Consumer groups told Congress Wednesday that only well- regulated financial institutions should be permitted to electronically deliver government benefits.
Check cashers and other nonbanks are not sufficiently regulated to guarantee recipients will get their money or be shielded from other predatory business practices, consumer advocates told a House Government Reform and Oversight subcommittee.
"If alternative providers of financial services are permitted to be conduits of federal payments, that would constitute the federal government's blessing of grossly abusive practices against low-income and elderly people," testified Margot Saunders, managing attorney of the National Consumer Law Center.
A 1996 law requires the federal government to deliver all government payments and benefits, except tax refunds, electronically by Jan. 1, 1999. Paying recipients electronically instead of by check is supposed to save taxpayers $500 million over five years.
The Treasury Department's toughest challenge will be to figure out how to reach the nation's 10 million benefits recipients without bank accounts, said John D. Hawke Jr., the Treasury's under secretary for domestic finance.
Although the agency's proposal will not be ready until July, Mr. Hawke explained that the Treasury is trying to draw the so-called "unbanked" into the financial mainstream by encouraging financial institutions to offer low-cost accounts.
Otherwise, the Treasury would set up electronic accounts for these recipients by contracting out to vendors. "We feel those (vendors) should be federally insured and regulated financial institutions" because only they can receive payments via automated clearing houses, Mr. Hawke said.
Consumer groups said they fear the Treasury will allow financial institutions to contract with "fringe bankers" - check cashers or other entities such as nursing homes-to deliver payments.
"What happens when they go belly up?" asked Larry White, a lobbyist with the American Association of Retired Persons.
The AARP argued that banks, thrifts, and credit unions will reap "a windfall" from serving 10 million new customers and should be required to offer them accounts that allow low balances and 10 free withdrawals per month.
Later Wednesday in a speech to an Electronic Funds Transfer Association conference, Mr. Hawke said electronic delivery will be optional.
"We have no way to force it upon consumers who want to continue to receive checks," he said. "It's not our intention to disadvantage consumers."