A little-noticed provision of the federal budget reconciliation act could cause a lot of financial headaches for most small banks and credit unions.
Under the law President Clinton signed in April that ended ths year's budget crisis, all federal payments to government contractors in the future must be sent electronically, rather than using paper checks. That includes transmission of the accompanying payment information.
The provision, which goes into effect next month, is part of an effort to shift toward a cashless society, thereby cutting costs and increasing efficiency. That goal may exceed the current capability of most small banks, however.
"It's going to be very important for small banks serving government contractors to make sure they have the ability to provide their corporate customers with the necessary information," said Viveca Y. Ware, director of payment systems for the Independent Bankers Association of America, a national trade group for community banks.
She estimated that only about 1,000 of the nation's banks can receive both payments and information electronically, leaving the other 9,000 out of luck. "If the community bank does not have the capability to provide the contractor with the necessary information, it could lose the customer relationship."
Electronic transmission of payments is not new to the industry, nor to community banks. All banks have been able to receive such payments for several years since the Federal Reserve System began requiring that the nation's automated clearing-house system be entirely electronic.
The change deals with the transmission of the data that accompanies the actual payment, information that explains the payment to the recipient. Most banks don't have the software or technology to receive that information electronically and pass it on to their customers.
"It doesn't help a customer to just get the payment," said Diane Casey, national director of financial institutions for Grant Thornton in Washington. "You need to get the other information that goes along with it. And if the bank can't supply that information to the customer, then the customer's not going to want to stay with that bank."
Under the new law, effective July 26, all payments and data for new government contracts must be sent electronically. Government contracts operating under the old system must make the change by Jan. 1, 1999. Some exceptions may be granted by the secretary of the treasury.
The change technically affects banks of any size with customers who contract with the federal government. Ms. Ware said a large percentage of government contractor payments are for less than $2,500. That indicates a significant number of small businesses, which are more likely to be served by community banks, she said.
Several software providers offer solutions to help community banks address the new requirement, but most tend to be expensive.
However, two low-cost packages target the community bank market for about $600 to $700 per year. One was developed by Goldleaf Technologies of Georgia and marketed by Payment Technologies Inc. in Carlisle, Pa., and the other is offered by the National Automated Clearing House Association.
