Concerned about the payment system's readiness for the "EFT 1999" mandate, the Treasury Department is pushing the Federal Reserve System to develop a low-cost electronic data interchange service.

Under that mandate, signed into law by President Clinton last year, most federal payments will have to be converted into electronic funds transfers by Jan. 1, 1999.

"Right now the systems that are in place and the software are not capable of transmitting a great deal of payment information," said John D. Hawke Jr., Treasury under secretary for domestic finance.

He said vendors to the federal government would find it difficult to "identify what payments are for" once the electronic mandate goes into effect.

The Treasury Department has suggested that the Fed can ease the transition by enhancing the data interchange capabilities of its bank payment services.

"We have been asked by the Treasury to provide translation capability on Fedline in order to support the mandatory EFT initiative," confirmed Sarah Green, senior vice president at the Federal Reserve Bank of Boston.

"We are evaluating whether it makes sense for us to go ahead and try to develop that capability," she said.

The Fed may issue a request for proposal later this summer.

"We want to do whatever we can to support development of financial EDI," Ms. Green said.

EDI is the exchange of documents and other information in standard computer formats. Electronic payments would be made via the automated clearing house network, the electronic funds transfer system designed for low-dollar recurring payments, such as direct deposits of payroll.

The ACH network contains several formats that can carry EDI information related to financial transactions.

The government issued more than 850 million payments to businesses and consumers in 1996. Conversion to electronic funds transfer could save $500 million in postage and paper-related costs in five years.

Electronic data interchange dates back to the 1970s. It has typically been adopted by large manufacturing companies and their trading partners using private business networks such as those of GE Information Services or Sterling Commerce.

The health care and mortgage industries, among others, increasingly find the automated exchange of documents and other information useful.

Banks can receive automated clearing house payments with attached EDI remittance information, but are most concerned about the payments.

Fedline is a network of personal computers serving more than 12,000 financial institutions. It gives many community banks a direct connection to the central bank for initiating wire transfers or ACH payments.

While some bankers are wary of any Federal Reserve action that smacks of competition with the private sector, the proposed EDI capability could benefit the private sector if it generates more electronic volume.

A handful of banks view EDI as a potentially lucrative fee-based business. But banks have not realized this potential, and have found the technology costly. Experts say perhaps as many as 50 banks offer full- fledged EDI services, although few are profitable.

Barbara Utendorf, vice president at Fifth Third Bancorp, Cincinnati, said the Fed could help change corporate perceptions about the automated clearing house.

She said company treasurers know most banks can't process EDI transactions and therefore turn to alternative networks.

"If we open those gates, where all banks have the ability to process it, I think you will see more corporations use the network," Ms. Utendorf said. "It would be a major event not only for the banking industry, but for the corporate industry."

The potential Fed effort is also seen by bankers as boosting a stalled EDI initiative led by the National Automated Clearing House Association and MCI Communications Corp.

MCI developed the service at the behest of Nacha, the Herndon, Va.-based group that coordinates ACH rulemaking.

Nacha issued a request for proposals on affordable EDI software in 1994. The resulting service involved software developed by the New York Clearing House Association and Bottomline Technologies Inc.

The New York Clearing House's software, in particular, is offered free to about 900 clearing house participants. As evidence of the lack of demand, only 70 have adopted it, said George Thomas, senior vice president at the clearing house.

Less than three dozen banks have bought MCI's service, and perhaps as many as 100 have installed software from Goldleaf Technologies Inc.

The government's push could "finally drive up some demand," Mr. Thomas said, though he wondered why the Fed "waited until the last minute."

He said Nacha approached the Fed as far back as 1993 to ask if it would develop an electronic data interchange service.

"They wouldn't, and now the Treasury is making them do it," Mr. Thomas said.

William Nelson, senior vice president at Nacha, tried to quell any potential competitive concerns, noting that EDI adoption is a shared priority.

The electronic mandate has "changed the whole equation" from the Fed's perspective, he said. "I think we are all on the same side."

Considering the several software options available to banks, Nacha has issued a request for comment on a proposed rule change that would require EDI translation capabilities for all banks. The association sees the possibility that the government may ultimately require it and wants the banking industry to control the terms.

The proposed Nacha rule change begins: "A receiving depository financial institution must make available to its receivers upon request all payment- related information contained within the addenda records transmitted with an ACH credit, debit, or zero dollar entry."

The wording does not distinguish between corporations and individuals, an important point for credit unions, savings institutions, and banks with no corporate banking business.

A source close to Nacha said the proposal, scheduled for a September vote, is not a shoo-in and might fare better if banks knew the Fed's intentions.

Michael Johnson, director of payment and recovery at the Social Security Administration, agreed that electronic data interchange has broad implications for all financial institutions, not just corporate banking giants.

Mr. Johnson said he has raised "the consumer EDI banner" to inform bankers that "EDI is not something restricted to a few institutions."

By 1999, Social Security will pay an estimated 51 million people electronically every month. A good portion of those will be sent to representatives or institutions such as nursing homes and hospitals.

These institutions historically have resisted direct electronic deposits because, absent EDI, the transmitted data are insufficient for reconcilement.

"Over the next few years, every financial institution is going to have to give some serious thought to this thing," Mr. Johnson said.

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