Bankers question new U.S. Treasury check.

The Financial Management Service, an arm of the U.S. Treasury that performs cash management services for federal agencies, expects to introduce a new payment instrument next year that competes with bank products.

The paper-based payment mechanism, called FedSelect, could be in use by U.S. government agencies by April, Financial Management Service officials said.

The FMS issued a proposal in October and is collecting comments before drafting a final rule.

The payment system is proposed to compete with check-like instruments called third-party drafts now provided by the banking industry.

The move by FMS is an effort to offer an alternative to draft services by banks. The major players in third-party drafts are Chemical Bank, New York; Mellon Bank, Pittsburgh; Riggs National Bank, Washington, D.C.; and Minneapolis-based Gelco PayNetwork, which uses Norwest Bank as its processor.

"We are talking about having our own third-party draft service," said Ollice Holden, regional director of FMS and sponsor of the proposal. "It is a commercial item internal to the government itself."

The cash management service allows employees to make payments in areas where they have no bank accounts.

Officials said that 32 agencies, including the departments of Housing and Urban Development, Agriculture, and Veterans Affairs use third-party draft services.

Last year, the agencies used 2.1 million drafts for a total dollar value of $500 million, according to FMS.

Mr. Holden said the proposal was part of the government's overall movement to cut costs. Comparisons based on actual billings from banks, he said, show that "our service to the government will be at least 50% less than what is being charged to us now.

"That's what it's all about," he continued. "In reinventing government, we are supposed to isolate and deal with those kinds of issues. If we could not produce a better product at a cheaper price, we would not do it."

Agency use of FedSelect will be voluntary, FMS officials said.

Unlike standard Treasury checks, which are valid for one year, FedSelect checks will be negotiable for either 90 or 120 days.

Also, agencies using the checks can stop payment on these checks.

The Uniform Commerical Code regulations that govern liability for Treasury checks will not apply to FedSelect checks.

In a comment letter, Kawika Daguio, federal representative of operations and retail banking at the American Bankers Association, said this difference would expose banks to the risk of fraud.

Mr. Daguio wrote that the ABA is "unable to support" the proposal in its current form, citing bankers' concerns at the potential for fraud-related losses.

Bankers also indicated the current proposal might lead to a reluctance to accept these items.

"A government employee could generate a check to himself or someone else, and the bank could still be liable for recovery by the government for lost funds," Mr. Daguio said.

Carolyn Morrison, vice president at Victoria Bank and Trust in Texas, said that, in the proposal's warrantee and presentment issues section, "there was an important part that said, unlike any other commercial-type check, the imposter rule is omitted.

"Once you omit the impostor rule from the warrantees statements under the UCC, it puts the full burden of risk on the financial institution when in fact the fraudulent act may have been taken to perpetrate issuance of the check, to which the bank did not have a part."

She pointed out that the nature of this "quick issuance" check was such that it is "just the type of instrument used to defraud people."

"As the proposal stands now," Ms. Morrison said, "I think all banks would be very hesitant and extremely cautious in accepting FedSelect checks."

Moreover, Mr. Daguio questioned the need for FedSelect checks in view of credit cards and other electronic methods of payment.

John Galligan, director of cash management policy and planning at the FMS, explained that thirdparty drafts are for situations in which electronic funds transfer mechanisms cannot be used.

"In fact," Mr. Galligan said, "we have a rule on the books that requires that an agency collect and pay by EFT unless it's not cost-effective, practical, or it's inconsistent with an existing statute."

He also said some agencies "absolutely have to have a paper instrument in some instances," such as operations at a disaster site where "they actually start pumping out checks on the spot."

The ABA indicated that it does not oppose the new check, only that it wants careful measures taken to clarify that FedSelect is not a Treasury check.

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