Though many corporations have realized the value of electronic payments, government agencies that process large numbers of taxpayer remittances have been less eager to install similar systems.
Some agencies cite the trouble of implementing complex software on limited budgets; others face legislative hurdles that mandate how much they can charge for various fees, fines, and taxes and leave no room for bearing credit card processing costs.
And because citizens, in many cases, have no alternative to making these payments, some agencies have not been motivated to replace the traditional paper-based systems.
As a result, some agencies that do accept electronic payments use a vendor that charges consumers a "convenience fee" to cover both the processing costs and its own profit margin. Advocates of this approach say it is easy for agencies to implement such a system, because they can outsource the processing.
But others are challenging this model by saying government agencies should act like businesses and evaluate the potential savings that come from processing electronic transactions in-house. Though this will likely mean the agencies would have to pay up-front costs to implement the systems, in addition to processing fees, some public officials are looking at the potential long-term benefits.
Gary Grippo, the assistant commissioner for federal finance in the Treasury Department's financial management service, said in-house electronic payments systems offer a huge potential for increased operational efficiencies and faster settlement.
"There are a lot of reasons to do this," he said. "The challenge is not in convincing the Treasury Department that there is value in this. The challenge is convincing the general public to transact with us electronically."
Greg Gentile, an executive vice president with Govolution Inc., a Washington payment technology vendor, said that because the in-house approach can eliminate consumer convenience fees, it could also lead to an increase in people willing to use electronic transactions to send money to local, state, and federal agencies.
"There is a major shift going on in the reasons why" agencies are adopting electronic payment technologies, Mr. Gentile said.
In the past, he said, offering electronic payment options typically meant allowing individuals to use credit cards and was considered a convenience for the person making a payment. And because card transactions incur an interchange fee that the agencies had no desire to pay themselves, they would contract with a vendor to handle the transactions, who would pass the extra cost on to the payers, he said.
That extra cost, which Mr. Gentile said could range as high as 10% of the payment, may have acted as a deterrent to consumer adoption of electronic payment services in the governmental realm. And because many agencies have considered setting up their own card processing systems as an extra chore, they had little motivation to reduce this burden on consumers, even if it could reduce the number of checks being mailed, he said.
But local, state, and federal organizations have come full circle and understand that e-payments are easier and faster to process, Mr. Gentile said. "Most public sector organizations have realized they must do everything they can to encourage the use of electronic payments by citizens and are dropping the convenience fees."
Mr. Grippo, who oversees the federal government's multitrillion-dollar revenue collection process, agrees. "We are making a big push to move people" away from making payments with paper checks, he said. "We are looking for ways to provide incentives for people to interact with us electronically."
One of those incentives is not to charge people a fee for paying various fees or taxes. The only agency under his jurisdiction that imposes any type of convenience fee is the Internal Revenue Service. The fee applies only to credit card payments, which are outsourced to two vendors, Official Payments Corp. and Link2Gov Corp., because of a law prohibiting the government from accepting credit card payments on federal tax payments.
All other federal agencies can accept card payments directly, without charging a convenience fee.
Because of the huge number of electronic payments the federal government receives from businesses for such items as payroll withholding taxes, 80% of the dollar value of incoming payments arrived in a digital format in fiscal 2003, though the number of electronic transactions initiated by individuals is far lower.
For example, only about 1% of consumers are paying their federal taxes with a credit card, Mr. Grippo said.
Jim Weaver, the chairman and chief executive officer of Tier Technologies Inc., the parent company of Official Payments, says these fees are not deterring people from making payments electronically. Official Payments, which manages card payment systems for local, state, and federal agencies, says it processes 72% of all IRS card payments.
Many people want to use credit cards because they can earn reward points, while others simply want to know the transaction will be completed immediately Mr. Weaver said. Some people use plastic because they need to pay the charges over time, he said.
Official Payments typically charges a fee of 2.5% to 7%, depending on the type of fee; local property taxes generally reach the top of the scale and federal and state taxes bring up the bottom.
Despite the fees, Mr. Weaver said, the number of card payments to government agencies is surging; the value of traffic fines paid electronically through Official Payments has risen 12% in the past year, and property tax payments has grown 39%.
"I think Americans in general are moving away from paying with paper and adopting a strategy of paying electronically," he said. "We've only begun to capture the market share here."
Part of the strength of Official Payments' approach is that it is easy for agencies to implement. They can outsource their payment processing to the Reston, Va., company, which operates a number of processing Web sites. The agencies receive the exact same revenue as they would garner from paper payments and do not have to do any extra work to create an e-payment infrastructure, he said.
"It's painless for them," Mr. Weaver said. "Clearly, the model that has won out is convenience fees."
Breffni McGuire, a senior analyst with TowerGroup Inc., the Needham, Mass., market research unit of MasterCard International, said convenience fees may not be deterring people from making card payments to the government. She expects the number of payments initiated through the Internet to rise.
However, she also said many government agencies have unwieldy payment systems that could clearly benefit from a shift to electronic payment systems. Outsourcing this business to a vendor does little to improve the agencies' internal operations, she said. "Certainly, there are a lot of opportunities for greater efficiencies" in the public sector.
Mr. Grippo said there are numerous advantages to accepting electronic transactions. For starters, he said, paper checks must be manually keyed into the system, and that labor-intensive process can generate a lot of mistakes; the error rate is 30 times higher for paper payments than it is for e-payments.
Even more importantly, he said, electronic funds clear faster - depending on which accounts the funds are destined for, a paper check may take an additional one to seven days to be processed and to clear. Some checks are delivered to remote field offices and may not arrive at a processing center for several days.
In contrast, an electronic payment can be transmitted instantly from anywhere to anywhere, and the funds are often in the national treasury the next business day, Mr. Grippo said. Considering the size of the federal budget, "a day of float matters."
Also, e-payments allow for better accounting, because the data on which government accounts should be credited is automatically entered into the system, he said. Paper checks that are dumped into huge lockbox operations may have the same information, but it is much more time-consuming to input that data into the system.
Electronic transactions can be filed into the government's books as much as a month sooner than paper payments, Mr. Grippo said. "We get better information about what's coming in," so it is easier for the various agencies to manage their day-to-day cash flow.
As a result, electronic payments are the obvious choice for Mr. Grippo. Businesses are already sending huge sums to the government electronically, and now "we want to incent the general public to pay us electronically."
