Two banks, a utility, and Visa are piloting a system with the federal government to pay bills electronically.

The pilot began in July when the General Services Administration used Visa's E-pay system to pay its Virginia Power and Light bills.

Payments were transferred electronically in one day over Visa's network from the government's payments bank, First Bank System, to Mellon Bank Corp., which does cash management for the utility.

Since a majority of government payments are made by check, this pilot seemingly has limited significance. But the General Services Administration has broadened its scope to include six other customers, and it expects other agencies to use E-pay.

Government agencies "do write a lot of checks to different vendors," said Armen Khachadourian, senior vice president of Visa U.S.A. "What E- pay is providing is an ability to automate that process."

The General Services Administration, the U.S. Treasury, and the Office of Management and Budget have begun converting paper-based transactions to comply with the Debt Collection Act of 1996, which mandates all federal vendors accept electronic payments by Jan. 1, 1999.

"There is a huge number of transactions that flow from agency to agency," that the government will do electronically, said the Treasury Department's consultant, Stanley W. Anderson, president of Anderson and Associates in Arvada, Colo. "The E-pay concept is just one of several solutions."

For example, Checkfree Corp., Columbus, Ohio, is working with the Small Business Administration to pay utility and phone bills electronically, a spokesman said.

The government has been working on a vendor-by-vendor basis to automate the process. And it can do automated clearing house payments when it knows the vendors' banks. The process of paying the vendors originates from the federal agency and goes by way of the Treasury, the Federal Reserve Board, and finally the banking system.

Problems arise when not all banks have the capability to do electronic data interchange, and when vendors move from bank to bank, said Dennis Fischer, chief financial officer for the General Services Administration.

With Visa E-Pay, now four months old, "I don't have to keep track of which vendor is dealing with what bank, and what bank account I have," Mr. Fischer said. "That saves me work and misdirected payments."

The pilot that grew out of the electronic payments mandate "will grow exponentially throughout the government," said Conrad Tselepsis, product design manager in Mellon's Global Cash Management. "I'm fairly certain this has met the objective of achieving electronic payments."

First Bank System, which has a procurement card contract with the government, worked within the confines of that deal to set up accounts for the government, said Steven Putney, president of First Bank's corporate payment systems.

"The credit card system can facilitate a lot of those transactions without the traditional types of economics associated with credit cards," said Mr. Putney.

"It allows us with relatively inexpensive technology in a bank card environment, to set up these utilities and property management organizations that wouldn't have a cash management or EDI capability to do this at their site."

Mr. Putney said First Bank plans to use Visa E-pay for its commercial card business.

The government is considering other alternatives to writing checks, which cost about 40 cents per transaction, and the automated clearing house, which reduces the cost to about 10 cents, Mr. Fischer said.

For example, in a separate pilot called Prime Pay, First Bank System is working with the Department of Veterans Affairs to pay bills electronically for one vendor.

VA hospitals order supplies from one pharmaceutical company, sending the request on-line. The company processes the order and receives funds electronically from First Bank System.

By the biggest nut to crack, Mr. Fischer said, is the 92% of the 20 million transactions the government makes a year that are for less than $100,000. Many of those can be captured by credit card.

First Bank System's Rocky Mountain BankCard System subsidiary provides credit cards for small-dollar government purchase. The Visa International Merchant Purchase Authorization Cards are given to authorized government employees to charge purchases under $25,000.

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