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March 4, 1998 RR-2272
UNDER SECRETARY HAWKE BEFORE THE HOUSE BANKING AND FINANCIAL SERVICES SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT
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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