Countdown To A Check-free Government

Savings To Taxpayers Deciding Factor
by Peggy Roush and Ian W. Macoy

On July 26 last year the first phase of the Debt Collection Improvement Act took effect.

One of the most important parts of the Act requires that as of January 1, 1999, all payments made by the Federal government (except tax payments) must be paid by means of electronic funds transfer (EFT).

This includes all individuals and companies who receive Federal payments-including recipients of Social Security, those who are in need-based programs (e.g., welfare), and vendors of products and services to Federal agencies.

Why the change?

Mostly for savings, of course.

There are now more than 400,000,000 (400 million!) paper checks issued by the government each year. By converting the payments to EFT, the government estimates saving 41? per payment-which means the overall savings from the Debt Collection Improvement Act is estimated to be more than $500 million over the next five years. This Act was a natural to be included in the budget agreement finally settled on by Congress and President Clinton in 1996.

The Treasury Department is charged with facilitating access to EFT by individuals and businesses included in the mandate. Since very few exceptions are likely to be allowed, Treasury is pursuing a three-pronged approach to ensure that access to Federal EFT payments is virtually universal: (1) Direct Deposit through the Automated Clearing House (ACH) Network and other EFT payment mechanisms using traditional bank accounts, (2) "DirectDeposit Too" into accounts established by financial institutions with electronic-only access (designed to appeal to individuals and companies that are currently "unbanked"), and (3) electronic benefit transfer (EBT).

As with many government rules and regulations, this Act presents us with both challenges and opportunities. For full implementation by January 1, 1999, the Federal government must coordinate closely with the private sector. This includes adopting EFT payment policies that recognize existing technology and banking industry practices, and depend on established payment and information processing systems.

Fortunately, an infrastructure already exists for processing government EFT payments, whether they are debit or credit entries processed through the ACH, or credit,debit, or stored-value card payments processed through ATM/POS networks.

For individuals holding banking accounts, we need only relate the benefits of Direct Deposit- convenience, deposit reliability, reduced theft.

The challenge lies in accommodating those individuals without bank accounts-the "unbanked." Experts say that 10 million adults in the U.S. do not hold bank accounts. Reasons range from lack of access to a financial institution to a distrust of all institutions. To reach these people, the Federal government does not wish to depend on EBT programs, where recipients would access their payments with an ATM/POS card. The government hopes to reach the major portion of the unbanked through the "Direct Deposit Too" concept.

The Federal government is encouraging financial institutions to offer to the unbanked "Direct Deposit Too" accounts into which Federal payments would be made directly. Access to the funds could be limited to card or other electronic access in order to keep the cost of servicing the account as low as possible for the financial institution. Financial institution participation would be optional, with the possibility of Community Reinvestment Act credit for offering the accounts.

The Federal government appears to be willing to allow financial institutions maximum flexibility in structuring and pricing "Direct Deposit Too" accounts. Participation could be great if the structuring of the accounts remains flexible.

Another significant challenge is converting current vendor check payments to existing EFT networks. The primary challenge, of course, is the Federal government's. It must ensure access to low cost, reliable means that link EFT payments with their remittance information in an acceptable format. Again, the ACH Network will play a critical role here. The banking industry has recently taken a number of steps to facilitate linking payment related information with EFT transactions through bank-owned networks such as Rapid*EDI and EDIBANX.

With the EFT mandate, the Federal government has clearly voiced its view that the paper check is largely obsolete as a viable payment mechanism. On the other hand, the government, banking industry, companies, and ordinary citizens all face challenges ahead before the full benefits of an all-EFT environment can be realized by everyone. While none of these challenges appear to be deal-breakers, they do, nonetheless, warrant the full attention and commitment to resolution by all involved.

What the Federal government does often sets the trend for the states and private industry. Does this mean we will see states requiring EFT in their payment relationships to save taxpayers' money? Does it mean private companies will be able to require payment to and from vendors and employees by EFT?

Yes. It's happening now.

Peggy Roush is an Executive Vice President at Norwest Bank, Minnesota and chairs the marketing Committee of the National Automated Clearing House Association (NACHA).

Ian W. Macoy is Senior Director of Government Relations at NACHA.

Together with several other national banking trade associations, NACHA will be hosting Countdown to '99; Mandated Electronic Delivery of Government Payments in Arlington, Virginia September 18-19. For information call (703) 742-9190.

Copyright © 1997 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 7, No. 5, 4/97