First Union Corp. has struck a big deal with the U.S. Treasury to convert the federal government's nontax receivables into electronic funds transfers.

The government hopes to process some $40 billion worth of receivables that aren't tax-related - such as student loan and mortgage installments - through the automated clearing house network in the near future. Specific target dates have not been established.

First Union, based in Charlotte, N.C., will be the "recommended bank" to provide the federal government's 71 departments and agencies with automated clearing house services.

The Treasury's cash management arm, the Financial Management Service, will manage the agreement with First Union. The unit plans a direct payment initiative to "speed up the collections of these funds," said Judith L. Neyman, a vice president at First Union.

First Union - designated as an "ACH-only" bank - is the latest to join the Treasury Department's Government Lockbox Network, a prestigious group providing banking services to the federal government.

Other participants include BankAmerica Corp., First Chicago NBD Corp., Mellon Bank Corp., Mercantile Bancorp., and NationsBank Corp. But First Union is the one that the Treasury will recommend for automated clearing house processing of nontax receivables.

Ms. Neyman said the automated clearing house can "cut mail float and the time it takes to process the work from days to hours."

The terms of the deal between First Union and the government were not disclosed.

Financial Management Service, which dictates which lockbox bank an agency uses, has charged First Union with focusing on clearing services in order to promote competition among member banks, said the unit's director, Paul Gist.

"What we are trying to do is drive the cost down, find the bank that provides the best service, and make sure the agency is satisfied in terms of the service it needs," Mr. Gist said.

"In theory, since First Union is the ACH specialist, it probably should be in a more favorable position to offer the cheapest ACH services."

Under the agreement, First Union and the government will jointly develop marketing strategies to promote the use of direct payment.

The arrangement could affect a significant portion of the nation's residents.

Collections likely to be affected include student loan and FHA mortgage payments.

"The incremental reduction in the cost of collecting each item will result in significant savings to the taxpayer," Mr. Gist said.

The federal agencies that opt to participate will design direct-payment programs for their respective customers. Automated clearing house files will be created and electronically sent through the network to First Union, which will then debit the payer's accounts.

In the case of student loans, "we'd just debit the students checking accounts," Ms. Neyman said.

"The student or individual consumer will have to, through the agency, set up a debit capability," she said.

The Treasury move is part of a larger goal to wean the federal government from the use of paper checks in favor of electronic funds transfers.

Receivables that aren't tax related accounted for just a fraction of $1.5 trillion the government collected during fiscal year 1994, the latest for which data are available.

The Financial Management Service is also directing the development of the Internal Revenue Service's Electronic Federal Tax Payment System, which will electronically collect about 90% of all corporate taxes within five years.

"We've talked about the paperless society for years," said Nina Archer, a First Union senior vice president who heads the bank's Cash Management Division.

"Helping the federal government make this transition is a critical step toward us getting there - much the same as the IRS' Taxlink program has stimulated the use of electronic tax payments."

Taxlink, the operating prototype, will be phased out later this fall in favor of the Electronic Federal Tax Payment System.

First Union will also offer agencies the use of its electronic data interchange services to automate accounts receivables operations.

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