present problems, and for those banked recipients who may face some hardship in the transition our regulation setting forth the availability of waivers will be in place well in advance of the effective date. To delay the effective date generally would, we believe, needlessly delay realization of much of the benefit of EFT '99.

  As we signaled in our Notice of Proposed Rulemaking, however, there is a substantial likelihood that the ETA will not be available by January 1, 1999, and thus unbanked recipients may not by that date have available a facility for receiving electronic payments. It was for this reason that we originally proposed to grant a waiver until the earlier of January 1, 2000, or when the ETA becomes available, to those recipients who certified that they did not have a bank account. In our subsequent deliberations, however, particularly with our colleagues at the Social Security Administration, we have become concerned about the logistical burdens that could result from a requirement for such written certifications from recipients who want to invoke any of the various waivers available.

  As the result of our continuing discussions with SSA, we believe we have jointly developed possible approaches to these problems. For example, we could consider granting an automatic waiver, requiring no written certification, for those who want to wait for the ETA, until the earlier of January 1, 2000 or the time the ETA is available nationwide. In addition, we could provide the agencies flexibility with respect to the process for the invocation of waivers, in order to avoid the need to deal with an avalanche of paper -- for example, by establishing a presumption that waivers have been invoked by recipients from whom no response is received after the agency has informed them of the options available to them under the regulation.

  Public Education

  We firmly believe that for EFT '99 to succeed, a significant public education effort is essential. Payments recipients not only must be informed of the requirements of the new law, but they must be fully and fairly informed of their options. Above all, they must be educated on the benefits of EFT in general, the attributes of the ETA, and the process for bringing about the conversion. We need to get across emphatically the message that no one's payments will be interrupted or withheld because of the transition, and we must give those recipients who have apprehensions about the program the comfort of knowing that waivers will be liberally available. In short, we recognize that effective communication is a key to success for any new program, and we are putting a great deal of time, energy and financial resources into conveying the appropriate messages to recipients.

  Treasury has conducted extensive market research to learn more about the characteristics of the recipient population, and we will be using that information to craft an effective, nationwide public education campaign. Our most recent market research, which took the form of focus groups around the country, tested various EFT '99 messages that may be used in the public education campaign. The purpose was to ensure the appropriateness of language, cultural sensitivities, ease of understanding, and overall appeal of the messages we hope to use in the campaign. We recognize that it is crucial to the success of EFT '99 that we make available to stakeholder groups and the public clear and easily intelligible information about the requirements of the legislation.

  Components of the campaign include messages to current check recipients about the requirement to convert to EFT payments, the safety and convenience of EFT, and the procedure for signing up for EFT. Another key aspect is educating those check recipients without accounts at financial institutions how to obtain and maintain a bank account. We want to assure that all payment recipients, particularly those without bank accounts, know that they do not have to give up checks until the ETA is available to them, and we want them to understand the scope of the waivers that will be available. We do not want recipients to be stampeded into choices that are not right for them, and this message will be key to the campaign and to any literature that we distribute.

  Treasury has undertaken extensive outreach efforts in furtherance of this campaign, including meetings with consumer and community-based organizations, government vendors, financial trade associations, and both bank and non-bank providers of payments services. We have placed a heavy emphasis on working through and with consumer and community groups in our public education efforts, as these groups represent and interact directly with payment recipients on an ongoing basis. Our outreach effort through these organizations, which has become a key component of our campaign, began in earnest with a meeting last November here in Washington that included interactive workshops and other discussions to help Treasury better understand recipients' diverse needs. A second forum, which was also widely attended, was held in Los Angeles in December to hear community organizations' perspectives on the needs of those in their communities.

  A grassroots public outreach effort will involve identifying hundreds of local community organizations that will assist our efforts in reaching current check recipients. I believe this effort is critical to the success of converting current check recipients, both banked and unbanked, to electronic payments. For instance, an ad hoc Financial Services Education Coalition has convened in response to the need for EFT '99 materials. Also, a new pamphlet, entitled "What You Need to Know About Your Federal Government Payment," has been printed and is being distributed to recipients to clarify any confusion that may be created by EFT '99. As of the last week of February, 455,000 copies of the English version and 8,500 copies of the Spanish version of this brochure have been requested by financial institutions, community-based organizations, and consumer organizations for their constituents. Over one million copies have been printed and are ready to be distributed free of charge to those who are interested.

  Treasury continues to meet with Federal agencies to develop EFT implementation plans. These meetings enable us to educate agencies on the provisions of the Act and also provide a forum for agencies to inform us of any potential problems with EFT implementation. We have obtained additional agency feedback from interagency policy workgroups that were formed to address major EFT conversion issues such as international payments, disaster payments, and vendor payments.

  In summary, the objectives of this campaign will be to work closely with the grassroots community, the private sector and other Federal agencies, to educate consumers so that they can make good choices, and to minimize disruption to recipients while adding value to the way they conduct their finances. Seamless coordination is a necessity if the public education campaign is going to succeed. Each entity must work in collaboration with the other, providing reinforcement, assistance and a shared set of objectives. Under the leadership of the Treasury Department, we are confident that this will happen.

  Conclusion

  The Treasury Department believes that EFT '99 provides an important opportunity for us to provide the high quality of service that our customers deserve, and at the same time to lower the cost of government to taxpayers.

  Thank you, once again, for the opportunity to report on the progress of EFT '99 as well as the challenges that lie ahead. I will be glad to answer any questions the Subcommittee may have.
  

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