The Treasury Department has significantly watered down its plan to have most federal payments delivered electronically by Jan. 1.

The agency announced revisions late last week that, because of a series of exemptions, would turn what began as a nearly mandatory program into a voluntary one.

People who receive Social Security checks and other government payments would not be switched to direct deposit unless they request the change-a reversal of the "opt out" requirement that was designed to maximize electronic volumes and the resulting cost reductions sought in the Debt Collection Improvement Act of 1996.

A senior Treasury official defended the move Friday but acknowledged that the savings would fall short of the previously estimated $500 million over five years.

"We are not gutting the program," Treasury Under Secretary John D. Hawke Jr. said. "We are protecting and preserving it. We are avoiding a political backlash from people who would find it a hardship of any sort to convert from paper to direct deposit."

The safer political course is to make the program voluntary and let the conversion happen gradually, Mr. Hawke said.

Over the last two years, 85% of new Social Security recipients have chosen electronic payment, and baby boomers are more comfortable banking electronically, he said.

Rep. Marge Roukema, R-N.J., praised Treasury's revised plan as "a common-sense approach" and predicted other lawmakers would react similarly.

"This is good news," she said. "What we are effectively doing is phasing this in .... These elderly people should not be forced to have a sense of insecurity about their checks."

A provision in the 1996 law required the government to begin delivering all payments except tax refunds electronically by Jan. 1, 1999. The act gave Treasury latitude to exempt some recipients.

Criticism of the mandate came quickly from many quarters and swelled after Treasury proposed rules last September to implement it.

The most contested part of the policy, dubbed EFT '99, was the requirement that the government create accounts for the estimated 10 million poor and elderly federal benefits recipients who lack bank accounts.

The Senate Banking Committee Chairman, Alfonse M. D'Amato of New York, and others in Congress complained that Treasury's blueprint would let banks sock Social Security and welfare recipients with high fees. They contended that many elderly recipients would accept no substitute for a paper check in the mail.

Consumer activists railed against the idea for similar reasons. Banks balked, too, because the Treasury had not decided how much may be charged to provide accounts to noncustomers.

The opposition slowed Treasury officials' efforts to complete their plan and raised questions whether the 1999 deadline could be met. The agency tried to solve the problem by proposing to delay for as long as a year the rollout of the accounts for recipients who do not use financial institutions.

What may have doomed the mandate was that proponents saw it as cost saver for the federal government but underestimated the social and business issues it would stir up, observers said.

"There probably was not enough sensitivity to the impact of this program on older people," Mr. Hawke acknowledged.

Industry groups generally supported Treasury's changes but said too many unanswered questions remain to pass final judgment.

"There is an interest out there (among bankers), but we still don't know what the cost is going to be," said Marcia Z. Sullivan, government relations director for the Consumer Bankers Association.

Treasury officials expect to issue the final regulation and account details by the end of July.

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