At a congressional hearing Thursday, bankers denied they will exploit the government mandate for electronic payments by gouging the poor and elderly with high fees.

The move to electronic delivery "will not result in windfall profits for banks," Mark McKenzie, executive director of Citibank Electronic Benefit Transfer Services, told members of the House Banking Committee.

Some lawmakers were skeptical.

"Banks are saving two to three times as much as the federal government every time a paper check is replaced by an electronic payment," said Rep. Paul E. Kanjorski, D-Pa.

These savings should offset the costs banks will bear to provide accounts to the 10 million federal benefits recipients who are not bank customers, he said.

Financial institutions also should be required to provide a wide range of services to unbanked benefit recipients in order to pull them into the financial mainstream, said Rep. Maxine Waters, D-Calif.

Banking industry witnesses countered that the government should not dictate the cost of an "electronic transaction account," claiming competition would keep the price low.

"Treasury should not regulate prices of deposit services provided by private institutions in a competitive marketplace," said W. Page Ogden, president of Britton and Koontz First National Bank, Natchez, Miss. "Price setting has never worked and results only in an administrative nightmare, raising costs and limiting the availability of services."

A 1996 law requires all federal payments except tax refunds to be made electronically by Jan. 1, 1999. It requires the Treasury to guarantee that people without bank accounts pay only "reasonable" fees and receive standard consumer protections. The department issued a proposal Sept. 16 addressing these goals. Comments are due by Dec. 16.

Treasury Under Secretary John D. Hawke Jr. said monthly service charges will be set by competitive bidding for exclusive contracts by region.

The Treasury has hired a consultant to determine what are realistic fees. Similar state programs have charged monthly fees of $2 to $3, he said.

The agency would let users of the electronic transaction accounts make an as-yet-undetermined number of free automated teller machine withdrawals, he added.

Marcelyn Creque, a Midwest regional volunteer director for the American Association of Retired Persons, said 30% of benefit recipients without bank accounts regularly cash their checks for free at grocery stores and would balk at any fee. Consumers also might be forced to pay twice if banks contract with check cashers and other nonfinancial institutions, she said.

Mr. Hawke noted that waivers would be available to let recipients continue receiving paper checks.

Money transmitters and check cashers lobbied lawmakers to let them provide electronic accounts.

"By requiring virtually all federal payments to be deposited in federally insured deposit accounts in the name of the recipient, competition in the delivery of services will be significantly inhibited," said G. Douglas McNary, president of Western Union Financial Services.

Although banking industry witnesses supported the Treasury's proposal, they made some criticisms.

Thomas J. Sheehan, president of Grafton (Wis.) State Bank, said the agency's plan to solicit bids for exclusive contracts on a regional basis could shut out community banks. "The larger the geographic area bidders are asked to serve, the more unlikely it is that smaller institutions will have the operational capacity to participate."

Benefit recipients should be given a choice of multiple institutions, said Brian P. Smith, policy development director for America's Community Bankers.

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