The Massachusetts and New York legislatures each have begun drafting measures that would require most of their government payments to be made electronically, sources said.
The measures, which could be built into the state budgets in the next few weeks, will be miniversions of recent federal legislation requiring most of the 840 million annual U.S. government payments to be made electronically by 1999.
Many of the particulars in the state measures still need to be ironed out, but sources said passage of some form of legislation is likely, since both states are eager to reap savings from replacing expensive paper check payments with electronic transactions.
If the states move to electronic transactions, it could boost traffic on the payments systems networks, reduce the number of checks processed by banks, and familiarize more consumers with electronic banking.
New York and Massachusetts are reportedly not the only states interested in reducing a reliance on paper-based payments.
"This is the big rage among all the states," said William W. Kilmartin, state comptroller of Massachusetts.
By eliminating paper checks in favor of lower-cost automated clearing house network transactions, "we can easily save millions of dollars," Mr. Kilmartin said.
The cost of cutting a check exceeds 40 cents, while transactions over the automated clearing house - a national network designed mainly for small-dollar payments- reportedly cost pennies.
Massachusetts issues about 50,000 checks weekly.
Check volumes for New York were not immediately available, but a source close to the Assembly ways and means committee said the state expects to move enough transactions to save up to $50 million in annual operational costs.
"We're modeling after the Federal law," said the source, who requested anonymity.
Under the New York and Massachusetts drafts, a wide variety of payments - including state employee payroll, retirement benefits, vendor payments, social services benefits, and pension fundings - would be required to be made electronically within the next few years.
As part of the move to electronic transactions, both New York and Massachusetts are cementing deals for the processing of their electronic benefits transfer transactions - payments such as welfare and food stamp programs.
Citibank EBT Services, a Chicago-based unit of Citicorp, has been chosen as the EBT processor for a seven-state coalition of northeastern states that includes Massachusetts and New York. But each of the states must negotiate individual deals with the bank.
"We went out to bid and selected Citibank as the single vendor for the entire Northeast," Mr. Kilmartin said. "We are ready to sign our contract with Citibank as soon our funding bill is done," which should occur "any week now."
When the contract is finalized, Mr. Kilmartin said, payments for about 250,000 welfare recipients in Massachusetts would be delivered through electronic channels, such as automated teller machines or point of sale terminals. Figures for New York were unavailable.
Citibank EBT is emerging as the leading processor of electronic benefits transactions. The company has agreements with a consortium of states in the Southeast as well.
If it succeeds in signing contracts with all the states with which it is in negotiations, the bank would do processing for 21 state electronic benefit transfer programs.
The reason for the popularity of electronic benefits transfer is simple: "It's been proven in a number of states to be a significant cost-saver," said Mark MacKenzie, executive director of global cash management at Citicorp.
Opposition to the pending electronic mandates has been close to nil, observers said.
One association of check cashing vendors in New York has sought to block that state's benefits transfer efforts, but observers said the issue is unlikely to hinder the progress of the programs.