Taking the nation a giant step toward a checkless society, Congress and the Clinton administration have enacted legislation requiring nearly all federal payments to be made electronically by 1999.

The little-noticed measure - which affects both consumers and businesses nationwide - was part of the omnibus budget bill that President Clinton signed into law last Friday.

To be sure, the government has already made significant strides in moving away from a paper-based payment system. The Treasury Department's Financial Management Service, which handles most federal disbursements, now issues just over half of its 840 million payments in electronic form.

But by bringing most other payments on-line, the government could pave the way for a massive shift away from paper. That will have tremendous implications for banks, which now process 60 billion checks a year.

"I can now envision the day when checks will become a thing of the past," said Judith Neyman, a vice president at First Union Corp., Charlotte, N.C.

The law's provisions are to be phased in 90 days from enactment - July 26. As of that date, newly eligible recipients of federal payments will have to provide government agencies with information on bank accounts to which the Treasury Department can electronically transmit payments. The law take full force on Jan. 1, 1999.

Among the payments covered by the law: social security, welfare, and veterans' benefits, as well as federal employees' salaries and pensions. Only income tax refunds are excluded.

"This legislation is a major milestone in the history of electronic funds transfers," said Elliott McEntee, president and chief executive officer of the National Automated Clearing House Association, Herndon, Va.

Despite the advent of automated teller machines, credit cards, and direct deposit payroll, the number of checks written in the United States has grown at an annual rate of about 5% over the last five years, experts said.

Last year, growth slowed to about 2%, and some think the federal government's decision to go all electronic could turn the tide of check growth.

Banks have a vested interest in reducing the number of checks they process. According to Mr. McEntee, each check payment converted to an electronic format saves a bank 80 cents in processing costs. He placed the law's annual cost savings for banks in the $500 million range.

Despite the measure's impact, it was overshadowed by the hubbub surrounding the broader budget package to which it was attached.

Even a senior executive at the New York Clearing House, a leading payments processor, was caught off guard. "I'm not aware of it and haven't seen anything on it," said Henry C. Farrar, a senior vice president, when told of the new act.

Mr. McEntee said when the new act's provisions are combined with past mandates for Federal electronic tax payments, "over 90% of the payments coming in and going out of the Federal government will be done electronically."

The move to electronic payments should shave the government's costs by about $500 million over the next five years, said Mark Brasher, an aide to the measure's sponsor, Rep. Stephen Horn, R.-Calif. That's because it costs the government 44 cents to issue a check, versus 2 cents to make the same payment via the automated clearing house network.

Not everyone is happy with the new measure. Michelle Meier, legal counsel at Consumers Union, a Washington-based advocacy group, said her group is concerned with "the mandatory nature" of the government's move to electronics.

Specifically, she worries about the effect on consumers who lack bank accounts to which payments, such as welfare, could be transmitted.

Government officials said such concerns would be addressed by the emerging national electronic benefits transfer system, which would enable "unbanked" consumers to access funds via automated teller machines and point-of-sale terminals.

James Hagedorn, director of public affairs at the Financial Management Service, said the Treasury Department plans to waive the electronic transaction mandate in cases where it would impose undue hardship.

Experts said the Social Security Administration faces perhaps the greatest challenge, since so many newly eligible citizens enter the system every month. Michael D. Johnson, director of payment and recovery policy there, said the agency has begun taking steps to simplify the process of enrolling banks and consumers in the electronic program.

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