The Treasury's rules for electronic benefit payments are taking shape, and they rely heavily on financial institutions to bring lower-income recipients into the banking mainstream.
Proposed rules, prepared for publication today in the Federal Register, outline steps Treasury will take to comply with the Federal Financial Management Act of 1994, which requires almost all government payments to be delivered electronically by 1999.
Included in the mandate are vendor billings, salaries, and federal direct payments like Social Security, veterans' benefits, and pensions. The benefits volume is 54.5 million payments a month, 45% of which is already delivered electronically.
Another 37% are paid in checks to people with bank accounts, who presumably can be easily converted to direct deposits.
With 10 million other payments, worth $5 billion a month, going by check to people without bank accounts, the law presents an opportunity and a challenge for the banking industry.
"It is our primary objective to have clients elect to have an account with a financial institution," said Peg McNamara, Treasury's EBT project director. "We're hoping financial institutions will be very active in addressing this market segment."
The so-called unbanked have historically been difficult to reach because of economic isolation or language and cultural barriers. The most recent Federal Reserve Board survey of consumer finances estimated 13% of U.S. families had no type of transaction or savings account in 1995, and 15% had no checking account.
Of that 15%, 85% had family incomes under $25,000, 48% said they did not have enough money or write enough checks to make an account worthwhile, and 23% said they simply did "not like dealing with banks."
To serve unbanked benefits recipients, Treasury has proposed that banks offer a new type of account, called Direct Deposit Two. It would be limited to debit card access at automated teller machines and point of sale terminals. There would be no minimum balance requirement, monthly statement, or checkbooks, thereby eliminating overdraft problems and other expenses associated with conventional bank accounts.
At a conference last week in Washington, Cathryn Donchatz, director of product promotion in Treasury's Financial Management Service, said banks might get Community Reinvestment Act credit for offering Direct Deposit Two accounts.
Banks need to be ready for a "massive EFT volume increase," Ms. Donchatz said, adding Treasury is seeking a "strong partnership with the private sector."
To that end, the American Bankers Association is holding seminars in 33 states to educate bankers about the new law.
William Phillips, director of the ABA's office of policy development, said bankers have an "optimistic view. Ten million (people) drawing $5 billion a month is a lot of money. For the most part you're going to see banks respond positively."
"There's a common misperception that those who need accounts have all their belongings in a shopping cart," said Mr. Phillips. Many working poor have no account by choice and "we have to try to fit their habits."
The ABA and other industry groups are developing a model product that takes Treasury's requirements into account and can be modified by member institutions.
Mr. Phillips said the banks may need some relief from Regulation E, which requires mailing of periodic account statements.
He acknowledged the lack of bank presence in certain neighborhoods and said "there are grocery stores with point of sale terminals where many (potential customers) can buy groceries and get cash back."
As a "last resort" Treasury will look provide an electronic benefits transfer service to those who remain unbanked, said Ms. McNamara.
Of the 10 million monthly Treasury payments to the unbanked, 13% go to recipients who also receive welfare payments from their states. Nearly every state is developing EBT programs to deliver welfare, food stamps, and other benefits electronically with debit cards.
Treasury is asking states to "call us and invite us to mutually serve the same client," said Ms. McNamara. Federal benefits could be issued through state-issued EBT cards.
Other rules to be proposed in June would define how Treasury would issue federal EBT cards to the seven million people who are expected to still be outside the system after efforts to include them have been exhausted. Only a waiver from those rules would allow checks to be issued, Ms. McNamara said.
