Sometimes small, unnoticed bits of legislation can pave the way for dramatic and far-reaching changes in our society. That may well have happened in April, when Congress amended an obscure law known as the Federal Financial Management Act of 1994.

This new law will soon result in millions of Americans being brought into the banking system for the first time, and it will change dramatically the way in which they handle their money.

At a time when the complexity of our economy makes it unthinkable for most people to conduct their daily affairs without a bank account, it has been estimated that as many as 20% of American families - including almost one-third of minority group families - have no such accounts. Many of these families, generally with annual incomes of less than $25,000, rely on check cashers, pawnbrokers, money transfer agents or local merchants to cash their payroll or benefit checks, frequently at a high cost.

If they receive their checks by mail, they run the risk of theft or loss. They pay their debts in cash, or with money orders, and whatever may be left over is held in currency until it is spent.

All of that will be profoundly affected on Jan. 1, 1999, when all federal payments - wage, salary and retirement payments, vendor and expense reimbursement payments, and benefit payments - will have to be made by electronic funds transfer. Only tax refunds are excluded.

Think of it: In little more than two years, more than 340 million payments a year that used to be made by check, involving over $240 billion dollars annually, will have to be made by electronic transfer!

In order to accommodate EFT payments, all recipients are required by the new law to designate one or more financial institutions "or other authorized agents" to receive their payments. To the extent that recipients do not have accounts of their own, the secretary of the Treasury is required to ensure that they will have access to an account at a financial institution "at a reasonable cost," and with "the same consumer protections with respect to the account as other account holders at the same financial institution."

Why is this such a big deal? Well, for one thing, there may be as many as 10 million people currently receiving federal benefit payments that do not now have bank accounts - and this does not include others who may receive different types of federal payments, such as wages or retirement. In other words, just taking into account recipients of federal payments, well more than 10 million people will become new users of the banking system as a result of the new law. If the states and private employers follow the federal lead in mandating EFT for their payments, as they very likely will, the potential increase in system users will be truly staggering.

This poses an enormous challenge and opportunity for our banking system: Will financial institutions respond to the prospect of millions of new users by developing and marketing new products, targeted to the needs of this new constituency? Or will they view these potential new customers as undesirable, too costly, or not worth the effort, and leave it to the government to deal with the problem?

I believe that banks should and will respond aggressively and creatively; in the best tradition of our competitive free-enterprise system, for the simple reason that there are profits to be made here. In the new electronic environment, there will be a tremendous opportunity for financial institutions to expand their deposit bases at lower cost by serving as depositories for the tens of billions of dollars that will flow each month directly into the accounts of payment recipients.

The new electronic environment will unquestionably change the way payments recipients who have not previously had bank accounts handle their money. Because there will no longer be a need to convert payments into cash immediately, as they must do now with payments by check, these recipients will be able to leave funds in their accounts until they are ready to spend.

To be sure, the average life of a monthly deposit may not be long, since recipients will undoubtedly draw down heavily at the front end. But even those balances should support the provision of some needed and useful services, and banks should have an incentive to compete for these new deposits by fashioning accounts that will serve the needs of this previously "unbanked" population.

One might expect, for example, that banks would, at a minimum, seek these new customers by offering them a basic account into which their monthly payments could be made by EFT, and from which withdrawals could be made by plastic card at ATMs and POS terminals. Additional deposits could be accepted, and other attributes of the account could be based on expected balances. Some specified number of withdrawals per month might be permitted before service charges were imposed, and the ability to make some number of free third-party payments by telephone transfer or other means might also be afforded. Additional services, such as balance inquiries, could also be provided.

By making such accounts purely electronic - with no paper checks to process or account statements to send out - banks could hold both their costs and customer charges to a minimum, and the risk and cost of overdrafts could be entirely eliminated. At the same time, these new accounts could provide customers with a safe and convenient means for receiving holding and accessing their EFT payments.

Farsighted banks will also see this as an opportunity to develop new relationships with families that have the potential to become customers for a much broader range of banking services, such as consumer loans, mortgages, savings accounts, and even investments, such as mutual funds. By definition, this population is made up of persons who have a regular income, but who, for one reason or another, have not used the services of banks. The challenge for banks is to entice them into the system, with new products, outreach, and educational campaigns.

There will certainly be other nondepository firms that will pursue business prospects emerging from the new legislation. Check cashers, money order vendors, retailers, data processors, and others will see the new electronic environment as offering them desirable opportunities. Indeed, some nonbank entrepreneurs have already targeted this market.

If the banking system does not rise to the challenge, government may be required by the new law to step in. The Treasury Department has an obligation to guarantee a "default" alternative - or, in the words of the new law, to "ensure that individuals required to have an account at a financial institution" in order to receive federal payments "will have access to such an account at a reasonable cost" and with appropriate consumer protections.

Is it really in the long-term interests of the banking system to have the government bear the responsibility of securing accounts for the millions of families who will need them? Is not a private-sector alternative far more desirable?

The challenge has been made, and it is now up to the system to respond to the opportunity.

Mr. Hawke is under secretary of the Treasury for domestic finance.

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