Mr. Chairman and Members of the Committee, I thank you for the opportunity to appear before you today to discuss implementation of the law that requires the federal government to make its payments electronically by January 1, 1999. This new law, which excludes only tax refunds, is of great importance to millions of Americans. I commend the Committee for the concern it has shown that this law be carried out in a manner that truly benefits all federal payment recipients. We share that concern, and we will keep it foremost in our thinking as we move forward in our rulemaking process.
This electronic funds transfer (EFT) initiative--what we refer to as "EFT-99"-- was enacted by
the 104th Congress as part of the Debt Collection Improvement Act of 1996.
It includes four distinct elements:
Treasury was given these responsibilities because of its role as the government's bill payer. Last year, Treasury's Financial Management Service (FMS) issued over 850 million payments on behalf of non-defense agencies, including various kinds of benefits, federal salaries, tax refunds, vendor payments, grants and loans. Currently, 57% of our disbursements, or roughly 480 million payments a year, are made by EFT, most through the Direct Deposit program, which uses the commercial automated clearinghouses to transfer funds directly into a recipient's account. Sixty percent of all benefit payments are made electronically.
The goal of the Department of Treasury is to issue payments by a method that will provide the best service to recipients, the lowest possible cost to taxpayers, and the greatest amount of transaction security. Treasury has been issuing Direct Deposit payments for over two decades, and our experience is that EFT is substantially more convenient, cost-effective, and secure than paper checks.
Electronic funds transfer improves service to recipients because it is the most reliable method for the delivery of payments. Recipients are 20 times more likely to have a problem with a paper check than with an EFT transaction. Each year Treasury replaces over 800,000 checks that are lost, stolen, delayed or damaged during delivery. Waiting days for a replacement check is an inconvenience and burden on recipients, especially those living on low incomes. On the other hand, misrouted EFT payments are never "lost," and are typically routed to the correct bank account within 24 hours. The new law, could eliminate over 1 million complaints annually associated with check payments.
EFT '99 will save taxpayers money. While our disbursement centers are extremely efficient, the cost of issuing checks is approximately 43 cents apiece, including postage, paper and labor. By contrast, Treasury issues EFT payments at an average cost of just 2 cents. We estimate that full implimentation of EFT '99 will save taxpayers approximately $500 million over 5 years in postage and check production costs alone. A substantial amount of these savings will accrue to the Social Security Trust Funds. Beyond these direct savings, there are also savings realized by relieving the payments system from the burden of paper processing -- savings that will ultimately be realized by consumers.
EFT '99 increases transaction security and significantly reduces opportunities for crime. On average. 75.000 Treasury checks per year are forged and fraudulently negotiated. These Crimes are traumatic for the victims. and they cost the financial industry as much as $70 million annually. In comparison, EFT payments are extremely secure.
Mr. Chairman. I'd now like to share with you some information about who our federal payment recipients are and what these recipients have told us about their preference for electronic payments. 1% will also describe our efforts to provide low cost service to those recipients without bank accounts.
Most federal benefit payees -- 88%-- are recipients of Social Security Administration (SSA) benefit payments. Others receive payments from programs administered by the Department of Veterans Affairs and the Railroad Retirement Board. SSA estimates that 91% of all Social Security recipients currently have a relationship with a financial institution, and therefore could presumably receive payments by direct electronic transfer without undue hardship. Over 64% of all SSA benefit recipients already receive their payments by Direct Deposit.
Recipients who receive their benefits electronically praise its safety and convenience. Among the reasons they have given for choosing Direct Deposit are these:
SSA has seen the rate of increase in Direct Deposit enrollment nearly triple the normal growth rate since the legislation went into effect on July 26, 1996. Clearly, more and more people are seeing the benefits of receiving payments electronically.
It is estimated that eighteen percent of all federal benefit payment recipients -approximately 10 million individuals -- do not have accounts with a financial institution. Fulfilling our mandate to assure these families access to an account at a financial institution, at reasonable cost, in order to receive electronic payments is perhaps the single most significant challenge Treasury facing in the implementation of EFT '99. The law provides adequate time to address these issues carefully and ensures a smooth, well-planned transition for recipients and for payment-paving agencies.
Treasury has already undertaken initiatives aimed at providing low cost alternatives to checks, including the development of a program called Direct Deposit Too. Direct Deposit Too is a model account, based on debit card access with no minimum balance requirement, that has been suggested to banks as a low cost alternative to traditional checking products. Treasury is considering other alternatives that are being reviewed with the benefit of substantial consumer outreach, consultation with the financial services industry, and research. Our objective is to balance the need for low cost banking services with the requirement for convenient access to funds by those without bank accounts.
One of Secretary Rubin's top domestic policy goals is to encourage those without bank accounts to move into the financial services mainstream. Financial service providers offer many services that are critically important, if not essential. to virtually all American families. These may include access to federally insured deposits, the opportunity to earn interest on deposits, the availability of personal credit, and access to home mortgages. Some 40 million American households with incomes under S25.000 need these services. The programs described earlier are an attempt to assist those without bank accounts to transition into the traditional financial services world without sacrificing convenience or low cost.
In implementing the provisions of the statute, we believe the following principles should be observed:
These principles have and continue to serve as our guideposts as we move through the implementation process.
In our view, effective implementation of EFT '99 will depend on Treasury developing strong - working relationships with and understanding of the concerns of the various program agencies, consumer groups, the financial Industry and other interested parties.
Treasury has been working with the agencies to identify and resolve the major issues confronting key stakeholders. Initial implementation focused on agency education and awareness, as well as development of agency implementation plans.
In addition, Treasury has held numerous meetings with representatives from consumer interest groups, financial service providers, and federal agencies to gather comments and discuss issues related to mandatory EFT implementation. Our outreach efforts to consumer oriented organizations began in earnest with a meeting that I convened this past November. Since July 1996, Treasury- representatives have met individually with eight different consumer groups. Treasury also held an EFT '99 consumer briefing, and question and answer session, at which over 30 consumer groups were represented. Also. Treasury representatives met with 15 different financial service providers including financial institutions as well as non-bank entities. Since passage of the Act, Treasury has contracted for two major research studies related to the electronic payment mandate. One of the studies was a socioeconomic study designed to obtain information regarding the characteristics of federal benefit check recipients. The other study was designed to obtain information related to entities that might serve as intermediaries, payment methods, and needs for waivers that could be used in developing the regulations.
Another major initiative is our plan to conduct a comprehensive education and marketing program to ensure that there is sufficient information available to the public about the requirements of the mandatory EFT legislation. A nationwide campaign will encourage check recipients to convert voluntarily to electronic funds transfer in advance of the January 1, 1999 deadline. The campaign will use the best vehicles available to relay our message, and it will include the use of inserts with check payments. Treasury included such inserts in all federal benefit checks mailed in April of this year.
Treasury believes that the success of the mandatory electronic funds transfer program is dependent in large part on the involvement of the various affected parties in the rulemaking process. The interim rule we published on July 26, 1996, outlined the two phases of the conversion mandate and requested comments on both the interim rule and on issues related to implementation of the January 1999 mandate. We received 29 comments from consumer organizations, trade associations, federal and State agencies, banks and non-bank financial service providers, addressing such issues as the definition of authorized payment agent, consumer protections, services for those without bank accounts, costs to recipients and the need for waivers. These comments are being carefully considered and will be addressed in the proposed rule, which itself will invite additional comments.
As is apparent from this discussion, Treasury is confronted with a wide array of issues and concerns that must be addressed in order to satisfactorily implement the statutory mandate. I share your concern Mr. Chairman, that the price of the government making its payments electronically not be the imposition of unreasonable costs on the recipients of payments. The statute requires that this program be available at "reasonable cost" and we will accomplish that goal. The task before us is formidable and we are in the early stages of that process. We intend to work closely with all interested parties to develop an implementation strategy that, as best as possible, balances everyone's needs. In this regard, our current focus and most important task is the development and publication of a proposed rule to solicit public comment and policy guidance on this payment program. Let me reiterate this is a proposed rule; it will leave a number of key questions unanswered; and we will actively seek input from the public on the proposed rule. None of these important issues have yet been finally decided.
In conclusion, Mr. Chairman, the Treasury Department believes that this legislative mandate
provides an important opportunity for us to improve the quality of service that our customers want and
need, and at the same time to lower the cost to taxpayers of our payments systems. We plan to enhance
access and choice for recipients. Benefit recipients have told us that they want to be able to receive their
payments at points that are easily accessible and that increase their safety and security if this can be done
at a reasonable cost. Our proposed regulation will attempt to address these needs. We welcome,
encourage, and look forward to the public comments that we will receive on our proposal, and we look
forward to working with this Committee as we move forward.
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