| TECHNOLOGY TOPICS |
In a sweeping three-pronged drive, Washington is moving to eliminate the flow of paper checks out of the federal treasury by December 31, 1998. The inflow of checks for employer-withheld tax payments will end for all but the smallest businesses. A checkless U.S. Treasury will affect tens of millions of individuals who receive government payments or in-kind benefits, millions of businesses that withhold taxes from their employees, and the small and large banks that service all of the above. An annual flow of a billion electronic payments worth about a trillion and a half dollars-one-fifth the value of the gross domestic product-will speed the economy's transition to a new era of paperless transactions, digital cash, and "wallets" embedded in plastic cards.
The campaign, directed by the Treasury Department's Financial Management Service (FMS), has three related parts: EFT99, which says that all federal payments to individuals or businesses must be made electronically; Electronic Benefits Transfer (EBT), which says that paper food stamps must be replaced by debit cards and that cash benefits must be delivered electronically; and Electronic Federal Tax Payment Service (EFTPS), which says that companies over a certain size must pay withholding taxes electronically.
None of these functions are new, except EBT. What's new is the breathtaking scope of the programs and the short time left to test and deploy systems that will affect all banks and their corporate and retail customers. The Treasury program illustrates the quickening pace of electronic banking. It took some 20 years for the industry to get 58% of the individuals who now receive federal payments to choose direct deposit (DD). The industry must bring the remaining 42% on board in the next 18 months.
Bankers won't be going the course alone. Treasury conducts outreach programs and provides explanatory materials. The American Bankers Association was a key player in designing the new systems. ABA's point man in representing bankers' interests is Bill Phillips, director of policy development and senior legislative representative. This spring he hit the road with Treasury counterparts to hold 30 day-long seminars, sponsored by state bankers associations, in every part of the country.
Phillips sees the Treasury initiative as part of a historic contest for control of the nation's payments system.
"We are consciously moving down the road toward electronic banking," he said. "All banks need to understand that the fight for control of the payments system isn't going to happen in a few years. It's happening right now. We cannot wait for glitzy new vendors to steal our customers away from us. We must give our customers the tools they must have to deal with the world as it is evolving. This means we will most likely also evolve and change as we go forward."
EFT99 means no more federal checks
The audacious goal of the Electronic Funds Transfer Expansion Act of 1996 is to totally eliminate paper checks in federal benefit and vendor payments by January 1, 1999.
FMS says it can issue an electronic payment for two cents, compared with forty-three cents for a paper warrant. As for security, the government expects to prevent more than 100,000 crimes every year by making mail theft, forgery, and counterfeiting impossible. Electronic funds transfers are 20 times less likely to create errors and handling problems. They are expected to forestall most of the present 1.7 million inquiries from recipients about checks that have been lost, stolen, damaged, or delayed during delivery. EFT efficiencies will also save taxpayers $100 million every year in postage and check-production costs, FMS estimates.
The accompanying chart breaks out the main categories of more than 424 million payments that FMS made in the first half of fiscal year 1997, of which 58% were electronic. (The Defense Department made an additional 70 million payments but did not say how many were electronic.) As the chart shows, the portion of total payments now being made by EFT varies greatly from group to group. Salaries (government paychecks) are 94% electronic, while only 25% of vendor payments are. The number of EFTs went up sharply last year because EFT99 required that after June 26, 1996, all new recipients of benefit payments must be paid by direct deposit.
Serving the "unbanked"
The great majority of Treasury's payments are Social Security retirement and disability benefits made to individuals who live and bank in every part of the country. Over the next 18 months, that flow will increase by half and will be required by law to include about ten million recipients who don't now have relationships with any financial institution-the so-called unbanked. Clearly, servicing the unbanked presents a marketing opportunity for banks everywhere. Not at all clear is whether reaching this little-understood group is likely to be a profitable undertaking.
Why do millions of adults choose or feel forced to manage their financial affairs without the convenience and security of bank accounts-even though many of them are employed, and many more receive sizeable checks every month from the government? Focus groups have provided some answers: They think they don't have enough money. Bank fees are too high. They're part of the underground economy and don't want to leave financial trails. They have ideological objections to banks. They're not physically or mentally able to. They simply don't know how to get started. They're denied service.
Whether a bank's executives try to sign up new accounts from the ranks of the unbanked will depend on the marketing imperatives of the community that each bank serves. However, banks that choose to go to the unbanked for new business will have to make special efforts to reach, educate, and support these new customers.
ABA's Bill Phillips stresses that banks aren't required to assume the responsibility for providing services to all of the ten million unbanked-"and definitely not for free."
FMS has been working out rules and strategies for delivering payments to recipients who are still unbanked at the end of 1998. One approach would be to designate agents to receive the direct deposits. An agent might be a nursing home, a mutual fund, or even a check-cashing service.
FMS has also floated a new concept, inscrutably called DD Too, which would offer a no-frills all-electronic version of a regular bank account. Designed as starter services for the unbanked, these checkless accounts would accept direct deposits, enable electronic payments, and dispense cash through ATMs or merchants' POS terminals. DD Too accounts could never be overdrawn, and their holders would not pay any service fees nor be required to maintain minimum balances.
Another major implementation issue is delivering remittance advices to vendors along with direct deposits made in payment for supplying goods and services to the federal government. More precisely, the issue is vendors' ability to receive the electronic remittance information. This requires that a vendor or its bank be equipped with software that can interpret the codes describing the payment: dates, buyer, product price, etc. In electronic commerce, this capability is a key element of electronic data interchange (EDI), and the codes are standardized in national and international protocols. FMS says that it uses these standard codes and will work with vendors and their banks on implementation problems. Banks that aren't yet EDI-capable (most banks) will either have to add the capability or forego the possibility of serving corporate customers who do business with the federal government. FMS is also working on alternatives, such as delivering the remittance information via Internet e-mail.
EBT means no more food stamps
The Electronic Benefits Transfer program has the same general goals as EFT99: replace paper benefit checks with EFT, cut the costs to all the involved parties, and reduce fraud and abuse. It differs in that it eliminates paper food stamps as money and replaces them with digital cash stored in debit cards. Part of the Welfare Reform Act of 1996, EBT is a hybrid system that encompasses both the welfare programs that were retained by the federal government and those that were turned over to the states in the act. Every state is mandated to have an EBT program in place by October 1, 2002.
The main players in EBT are benefit recipients, merchants, and their banks. In supporting roles are prime and subcontractors who design the system, provide the hardware and software, manage the networks, train participants, authenticate users, run call centers, maintain participant databases, and load debit cards. Directing the action is usually the state's head of human services, with feds in an advisory role.
After qualifying with the state, a food-stamp recipient gets a magnetic-stripe debit card. This is coded to enable two separate functions: (1) purchases, food or other, at the point-of-sale (POS) terminals of participating merchants; and (2) cash withdrawals from bank ATMs. A nationwide standard of ATM interoperability for EBT cards-the "Quest" mark-has been formulated by the EBT Council, an industry coalition. The dollar value that is remotely loaded into the card at the beginning of the month replaces the food stamps of the present system. For every purchase, the POS terminal returns a printed receipt which shows the balance remaining for the month. The value loaded into the cash sector of the card is the sum of all the client's federal and state cash benefits.
Participating merchants (supermarkets, drug stores, etc.) handle EBT purchases in the same way as any POS purchases. The terminal verifies the card and PIN combination, deducts the amount of the purchases, authorizes the transaction, and transmits it to the appropriate banks via the Automated Clearing House system. If a merchant doesn't use POS terminals for its commercial customers, the EBT authority will furnish one or more at no cost. However, those terminals can only be used for EBT purchases.
A bank can benefit from EBT in several ways. Direct deposit of cash benefits removes the risk of cashing forged checks. Handling (former) food stamp purchases is transformed from a tedious chore outside the bank's normal workflow into an automated fee generator. Other new-business possibilities: become a card issuer, a federal financial agent, or a settlement bank.
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Maryland was first with statewide EBT Following nearly a decade of relatively small-scale demonstrations, the Maryland EBT system became the first in the nation to operate statewide, serving both urban and rural areas. In the spring of 1994, the U.S. Department of Agriculture analyzed the performance of the system and came up with findings that still serve as guideposts for later programs. The Maryland program delivered about $59 million in monthly benefits to 168,000 households, whose members could access their benefits at any of some 1,800 ATMs in the state, at about 3,300 food-retailer locations, or at a handful of nonfood retailers. The demo project projected a net cost saving of $750,000 per year when the program was in full operation, meaning that the state would recoup its start-up investment in a little over three years, according to Rosemarie (Jerri) Thomas, director of EBT for the State of Maryland. Nearly half of the savings came from reducing "benefit diversion"-using stamps for unauthorized purposes or selling food coupons for cash. Food-stamp recipients gave the new program a rousing 83% favorable rating. Recipients of cash benefits approved in greater numbers, and with feeling: "You don't have to pick up your benefits." "You don't have to cash your check all at once." They also mentioned better security and less embarrassment as reasons for preferring electronics over paper. Food retailers liked EBT's easier handling, lower labor costs, increased sales, reduced fraud, and the elimination of cash change. Financial institutions unanimously favored the new approach, citing reduced operating costs, eliminating the hassle of handling and accounting for paper food coupons, and generating revenues from usage fees charged to retailers and customers. |
The distinction of being the first with a single system capable of handling both state and federal benefits goes to Alabama, whose pilot program is scheduled to finish in November of this year. The state is now working on incorporating the federal Women Infants and Children (WIC) program, which adds the complication of authorizing customized purchases, such as a certain infant-milk formula. In Alabama, as in 25 other states, Citibank is the EBT prime contractor and state director Gene Gandy's link to the entire system. Citi itself handles the program's financial aspects: it accepts deposits from the federal government, houses and maintains individual accounts, authorizes usage, and settles accounts with the banks and merchants involved. Deluxe Payment Systems does the processing. Lockheed manages the network, retail services, and training. This triumvirate of EBT contractors has somewhat interchangeable roles. In some states, Deluxe is the prime contractor and in others it's Lockheed.
Paying payroll taxes electronically
Treasury not only wants to eliminate all of the paper checks it sends out; it also wants to stop receiving them-at least from business taxpayers-by New Year's Day 1999. That's the goal of the electronic federal tax payment system (EFTPS).
The program is being phased in from the top down, taxpayers with the biggest payments first. By July 1 of this year, taxpayers who withheld $50,000 or more for employee taxes in the 1995 tax year were required to sign up for EFTPS. That meant about 1.2 million businesses. The threshold will go down to $20,000 in the 1999 tax year, covering almost all businesses except the self-employed. That means it will affect virtually all banks, too.
Taxpayers have some choices in how they pay their taxes-as an ACH debit, an ACH credit, or using same-day Fedwire.
To use an ACH debit, now the most popular option, the taxpaying business directs Treasury from a Touch-Tone phone or a PC to deduct from its bank account the amount due for the reporting period. If the request is made by Treasury's deadline, that department assumes responsibility for getting it to the IRS on time.
To use an ACH credit, the taxpaying business tells its bank to handle the periodic payments to its account with Treasury. If the firm has enough money in its account at tax time, the bank makes the payment electronically-and accepts responsibility for getting it to the IRS on time. That is, if a computer goes down, the bank is liable for any late penalties. Of course, the bank can collect fees to cover the service and the risk.
Business taxpayers who choose to pay by same-day Fedwire have a few more hours to make the payment, but as with the ACH credit, liability for timely payment remains with the taxpayer and possibly the firm's bank.
Last year's phase-in of EFTPS at the $50,000 threshold was attended by much confusion, and many firms faced penalties for not complying with the original Jan. 1 deadline. Treasury moved the date to July 1 and hints it will continue to be accommodating. Clearly, banks have a responsible role in helping their business clients get it right. The challenge is daunting. Six months ago, none of the typical bank's clients paid their withholding taxes electronically. Eighteen months from now, all of them will have to. BJ
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