[House Hearing, 105 Congress]
[From the U.S. Government Publishing Office]



 
   OVERSIGHT OF THE IMPLEMENTATION OF THE ELECTRONIC FUNDS TRANSFER 
       PROVISIONS OF THE DEBT COLLECTION IMPROVEMENT ACT OF 1996
=======================================================================

                                HEARING

                               before the

                 SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
                      INFORMATION, AND TECHNOLOGY

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM
                             AND OVERSIGHT
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED FIFTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 18, 1997

                               __________

                           Serial No. 105-63

                               __________

Printed for the use of the Committee on Government Reform and Oversight






                       U. S. GOVERNMENT PRINTING OFFICE
45-434                         WASHINGTON : 1998
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              COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT

                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
J. DENNIS HASTERT, Illinois          TOM LANTOS, California
CONSTANCE A. MORELLA, Maryland       ROBERT E. WISE, Jr., West Virginia
CHRISTOPHER SHAYS, Connecticut       MAJOR R. OWENS, New York
STEVEN SCHIFF, New Mexico            EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California          PAUL E. KANJORSKI, Pennsylvania
ILEANA ROS-LEHTINEN, Florida         GARY A. CONDIT, California
JOHN M. McHUGH, New York             CAROLYN B. MALONEY, New York
STEPHEN HORN, California             THOMAS M. BARRETT, Wisconsin
JOHN L. MICA, Florida                ELEANOR HOLMES NORTON, Washington, 
THOMAS M. DAVIS, Virginia                DC
DAVID M. McINTOSH, Indiana           CHAKA FATTAH, Pennsylvania
MARK E. SOUDER, Indiana              ELIJAH E. CUMMINGS, Maryland
JOE SCARBOROUGH, Florida             DENNIS J. KUCINICH, Ohio
JOHN B. SHADEGG, Arizona             ROD R. BLAGOJEVICH, Illinois
STEVEN C. LaTOURETTE, Ohio           DANNY K. DAVIS, Illinois
MARSHALL ``MARK'' SANFORD, South     JOHN F. TIERNEY, Massachusetts
    Carolina                         JIM TURNER, Texas
JOHN E. SUNUNU, New Hampshire        THOMAS H. ALLEN, Maine
PETE SESSIONS, Texas                 HAROLD E. FORD, Jr., Tennessee
MICHAEL PAPPAS, New Jersey                       ------
VINCE SNOWBARGER, Kansas             BERNARD SANDERS, Vermont 
BOB BARR, Georgia                        (Independent)
ROB PORTMAN, Ohio
                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
         William Moschella, Deputy Counsel and Parliamentarian
                       Judith McCoy, Chief Clerk
                 Phil Schiliro, Minority Staff Director
                                 ------                                

   Subcommittee on Government Management, Information, and Technology

                   STEPHEN HORN, California, Chairman
PETE SESSIONS, Texas                 CAROLYN B. MALONEY, New York
THOMAS M. DAVIS, Virginia            PAUL E. KANJORSKI, Pennsylvania
JOE SCARBOROUGH, Florida             MAJOR R. OWENS, New York
MARSHALL ``MARK'' SANFORD, South     ROD R. BLAGOJEVICH, Illinois
    Carolina                         DANNY K. DAVIS, Illinois
JOHN E. SUNUNU, New Hampshire
ROB PORTMAN, Ohio

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
          J. Russell George, Staff Director and Chief Counsel
                Mark Brasher, Professional Staff Member
                John L. Hynes, Professional Staff Member
                          Andrea Miller, Clerk
           David McMillen, Minority Professional Staff Member

























                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on June 18, 1997....................................     1
Statement of:
    Creque, Marcelyn, volunteer director, American Association of 
      Retired Persons............................................   158
    Hawke, John D., Under Secretary for Domestic Finance, 
      Department of the Treasury; and Mark D. Catlett, Chief 
      Financial Officer, Department of Veterans' Affairs.........    16
    McEntee, Elliott, president and chief executive officer, 
      National Automated Clearing House Association; Dina 
      Nichelson, president, American League of Financial 
      Institutions; and Margot Saunders, managing attorney, 
      National Consumer Law Center...............................   176
    Wagner, G. Martin, Associate Administrator, General Services 
      Administration.............................................     5
Letters, statements, etc., submitted for the record by:
    Catlett, Mark D., Chief Financial Officer, Department of 
      Veterans' Affairs:
        Information concerning visitors to the AFC...............   156
        Prepared statement of....................................   101
        VA OIG evaluation of electronic data interchange 
          implementation.........................................   109
        VA strategic plan........................................    30
    Creque, Marcelyn, volunteer director, American Association of 
      Retired Persons, prepared statement of.....................   161
    Hawke, John D., Under Secretary for Domestic Finance, 
      Department of the Treasury, prepared statement of..........    21
    Horn, Hon. Stephen, a Representative in Congress from the 
      State of California, prepared statement of.................     3
    McEntee, Elliott, president and chief executive officer, 
      National Automated Clearing House Association, prepared 
      statement of...............................................   178
    National Check Cashers Association, Inc., prepared statement 
      of.........................................................   232
    Nichelson, Dina, president, American League of Financial 
      Institutions, prepared statement of........................   196
    Saunders, Margot, managing attorney, National Consumer Law 
      Center, prepared statement of..............................   205
    Wagner, G. Martin, Associate Administrator, General Services 
      Administration, prepared statement of......................     7
















   OVERSIGHT OF THE IMPLEMENTATION OF THE ELECTRONIC FUNDS TRANSFER 
       PROVISIONS OF THE DEBT COLLECTION IMPROVEMENT ACT OF 1996

                              ----------                              


                        WEDNESDAY, JUNE 18, 1997

                  House of Representatives,
Subcommittee on Government Management, Information, 
                                    and Technology,
              Committee on Government Reform and Oversight,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 9:35 a.m., in 
room 2247, Rayburn House Office Building, Hon. Stephen Horn 
(chairman of the subcommittee) presiding.
    Present: Representatives Horn and Maloney.
    Staff present: J. Russell George, staff director and chief 
counsel; Mark Brasher and John L. Hynes, professional staff 
members; Andrea Miller, clerk; David McMillen, minority 
professional staff member; and Ellen Rayner, minority chief 
clerk.
    Mr. Horn. The Subcommittee on Government Management, 
Information, and Technology will come to order.
    The Debt Collection Improvement Act of 1996, passed by 
Congress last April, included a provision to move the Federal 
Government toward direct deposit and electronic payments. This 
will reduce dramatically the problems of lost, stolen, 
counterfeit, and forged checks. It will also provide an 
opportunity for Federal agencies to reengineer their functions 
by taking advantage of electronic technology.
    The new law requires Federal payments to be made 
electronically by 1999, unless the beneficiary falls under an 
exemption available for hardships. Congress gave the Department 
of the Treasury flexibility in implementing a sensible payment 
system. We look forward with great interest to the release of 
the Department's proposed rule on implementation.
    I'm somewhat concerned, however, that this rule is not yet 
available for public comment. The rule will affect millions of 
people. It will require complex changes by citizens, the 
financial sector, and the Government. For these reasons I'm 
concerned that the delays may endanger public support and 
acceptance. I urge the Secretary of the Treasury to publish the 
proposed rule without delay. It needs to be done right, but 
part of doing it right is doing it quickly.
    The Department of the Treasury and other Federal agencies 
will need to conduct an aggressive public education campaign 
throughout 1998. They will need to provide information on how 
recipients can receive payments electronically. Without a rule, 
agencies cannot undertake this education campaign, answer the 
public's questions, and take the necessary steps to ensure that 
the transition to electronic payments is complete on January 1, 
1999.
    Thorny questions remain, especially regarding individuals 
without bank accounts. The Secretary of the Treasury has broad 
discretion in resolving such questions. We are fortunate today 
to have the Honorable Jerry Hawke, Under Secretary of the 
Treasury, be the point man on the electronic funds transfer for 
the Secretary.
    The proposed rule is not the only major project in 
electronic payments. The General Services Administration 
recently issued a draft solicitation and request for comments 
for the next generation of fleet, travel, and purchase card 
programs. These programs will be merged into one single card. 
This may be the best vehicle the Federal Government has to 
promote wider use of so-called smart cards, where data are 
stored on the card itself rather than in a central computer 
that must be accessed.
    Electronic payments are just one aspect of electronic 
commerce. In the finance office of the future, we will need to 
coordinate the Government's technological improvements with 
private sector standards to ensure compatibility and 
interoperability.
    Recently the Department of Agriculture showed what can be 
accomplished. It found that processing the paper transaction 
for an average order worth $185 cost $85 in administrative 
expenses. By contrast, processing the same order with the 
purchase card cost only $32. The purchase card also provided 
opportunities to reduce processing costs further to $17.
    In the private sector, General Electric has been able to 
re-engineer its procurement systems by putting them on the 
Internet, thus ensuring wider vendor participation. Costs have 
gone down, and the procurement process has been compressed. 
General Electric has found that small businesses benefit the 
most. We would like to see Federal agencies obtain similar 
success in flattening organizational hierarchies, reducing 
costs, and engendering greater competition in the future.
    This scale of change will be difficult. We're fortunate to 
have a well-regarded expert here with us to discuss this issue 
of electronic commerce, Marty Wagner of the General Services 
Administration.
    Mark Catlett of the Department of Veterans' Affairs has 
been a leader of pushing that agency toward electronic 
payments. His position in the Chief Financial Officers' Council 
can be very helpful in sharing experiences with other Chief 
Financial Officers who have been less successful with their 
agency payment system.
    We are also fortunate to have with us today representatives 
of business organizations for our second panel, and 
representatives of consumer organizations for our third panel. 
These witnesses can discuss intelligently the issues 
surrounding the new electronic funds transfer law. We welcome 
all these witnesses, and we look forward to their testimony.
    [The prepared statement of Hon. Stephen Horn follows:]

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    
    Mr. Horn. We will now begin with the first panel, the 
Honorable John D. Hawke, Under Secretary for Domestic Finance. 
Is he here yet? He'll be here at 10.
    So, Mr. Wagner, Associate Administrator, General Services 
Administration, will begin. Welcome, Mr. Wagner. And as you 
know the routine, raise your right hands.
    [Witness sworn.]
    Mr. Horn. Thank you very much. The gentleman has affirmed 
the oath and may begin.

STATEMENT OF G. MARTIN WAGNER, ASSOCIATE ADMINISTRATOR, GENERAL 
                    SERVICES ADMINISTRATION

    Mr. Wagner. Mr. Chairman, we do appreciate your interest 
because we think making electronic commerce work in the Federal 
Government is going to depend in part on both the support and 
guidance of the legislative branch. I was particularly 
impressed by your remarks at the beginning, because it showed 
that you understood how important business process re-
engineering and not simply using it as a new way of using, you 
know, with electrons to replace with atoms.
    I did make a prepared statement. Rather than read it, if I 
can submit it to the record?
    Mr. Horn. Right. It automatically with all witnesses goes 
in when I introduce you and then summarize any way you would 
like.
    Mr. Wagner. OK. If I might summarize very quickly. We see 
electronic commerce is the technology of electronic commerce as 
a great enabler. It facilitates change, but should not be used 
for its own sake. That would be one of our first premises. Our 
second is that in order to be successful, we have to ride 
commercial systems. The Government, big as it is, is a small 
tail on a fairly large dog, and we need to recognize that 
following the lead of the commercial sector is, in fact, the 
way to go. The third premise is that we're trying to follow a 
unitary vision, a single face to industry, at the same time 
recognizing that individual agencies and individual firms have 
unique requirements that they need to do themselves. So there 
is, in fact, a balancing between the single face goal and then 
recognizing the diversity across the economy.
    Now, we have made some progress, but I have to say there is 
a great deal still to do. We have had a great deal of success 
so far in the use of commercial cards using magnetic stripes, 
but we're only beginning to use the smart cards. In the new RFP 
that the Federal Supply Service of GSA has out as a draft for 
comment that you alluded to earlier, we are consciously 
embracing this unitary integrated vision. It's not simply 
viewed as a device to do business as usual.
    The second area that I think we've been fairly successful 
in is the use of the Internet and the WorldWide Web. For 
example, the catalogs, like GSA Advantage! and many other 
catalogs fielded by government agencies, seem to be a pretty 
effective tool for connecting government customers. At least 
for small purchases where you need a warehouse and to see what 
you need in the overall system. Finally, electronic benefits 
transfer, where we're moving from a paper-based world to card 
delivery systems, which may--and I'm sure the Treasury 
Department will be dealing with these issues--may also deal 
with concerns of the unbanked.
    On the electronic benefits transfer, if I could point out, 
this is not a normal role for GSA, but we are working with the 
actual agencies, which is the Agriculture Department, and 
Health and Human Services. They, in fact, make the policies. We 
are a coordination function, a single point of contact.
    And I have to confess, we do have in our own area certain 
things we view as mightily important. For example, we do not 
want the EBT card vision to actually take us backward from 
where we have been in paper. Right now a food stamp, for 
example, is good anywhere in the United States. We've embraced 
a unitary vision with EBT, with commercial systems. There's 
something called the Quest Mark, which follows commercial 
operating rules. To the extent we all--all States and the 
Federal Government-use this commercial system. We will then 
build something that is national in scope rather than creating 
new stovepipes.
    If I could make one question, we have, I believe, in 
section 30 in the DOD authorization bill on the Senate side, a 
recommendation for repeal of what was called FACNET provisions 
passed a few years ago before the Congress. It, in fact, 
illustrates how quickly this technology moves. It was a good 
idea for the time. GAO has now recommended, as are we, that it 
be--it be repealed because it is pushing the Government toward 
what is a good solution, but not ``the'' good solution. So we 
would urge you to consider whether you might embrace that 
approach.
    And with that quick summary of my testimony, I would be 
happy to answer any questions you might have.
    [The prepared statement of Mr. Wagner follows:]


    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    Mr. Horn. Well. It's an excellent summary, and we 
appreciate all you're doing in this area.
    In terms of FACNET, have you and the administrator sent a 
letter to the various Members of the committee?
    Mr. Wagner. I do not know the exact process. There has been 
certainly some process between the Office of Federal 
Procurement Policy and the Congress. If I could submit that for 
the record later on, the process.
    Mr. Horn. Yes, we would like to. And we'll be glad to 
followup on that. I assume it has the clearance of OMB that's 
in accord with the program of the President.
    Mr. Wagner. Yes, sir, it does.
    Mr. Horn. OK. Let me just ask a few questions here. There 
are going to be some questions we also ask Under Secretary 
Hawke.
    Your testimony asks for our support for new legislation 
that you say will provide more flexibility for electronic 
commerce. How will it do so?
    Mr. Wagner. Well, primarily this is the FACNET point I just 
mentioned. By pushing agencies toward a specific solution that 
basically is an electronic data interchange hub-based system, 
that tends to take energy away from the more recently developed 
Internet web-based approaches. So it gives us more flexibility 
to pursue where the technology is going rather than where the 
technology looked like it was going 3 years ago.
    Mr. Horn. Your testimony identified the potential of smart 
cards. What are the barriers in implementing smart cards all 
across Federal agencies?
    Mr. Wagner. The barriers to smart cards, I think there are 
really two. There is the one I think that all agencies are 
aware of: It's new and it's hard to do. There are issues of you 
can't just decide you're going to get smart cards. You have to 
worry about readers. So you have to find a cluster of a need 
for smart cards and deploy both the infrastructure and the 
cards themselves. That's the issue that all agencies are 
currently working on.
    Where we become concerned, it's back to my earlier point of 
a single face to industry. We're really quite worried that if 
we just do smart cards wherever they make sense, and that's a 
good idea, we run the risk of creating whole new stovepipes and 
separate domains. And you alluded in your remarks to the need 
to reengineer. So we're worried that the way smart cards might 
be done in an EPA where I once worked or a Treasury Department 
where that I once worked, if they're too different, we're going 
to end up having compatibility problems later on. We're, in 
fact, working with the agencies on some degree of commonality 
and how smart cards would work.
    Mr. Horn. How much infrastructure is already in place on 
the smart cards?
    Mr. Wagner. I do not have any good figures, but it's 
scattered and spotty in there. It's starting to appear to be 
there's a lot more than we might have realized. The Department 
of Defense has done a fair amount of work. It's--but I would--
if I could submit to you a more--what I would do off the top of 
my head would be anecdotal.
    Mr. Horn. Well, I don't want to cause you a lot of trouble. 
I just want to see the job done, but I was curious if you had a 
sense of that and the places where we're really lagging?
    Mr. Wagner. Where we're really lagging? I think we're all 
feeling our way forward. And there is, in fact, some dance when 
you're going through a new technology where what is new is 
always proprietary and unique to specific companies and 
specific requirements. As we move through those, we want those 
new services and features, but we don't want to lock ourselves 
in. So that's the process we're going through. There's a danger 
of crystallizing too soon on the wrong technology.
    Mr. Horn. Your testimony described a vision for the future 
where smart card systems are used as an integral part of the 
Government's internal business process. Can you describe how 
distant this future vision really is, and what is your 
timeframe for achieving that vision?
    Mr. Wagner. OK. My timeframe is basically to achieve a lot 
within the next 2 years, with a time horizon of about 5 years, 
and part of a time horizon of 5 years with a technology that 
moves as quickly as this, it's quite dangerous to speculate too 
far in the future.
    In the very near term we have the FSS card RFP, which will 
be hopefully awarded in the early part of the next calendar 
year. That would be a good vehicle for implementing smart card 
technologies and integrated solutions. We're also working with 
piloting, the planning model. Pure planning doesn't work, you 
have to do experiments. There is, for example, work with the 
Treasury Department on intragovernmental transfers where we're 
moving money within the Federal Government, but currently using 
cards to do it is more costly than it should be. We're working 
with--there's a Treasury pilot, a GSA pilot, and then we'll be 
trying to have a framework for learning through them.
    But the basic time horizon is within 2 years to see 
substantial penetration of smart cards. By that I mean you can 
see them, you can count them, you know what they're doing, to 
be using them to some degree in a standard way. Recognizing 
that what the world looks like in 2 years is going to be 
different from what we think it is. We'll have to reset for our 
next 2 years and then 5 years.
    Mr. Horn. In the last Congress, the House introduced smart 
identification cards. Employees were told that locked doors 
would open when important staff approached, and all sorts of 
new capabilities would be added on to this smart card. The new 
Congress brings new ID cards. Now they're of the cheap plastic 
variety again, and those new features were never implemented. 
Does GSA risk getting ahead of the private sector and bringing 
out a smart card when this contract is awarded or of procuring 
a card that we do not need?
    Mr. Wagner. I do not think we're actually running the risk. 
In the original draft that went out for industry comment, we, 
in fact, had a requirement for hybrid cards, which is another 
term for smart cards. It has the chip on it. We removed that as 
a mandatory requirement, but have that as value added. The 
approach we take embraces the current mag stripe 
infrastructure, but looks for migration paths as you move into 
a smart card future. We think it is very important to do 
experiments to pilot and learn from those pilots and then 
adjust accordingly.
    The, if we get--in fact, there's a good, perhaps a 
standard, phrase. We like to be on the ``leading edge, but not 
the bleeding edge.'' We plan to be sitting there just behind 
the innovative commercial leaders, not so far behind as to be 
left behind, but not so close up as to get our own blood on 
those edges. Sorry for that.
    Mr. Horn. I sympathize with that observation from long 
experience.
    Your testimony describes some of the accomplishments in 
implementing electronic benefit transfer systems. What goals 
are you trying to achieve for the electronic benefits transfer 
program, and what is GSA's role in the mission?
    Mr. Wagner. Well, our main role is to coordinate and 
facilitate the move toward this unitary vision. We are working 
actively with the involved agencies as well as the States to 
facilitate that move to that common vision. I think that what 
we see as the most important thing that GSA does, as 
distinguished from major policy calls by other agencies, is 
that, when you use that EBT card, that it may be different 
contracts and different States, but it's in accordance with the 
uniform infrastructure using the Quest Mark and the standard 
operating rules; that it's as nationwide and is more effective 
than the current, for example, paper food stamp-based program.
    Mr. Horn. Let me ask you the question, as I mentioned 
earlier, that I will also be asking Under Secretary Hawke.
    We will swear in our other two witnesses, and you are right 
on time, gentlemen. Thank you very much.
    But, Mr. Wagner, let me ask you, in April, the Subcommittee 
on Government Management, Information, and Technology held a 
hearing on the Debt Collection Improvement Act of 1996. I asked 
Jerry Murphy to examine with the General Services 
Administration whether an administrative offset feature could 
be incorporated into Federal credit card systems to offset 
Federal payments to deadbeat vendors who are delinquent on 
Federal debts. These cards will be accepted by millions of 
vendors, some of whom will owe money to the Federal Government. 
These payments will represent $30 billion in disbursements over 
5 years. Is there any progress on that front?
    Mr. Wagner. Yes, there is some progress. I should emphasize 
you've hit on a very key issue in how to implement the act. In 
current RFP, the act applies to the prime contract vendors, and 
we have that covered, and any payments to them will go through 
the offset process.
    The question you allude to is agency action, purchases of 
50 or 100 or some small item from vendor A, and it goes into 
the credit card system, and it's settled according to the 
operating rules followed by millions of businesses.
    We do not yet have a good answer on that question. What we 
have done is we have solicited input from the industry on how 
best to address this concern. We're working with the Treasury 
Department on how to do that. But when I mentioned--it's 
important to keep in mind, as you yourself have pointed out, 
that when you are in the commercial system, you have to 
recognize they're following commercial rules. Working through 
that process with the Treasury Department is likely to take 
some time, but we want to begin now because this contract is a 
multiple award contract, likely to last for many, many years. 
And the fact that we may not be able to do something today, 
according to the banking system rules, doesn't mean that over 
the life of the contract that it will not be possible later on. 
We'll be working toward coming up with a solution. We'd also 
appreciate any guidance you may have to give us on this issue.
    Mr. Horn. Well, Mr. Wagner, you've done an outstanding job. 
Can you stay with us a little bit----
    Mr. Wagner. Yes.
    Mr. Horn [continuing]. In case questions come up when the 
Under Secretary testifies and Mr. Catlett?
    Gentleman, if the two latecomers are here--or early 
arrivals, I should say.
    [Witnesses sworn.]
    Mr. Horn. Thank you, gentlemen.
    Both witnesses have affirmed.
    Let's start with Under Secretary Hawke. I know you're in a 
tight schedule this morning. You've already delivered one major 
address to change Federal policy. This is your next appearance. 
So, thank you for coming.

   STATEMENTS OF JOHN D. HAWKE, UNDER SECRETARY FOR DOMESTIC 
FINANCE, DEPARTMENT OF THE TREASURY; AND MARK D. CATLETT, CHIEF 
       FINANCIAL OFFICER, DEPARTMENT OF VETERANS' AFFAIRS

    Mr. Hawke. Mr. Chairman, this is my most important 
appearance today, and I appreciate the opportunity to be here. 
We're shooting for the 10 o'clock schedule that we understood 
was the timing.
    Mr. Horn. You're right. You're ahead of time. So please 
proceed with your testimony any way you would like to give it. 
As you know, it's automatically included and if you would 
please like to summarize.
    Mr. Hawke. Thank you. I will truncate my prepared 
statement, Mr. Chairman, and we appreciate the opportunity to 
appear before you today to discuss the implementation of the 
new EFT 1999 mandate. This law, which as you know, excludes 
only tax refunds, is going to have far-reaching implications 
for millions of Americans.
    The electronic transfer initiative includes four distinct 
elements. After July 26, 1996, all Federal payments, except tax 
refunds, to newly eligible recipients who have bank accounts 
must be made by EFT. And that is proceeding well, Mr. Chairman. 
We understand that 85 percent or more of new recipients are 
coming onstream with electronic payments.
    Starting January 1, 1999, all Federal payments, with the 
exception of tax refunds, must be made by EFT. Treasury is 
mandated to ensure that all recipients who are required to 
receive payments electronically have access to an account at a 
financial institution at a reasonable cost and with the same 
protections as other account holders at that financial 
institution. And finally, the Secretary is authorized to grant 
waivers based on recipient hardship, for classes of checks, or 
where otherwise necessary.
    Our goal, Mr. Chairman, is to issue payments by a method 
that will provide the best service to recipients at the lowest 
possible cost to taxpayers and with the greatest degree of 
transaction security. Attached to my written statement is a 
chart that shows the benefits of EFT. As the chart shows, EFT 
will save taxpayers money. The Government's cost for an EFT 
payment is only 2 cents--this is right at the back of my 
statement--while check payments cost the Government 43 cents 
each. We estimate that full implementation of EFT 1999 will 
save taxpayers approximately $500 million over 5 years in 
postage and check production costs alone.
    This chart also shows a drastic decrease in payment 
inquiries and claims under EFT as compared to the paper check 
environment. The chart further shows that EFT increases 
transaction security and significantly reduces opportunities 
for crime.
    Mr. Chairman, I would like to share with you now the 
principles that Treasury has formulated to guide it in the 
implementation of EFT 1999. First, the transition from a paper-
based system to an electronics system should be accomplished 
with the interests of recipients ranking of paramount 
importance. We should maximize private sector competition for 
the business of handling Federal payments so recipients not 
only have a broad range of choice of payment services and 
service providers, but also that they receive their payments at 
a reasonable cost with substantial consumer protections and 
with the greatest possible convenience, efficiency, and 
security. All recipients, and especially those having special 
needs like the elderly individuals with physical, mental, or 
language barriers and those living in remote or rural 
communities, should not be disadvantaged by the transition to 
electronic payments.
    Finally, the EFT 1999 program should, to the maximum extent 
possible, seek to bring into the mainstream of our financial 
system those millions of Americans for whom the system is as a 
practical matter not presently available. And I should say, Mr. 
Chairman, that overarching these principals is the major 
objective of reducing the costs to the government and taxpayers 
of the whole payments process.
    Since the passage of the Debt Collection Improvement Act in 
April of last year, we've made significant progress in our 
implementation efforts. In July of last year, we released an 
interim rule implementing the first phase of the conversion 
from check to EFT. That is the phase relating to new recipients 
who come onstream and who have bank accounts.
    In addition to reviewing the comments received in response 
to the interim rule, Treasury has undertaken extensive outreach 
efforts. These include meetings with various interest groups, 
including consumer groups, vendors, financial trade 
associations, and financial services providers, including bank 
and nonbank entities. Our outreach efforts to consumer 
organizations began in earnest with a meeting that I convened 
last November. Treasury representatives have met with 11 
different consumer groups over the 9 months since July 1966. We 
also held an EFT 1999 consumer briefing session in April that 
was attended by over 30 consumer groups.
    Our representatives have met with 17 financial services 
providers since the publication of the interim rule. These 
providers include financial institutions as well as nonbank 
entities, such as check cashers, automatic bill payers, and 
other financial services providers.
    In addition, we held an EFT 1999 briefing session that was 
attended by a number of financial trade associations. In 
partnership with the Federal Reserve Banks and the American 
Bankers Associations, we've reached over 1,000 financial 
institutions in nationwide seminars held since October 1996, 
and these seminars will continue through this fall.
    Part of our objective here, Mr. Chairman, has been to raise 
the level of awareness of the financial services industry to 
what's coming down the pike in respect to EFT 1999. In April of 
this year, we met with a group of Government vendors to discuss 
their concerns regarding EFT 1999. And since the passage of the 
legislation, we've worked closely with Federal agencies, the 
Federal Reserve, and financial institutions.
    We've seen tremendous momentum in converting benefit check 
payments to EFT. The Social Security Administration, for 
example, has seen its direct deposit enrollment rate nearly 
triple since its legislation went into effect July 26th of last 
year. This results from the laws requiring that all newly 
entitled recipients with bank accounts receive payments by EFT. 
From fiscal year 1996 year-end to mid-fiscal 1997, the 
percentage of all Treasury-disbursed EFT payments has increased 
4 percentage points, from 53 to 57 percent of total Treasury 
disbursements.
    The immediate challenge that we're facing is publishing a 
proposed rule to implement the second phase of EFT 1999. Our 
goal in this rulemaking process is to develop policies that are 
simple, clear, and most importantly, effective in dealing with 
the difficult issues associated with mandatory EFT. We 
anticipate a mid-July 1997 release date for the proposed 
regulation, with a 90-day comment period, after which we'll put 
out a rule in final form.
    By far the most complex and controversial policy issue 
confronting us in our efforts to implement EFT 1999 is how to 
meet the needs of recipients without bank accounts. Under the 
existing Federal payment system, electronic payments may only 
be deposited into accounts at financial institutions that are 
members of automated clearinghouses. As a result, the 
population of Federal payment recipients without bank accounts 
is currently precluded from receiving the benefits of direct 
deposit.
    Secretary Rubin has made it one of his high priorities to 
encourage people without bank accounts to move into the 
financial services mainstream. And financial services providers 
offer many services that are critically important, if not 
essential, to virtually all American families. These may 
include access to federally insured deposits, the opportunity 
to earn interest on deposits, the availability of personal 
credit, and access to home mortgages. Some 40 million American 
households with incomes under $25,000 need these services.
    Many payments recipients without bank accounts have told us 
that the lack of reasonably priced financial services currently 
prevents them from moving into the financial mainstream. As a 
result, Treasury has devoted significant efforts to increasing 
the availability of low-cost banking services. Our Direct 
Deposit Too program encourages banks to offer a reasonably 
priced direct deposit account. Direct Deposit Too is based on a 
model account, based on debit card access with no minimum 
account requirement. And we've suggested this to banks as a 
low-cost alternative to traditional checking accounts. For 
recipients who are unable to obtain low-cost financial services 
through the private sector, Treasury is also developing a 
nationwide electronic benefits transfer system.
    We recognize that some recipients of checks will be unable 
to receive payments electronically because of their personal 
circumstances. In the proposed regulation, Treasury will 
solicit comments on the circumstances under which a recipient 
should be granted a waiver from receiving payment 
electronically. We will take into account not only geographic, 
physical, financial, and mental barriers, but other compelling 
circumstances.
    A major issue associated with implementing the mandatory 
EFT requirement is how we convert vendor payments to electronic 
funds transfer. Although vendor payments comprise only 2 
percent of total Federal payments, they represent a much larger 
percentage of nonbenefit agency payments, between 10 and 30 
percent depending on the agency.
    Vendor EFT enrollment has increased approximately 60 
percent from fiscal year 1996 year-end to mid-fiscal 1997. 
However, the total percentage of vendor participation is still 
only 26 percent. Historically, vendors have been slow to enroll 
voluntarily in the EFT program, partly because of obstacles 
associated with disbursing electronic payments to vendors. One 
major challenge is that many vendors are not able to access the 
remittance information that's transmitted along with electronic 
payments. As a result, when payments are credited to their 
accounts, it may be difficult for them to reconcile their 
accounts receivable. This problem occurs because many small to 
medium-sized banks do not have the special software that's 
needed to translate to readable form the information that's 
transmitted with electronic payments.
    It's estimated that there are approximately 11,000 banks 
capable of accepting an electronic payment. Fewer than 1,000 
can translate the remittance data into a readable form for 
their customers. We're presently working with other Federal 
agencies, financial institutions, and vendors to address these 
problems and develop low-cost solutions.
    I would like to discuss briefly one of the most significant 
aspects of our plan to implement EFT 1999. Aside from our other 
implementation efforts, we plan to conduct a comprehensive 
public education campaign to ensure that there's sufficient 
information available to stakeholder groups and the public 
about the requirements of the mandatory EFT legislation and 
about the benefits of electronic transfers.
    In fiscal 1997, we'll provide informational services to 
financial institutions to ensure they're operationally prepared 
for handling the increased demand for EFT services. In 
addition, we will continue our interaction with consumer 
groups, government vendors, financial trade associations, and 
other government agencies to ensure they're aware of the 
implications of the EFT legislation. We'll also roll out a 
nationwide public awareness campaign that will encourage check 
recipients to convert voluntarily to electronic fund transfer 
in advance of the January 1, 1999 deadline.
    In summary, the objectives of this campaign will be to 
partner with the private sector and other Federal agencies, to 
educate consumers to make good choices, and to minimize 
disruption to recipients while adding value to the way they 
conduct their finances.
    In conclusion, Mr. Chairman, the Treasury Department 
believes that this legislative mandate provides an important 
opportunity for us to provide the high quality of service that 
our customers want and need and at the same time to lower the 
cost to taxpayers. Benefit recipients have told us that they 
want to be able to receive their payments at points that are 
easily accessible and increase their safety and security if 
this can be done at a reasonable cost. Our proposed regulations 
will attempt to address these needs. We welcome, encourage, and 
look forward to the public comments that we will receive on our 
forthcoming proposal, and we look forward to working with the 
committee as we move forward on this initiative. Thank you, Mr. 
Chairman.
    Mr. Horn. Well, we thank for you that very full statement.
    [The prepared statement of Mr. Hawke follows:]




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    Mr. Horn. Now we welcome Mr. Catlett. Mark Catlett is the 
Chief Financial Officer of the Department of Veterans' Affairs, 
and we're glad to see you here again.
    Mr. Catlett. Thank you, Mr. Chairman.
    Mr. Horn. And the statement, you don't have to read it. It 
is in the record. If you would like to summarize it.
    Mr. Catlett. Yes, sir, I would.
    Mr. Horn. And we can get to questions.
    Mr. Catlett. Mr. Chairman, it is my pleasure to be here 
today on behalf of the VA to testify on the Debt Collection 
Improvement Act of 1996. I'm here today to provide you some 
insight into our electronic commerce activities with the 
thousands of vendors that we do business with daily that are 
vital to accomplishing our VA mission.
    The VA realized some time ago that EFT, electronic data 
interchange [EDI], and electronic commerce [EC] were the 
business solution to streamlining procurement and payment 
processes. As early as 1995, VA developed an electronic 
commerce strategic plan. I have a copy here. I will be happy to 
submit it to you for your information.
    Mr. Horn. Right. Without objection it will be in the record 
at this point.
    [The information referred to follows:]



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    Mr. Catlett. In this strategic plan we identified a series 
of activities and improvements we sought to implement in order 
to bring about EDI and electronic commerce. With the completion 
of these improvements, the VA has met its goals as outlined in 
this plan. The VA now provides a number of alternative 
solutions for EC and EDI processing, including the use of the 
IMPAC card for micropurchases, and a prime vendor payment 
system for purchases of pharmaceutical and hospital supplies. 
In combination, EDI and EC alternative solutions have led VA to 
be one of the leading agencies in promoting EC solutions for 
acquisition, finance, and payment-related processes.
    Currently, VA processes 30 percent of its invoices, 99.6 
percent of its receiving reports, and 49 percent of its vendor 
payments electronically. Through development of EFT payment 
capabilities and enthusiastic promotional efforts, VA has been 
highly successful in significantly increasing the number of 
payees receiving salary, travel, and benefit payments.
    Through the EC and EDI processes, programs currently in 
place, and the significant enhancements scheduled for the 
immediate future, VA offers a comprehensive EC/EDI/EPT program. 
All of these electronic commerce activities have resulted in a 
reduction of close to 10 million paper transactions annually 
for the VA. In 1990, we were transactioning paper mostly at our 
finance center in Austin and at our medical centers primarily 
over 11 million pieces of paper. We hope by the end of 1997 to 
be at about 1.3 million pieces of paper.
    This has obviously benefited the VA. We believe it has also 
benefited our trading partners and the various payment 
recipients. We are in a position to implement, essentially meet 
the mandatory requirements of the act of all electronic 
payments by January 1999.
    I will just add a few other updates and highlights of our 
activities to give you some sense of the activities that we 
have underway. In EDI, the VA utilizes a full EDI cycle for the 
procurement and payment process. At the end of April 1997, VA 
had 485 trading partner relationships, primarily our largest 
trading partners, established with vendors wishing to receive 
electronic requests for proposals to submit their offers. 
During fiscal year 1996, the VA received 180,060 EDI invoices, 
not including our credit card activity.
    Our Austin Finance Center staff worked closely with 
Treasury's Austin Regional Finance staff to implement the first 
application of the American National Standard Institutes X-12 
820 payment instruction and remittance advice. By the end of 
fiscal year 1996, over 40 percent of VA payments were issued as 
EDI payments. To promote and enhance EFT participation in May 
1997, the VA mailed letters to over 50,060 of our 200,060 
vendors currently receiving paper checks. To date, we have had 
positive responses from almost 11,060 of those vendors. In June 
1997, this month, VA will contact a second group of 50,060 
vendors. The process will continue until all vendors have been 
contacted and enrolled.
    The IMPAC Visa purchase card is used almost exclusively now 
in the Department for micropurchases, those purchases under 
$2,500. We have had great expansion in this past year. At the 
beginning of fiscal year 1996, less than 1 percent of our 
micropurchases were done on purchase cards. As of April 1997, 
we're over 90 percent. This is due largely to VA's internally 
developed credit card system which has made it convenient for 
our employees as well as for the vendors. This system 
electronically processes all VA's Visa transactions. In the 
month of April, 140,060. The transactions are posted to our 
accounting system automatically, and, of course, electronically 
remits payments to the bank card contractor. VA has received 
$2.7 million in rebates, and has been recognized for this 
credit card system, with the Hammer Award by Vice President 
Gore.
    Further, Mr. Chairman, we intend and have begun to expand 
this activity to our Prime Vendor Alternative Payment Program, 
which will streamline VA's multibillion-dollar prime vendor 
payment process. Using a payment system based on the credit 
card system I have just mentioned, VA can now accept an 
electronic transfer file for prime vendor transactions, post 
those transactions to our accounting system, and, again remit 
the electronic payment to the contract bank.
    Thank you for this opportunity to share our views and 
innovative initiatives on electronic commerce as it relates to 
the Debt Collection Act.
    Mr. Horn. Well thank you very much Mr. Catlett.
    [The prepared statement of Mr. Catlett follows:]

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]


    
    Mr. Horn. Could you tell us, is there any experience we 
have in terms of auditing where electronic data interchanges 
are more difficult to audit than paper ones? What do we know 
about that when it gets--have you had any chance to even look 
at possible fraud, that kind of thing?
    Mr. Catlett. Mr. Chairman, I'll get that for the record. In 
general, I know our Inspector General has begun to look at this 
issue as we have expanded greatly, particularly in the credit 
card area. The general information that I have for you today is 
that there is less fraud and less chance for abuse in that 
program. I don't believe we have an official report from the 
IG, but they have done some preliminary investigative work, and 
I'll be glad to provide that for the record.
    [The information referred to follows:]


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    Mr. Horn. Good, I'll appreciate it. I would be glad to 
receive for the record what I thought you would answer, and you 
did. I also need to know if there are problems and what we need 
to do in that area to solve them.
    Now, let me get back to the questions with Mr. Hawke, and 
then we'll pursue questions with all of you. This question 
relates, Mr. Secretary, to the unbanked. Most ATMs have a $300-
per-transaction cash limit, while Social Security checks 
average about $700. How does the Department of the Treasury 
propose to ensure that the beneficiaries will not have to go 
three times to the ATM to withdraw their money if they need it 
immediately with all the hassle, the delays, and the costs that 
that entails?
    Mr. Hawke. Well, that is a problem, Mr. Chairman, that 
we're very concerned about. We would never create a mandatory 
account that would prevent a recipient from getting all the 
cash they need. There is of course, a security feature to those 
limitations on ATM disbursements as well as a kind of a 
logistical reason for them. But that's one of the questions we 
are going to be addressing as we try to formulate the 
specifications for the account that we will provide.
    I think it's important to remember here that many 
recipients will be choosing accounts at a financial institution 
of their choice. And we're trying to encourage as much 
competition among the financial sector as possible to offer 
consumers voluntary choices of accounts that they can opt into 
the way they do today. So the forces of competition will play a 
role here.
    What we're most challenged by right now is how we fulfill 
our mandate to assure that everybody has access to an account. 
And that's the option where we will probably be going out and 
procuring account services. We will write the specifications 
for that account, and this is one of the issues that we'll have 
in mind very much when we do that.
    Mr. Horn. One often reads about fraudulent activities that 
occur are really--people that prey on senior citizens at the 
time the check is coming. Now, I don't know if the ATM helps 
deter some of that, since I guess they can stand there and file 
it several times to get all the cash out of the account. But 
sometimes tellers, when they see people in the bank, can spot 
that type of thing and sort of alert people that one is 
withdrawing under pressure what's in the account. Has much 
thought been given to that?
    Mr. Hawke. Not to that specific issue, Mr. Chairman. But we 
believe that, generally speaking, an electronic account is 
going to be more secure and provide more protections for 
recipients than the present paper check. Today the recipient of 
a check is forced to convert that into cash all at once. And 
they take the risk not only of theft of the cash, but loss of 
the check and forgery and alteration. In the electronic 
environment, we would hope that we can structure an account, 
and that the private sector institutions will offer accounts 
that will encourage thrift; that is, will encourage individuals 
to leave their funds in the account so that they're not forced 
to take them all out on the first day. And that not only 
provides a security feature for the individual, but also is one 
of those factors that's important in trying to get the unbanked 
people into the banking system, make them accustomed to using 
bank accounts and comfortable with that.
    Mr. Horn. Well, I think you're absolutely right. I think a 
lot of theft goes on when those checks arrive, right out of 
mailboxes. And this way you would at least know the money is 
automatically deposited in your bank account. And I must say my 
bias is I can't believe someone wouldn't want it deposited in 
their account and not waste their time as we used to to have to 
go to the bank, put the check in, and all the rest of it. So if 
we want to protect senior citizens, I would think this is the 
way to protect them.
    Later witnesses will argue that only federally regulated 
and insured institutions be permitted to be the conduits of 
electronic Federal payments. This would have the effect of 
excluding certain businesses, such as check cashing firms. 
These firms have the infrastructure in place in many poor 
neighborhoods with no banks, but many assert these firms engage 
in predatory practices. What's your reaction to this?
    Mr. Hawke. Mr. Chairman, I think we need to determine who 
can be the conduit; that is, who can have the relationship with 
the recipient, and what kind of institutions we can deliver 
payment to. Right now we can only deliver payment to 
institutions that are members of automated clearinghouses. That 
essentially means depository financial institutions.
    Just as with paper checks, there's a limit to what we can 
do to restrict the arrangements that an individual makes once 
the funds come into the possession of the individual. An 
individual who receives a check today, can take that check and 
cash it at any place they want or do whatever they choose with 
it. So, by analogy, there are limitations to what we can do 
with respect to an individual's ability to engage in other 
relationships once the payment goes into an account.
    Now, we do feel rather strongly that as far as the account 
that we're concerned about what we've come to call the default 
option, that is the option that we provide for recipients who 
don't have a bank account and haven't chosen one of their own, 
that those should be in federally insured and regulated 
financial institutions to provide the maximum safety for those 
individuals for whom we are providing the account. As I say, 
the arrangements that individuals make with other parties with 
respect to the treatment of that account once the funds are in 
there in the individual's names is something that we probably 
have very little ability to affect.
    Mr. Horn. This question concerns the proposed benefits 
security card, Vice President Gore's proposal, as we know, to 
have all Federal benefits on a single card. Have you considered 
whether some seniors or veterans would not want their payments 
associated with the concept that might imply public assistance 
payment or welfare benefit, and might that damage acceptability 
of the card? What's your thinking at this point?
    Mr. Hawke. Yes. That is a concern that we are aware of and 
sensitive to and we haven't decided exactly what the 
interaction will be between the EBT programs and the EFT 
program. There are lots of reasons why we might not require a 
Federal recipient to use the benefit security card. For 
example, the benefit security card is a medium for 
transmitting, in many cases, family benefits like food stamps, 
where they're available to a number of members of the family. 
But in electronic funds transfer, the transfer has to be made 
to an individual who is the designated recipient of that 
payment. There may be different features in the default option 
account that we provide that would lead us to want to make that 
available rather than forcing people onto a benefit security 
card. But that's an issue that we have very much in mind.
    Mr. Horn. Mr. Catlett, has the VA given any consideration 
to this idea of the proposed benefits security card? Since you 
have a number of benefits to render, I just wonder how you feel 
about it at this point?
    Mr. Catlett. Sir, we estimate about 9 percent of our 
beneficiaries are unbanked at this point. We have not looked at 
those specific issues in detail that we have addressed here. In 
general as an option, I endorse the idea that the safety and 
convenience is something that we ought to promote with our 
veterans. We have some issues there in terms of thinking that 
all 130 percent of our veterans will be able to be 
electronically receiving payments by January 1999, but we are 
making great progress in expanding the number who are 
participating in the EFT program.
    Mr. Horn. Has the Chief Financial Officers' Council looked 
into the benefit security card in any way? Is there a subgroup 
or task force?
    Mr. Catlett. There have been discussions, and I know Marty 
has been to the council speaking to us about that.
    Mr. Horn. Do you want to add anything, Mr. Wagner, just to 
the benefit security card, the degree to which it's being 
considered in the executive branch?
    Mr. Wagner. The specific issue of stigma, I'm going to have 
to do some thinking about it. My top-of-my-head reaction is 
you're looking for a delivery platform that's a single face 
delivery platform to deliver multiple services, whatever they 
may be. And it sounds to me like there's a real risk. But the 
way to deal with it is you address it as a broad-based solution 
rather than just an extension of a welfare or a food stamps 
program.
    But I think I have to go back and discuss that potential 
issue. That could be--the way it's perceived. It's also an 
empirical question, what they really feel rather than what 
people say they feel. We'll look into it.
    Mr. Horn. Thank you.
    Mr. Secretary, the issue of cost has emerged as a key issue 
concerning the implementation of the EFT law. How will cost be 
apportioned between the Treasury, vendors who provide EFT 
services via contractor relationships, and recipients of 
Federal benefit program payments?
    Mr. Hawke. Well, Mr. Chairman, with respect to what I call 
the default option, that is the account that we will procure 
and make available to those unbanked recipients that don't 
otherwise choose their own account, we don't view that as a 
subsidized account. That is an account where we will set the 
specifications of the account in the invitation for bids. And 
we'll get competitive bidding from companies that will offer 
this with the expectation of getting a substantial volume of 
payments.
    Our mandate under the statute is to make sure that that's a 
reasonable cost. But there is no mandate for us to subsidize an 
account. And we're concerned about what the effect of that 
would be. Ideally, the private sector would respond to this new 
initiative with a wide variety of account configurations that 
would be of appeal to people who are receiving electronic 
payments. And first off, we would like to see the processes of 
competition work. If we come out with a subsidized account, it 
may undermine that process. So we have to be very careful in 
that regard.
    Mr. Horn. Your testimony briefly mentioned the 
disincentives in the Prompt Payment Act to use EFT for vendors. 
Could you describe some of those disincentives?
    Mr. Hawke. Well, the principal problem with respect to 
vendors is the problem of transmitting payments information 
along with the payment. Particularly larger vendors, who are 
recipients of a lot of payments, are going to have difficulty 
identifying a particular payment to a particular invoice. And 
that's the major problem that that's inhibiting us from moving 
ahead on the vendor side. When electronic data interchange 
becomes more readily usable, we think that problem will tend to 
disappear.
    Mr. Horn. Mrs. Creque, who represents the American 
Association of Retired Persons, AARP, and who will be a witness 
after this panel, notes the possibility of nursing homes or 
other institutions with the financial interest in payees being 
designated as an authorized payment agent. Have you looked into 
this possibility?
    Mr. Hawke. We've been considering that possibility. And 
there are presently arrangements that the Social Security 
Administration sanctions with respect to the designation of 
third parties to receive payments on behalf of individuals who 
are incapacitated or the like. We don't propose to change those 
or really expand those relationships at all. Again, we believe 
that our mandate is to transmit funds to an account in the name 
of the individual recipient. And in cases of particular 
hardship, we would grant waivers, where appropriate, to allow 
an individual to continue to receive a check.
    Mr. Horn. Now, I'll ask you the question that I asked Mr. 
Wagner. In April, the Subcommittee on Government Management, 
Information, and Technology held a hearing on the Debt 
Collection Improvement Act of 1996. At that time, I asked Jerry 
Murphy to examine with GSA whether an administrative offset 
feature could be incorporated into Federal credit card systems 
to offset Federal payments to deadbeat vendors who are 
delinquent on Federal debts. These cards will be accepted by 
millions of vendors, some of whom will owe money to the Federal 
Government. These payments will represent $30 billion in 
disbursements over 5 years. Is there any progress on that 
front?
    Mr. Hawke. I think Mr. Wagner said about what I would have 
said on that question. We've asked GSA to build into the new 
card the capacity for offset, and we're working with them to 
try to see how that could best be done.
    Mr. Horn. Well, we thank you.
    And we move now to Mr. Catlett for a few questions. And 
your testimony noted that 49 percent of the vendor payments are 
processed electronically. That compares with a mere 12 percent 
governmentwide. This was accomplished in an organization where 
each hospital director jealously protects his or her turf. Do 
you have any feeling why other agencies haven't been as 
successful as the VA? Or does modesty keep you from answering 
that question?
    Mr. Catlett. Mr. Chairman, I would like to answer that 
question from our perspective.
    Mr. Horn. Yes.
    Mr. Catlett. Which is, I believe, one reason, as you 
recognize, we do have activities across the country. But some 
time ago, before we even reached electronic payments, had 
centralized the process in our financial transactions. So that 
clearly has given us a capability. All this information, as I 
noted, nearly 130 percent comes electronically from the 
facilities now to our center in Texas. And that's been the 
focus of our activity, to develop these relationships with our 
trading partners and with the vendors.
    As I mentioned, there were 485 where we have full process. 
We've gone after the largest ones first. Despite having 
hundreds of facilities, there are several hundred companies 
that probably do 80 percent. It's the 80/20 rule here; 80 
percent of our business, probably, with the top 20--clearly 
with the top 20 percent of our 200,060 vendors, and I'm sure 
it's higher than that. So we've been able, through having a 
centralized activity, to address the industry in that way.
    Mr. Horn. As the VA have shown, if management makes the 
electronic payments a priority, it can dramatically increase 
the volume of electronic payments. What leadership has the CFO 
Council provided in the area of electronic payments?
    Mr. Catlett. The CFO Council you're speaking about?
    Mr. Horn. Yeah.
    Mr. Catlett. The--we have a--1 of the 12 subcommittees that 
work on issues regularly and routinely in the--for the Council 
has identified this as an issue. Actually, the--my Deputy, the 
Deputy CFO for the VA, has been the chair of that group and has 
led that activity. So we are--there are regular activities or 
monthly reports to the CFO Council on this. We designate this. 
And I can't say exactly. We've had our annual retreats over the 
last 4 years now. And 2 or 3 years ago this was identified as 
one of the areas that needed attention. And so once I've 
identified that and we establish a subcommittee, the work of 
that subcommittee has proceeded and has been regularly reported 
to the Council. So it's been designated as a high priority in 
the CFO Council.
    Mr. Horn. OK. I understand you're the legislative chairman 
in the Council?
    Mr. Catlett. Yes, sir.
    Mr. Horn. Any pitches you want to make while you're on the 
record.
    Mr. Catlett. No, sir, not at this moment.
    Mr. Horn. OMB can't do anything to you since I asked you 
the question.
    Mr. Catlett. Thanks for the offer, but I'll pass for the 
time being.
    Mr. Horn. Your testimony also mentioned that your 10 
million paper transactions have been eliminated. I think we'll 
all give a cheer to that. That's a lot of paper, a lot of trees 
saved. The Sierra Club ought to be giving you an award, I 
think, or Secretary Brown, as he leaves. Has this allowed you 
to downsize and re-engineer the accounting department?
    Mr. Catlett. Yes, sir. I was thinking about coming up when 
the National Performance Review identified the 252,060 
reduction in staff was identified, I was skeptical at that 
time. They were identifying 50 percent for personnel, finance, 
procurement, having worked in this job for 4 years and realized 
what we have been able to do, I think that is a realistic goal. 
We have not reached the 50 percent goal yet, but we will be 
able to do so. There are more activities for us to centralize 
in terms of processing our financial and procurement 
activities. So it is very possible that we are well on our way 
to meeting that goal.
    Mr. Horn. Well, that's a very impressive record. And I 
guess I'd ask you how active you've been on making these vendor 
payments electronically? And do people in other agencies come 
to you since you have a success story here and say, OK, how did 
you get it done?
    Mr. Catlett. Yes, sir. In the past 6 months GSA and DOD 
have been to our Austin Finance Center to look at our financial 
management processes. I think, even DOD's CFO, Mr. Hummer, has 
been there as well. And I can provide for the record those 
others who have been there. I'll make a little plug here other 
than legislative.
    Obviously we have two interests here. In that consolidation 
going on, we are a franchise activity, hoping to sell those 
services, cross-service other agencies with that. But we, of 
course, as well are introducing them and sharing with them our 
technology and our practices and processes down there that they 
may want to emulate.
    [The information referred to follows:]

Visitors to the AFC
    Veterans Canteen Service--Art Austerman
    VHA MCCR--Barbara Mayerick
    VHA HAC--Director and IRM staff member

    Social Security Administration--John Moellar
    Treasury Financial Management--Central Office
    Federal Communications Commission, Washington, DC

    VA Foreign Services Officer--Diane Fuller.
    VAMC San Antonio, TX--Chief of Subsistence, Chief of Supply 
Services, Fiscal Officer, and Chief of Accounting.
    Department of Defense--Dr. John Hamre, Under Secretary of 
Defense, Comptroller and CFO; Col. Derald Emory, Military 
Assistant to Dr. Hamre; Bruce Carnes, Deputy Director for 
Resource Management, DFAS; Ron Good, Office of the Deputy CFO.
    Department of Agriculture (USDA)/National Finance Center 
(NFC)--18 visitors.
    Department of the Army, Ft. Sam Houston, TX--Lt. Col. 
Gloria Kitsopoulos, Denise Johnson, Joe Demariano.
    Immigration and Naturalization Service (INS), Dallas, TX--3 
visitors (Assistant Director for Finance was one).
    USMC (Retired), Okinawa, Japan--Colonel Roberts.

    Mr. Horn. As I understand it, now, of the 39 million 
benefit payments, slightly more than half were made 
electronically. And that mirrors the rate, as I understand it, 
governmentwide. Is that your approximation?
    Mr. Catlett. We're now over 60 percent. In the past year we 
have made some increases. We've been canvassing.
    Mr. Horn. Why has the VA's success with converting vendors 
not been equaled with similar success on the beneficiary side?
    Mr. Catlett. Right. And, well--for our employees we are at 
94 percent, which I think is comparable. We have recently gone 
to--the 50 percent number that you are speaking to was a number 
I was familiar with. Frankly, until I was preparing for this 
hearing, and in the last year, we have increased it at another 
10 percent. We have been doing outreach. We have been stuffing 
checks to our veterans and making our pitches to the 
convenience and safety of the program. And there's been a 
response and an increase here in the past year.
    Mr. Horn. Let me speculate. Is it because you as CFO have 
the authority over vendor payments, but the VA Benefit 
Administration is less helpful with respect to beneficiaries?
    Mr. Catlett. No, sir, that is not the case.
    Mr. Horn. You're going to defend them.
    Mr. Catlett. No, it's more than a defense. They have been 
very active in this. It's their cost that they save. They, like 
all the rest of us, want to reduce their costs as well as 
providing excellent service to veterans. There is safety and 
convenience for veterans that they believe in, and they are 
promoting and assisting us. They have staff very active in 
making outreach efforts to veterans. But as I have said, it is 
their mail costs that we are saving as each recipient agrees to 
receive an electronic payment.
    Mr. Horn. So you think there is cooperation and there will 
be progress in this area?
    Mr. Catlett. Yes, sir. I mean, again, this is a cohort of 
the population that I think that are--you know, the older 
Americans that are--as we at least intuitively say--will be 
those that are most difficult to convert, particularly as you 
get to the final numbers.
    Mr. Horn. The last question is for Mr. Hawke. You note that 
only 1,060 out of the 10,060 financial institutions are capable 
of using financial EDI or electronic data interchange. That 
seems low, especially when we're asking citizens to increase 
the use of technology. What's Treasury planning to do to get 
the banks up to speed in this area?
    Mr. Hawke. Well, we have been working with the banking 
trade associations on this problem. And in part, it's a 
question of getting the proper software installed and getting 
the right systems installed. I think progress is going to have 
to be made toward this. This is the wave of the future. And 
banking institutions that want to really provide the services 
that their customers are demanding, are going to have to come 
along with this. However, in smaller banks where they don't 
have the software and systems capacity right now, progress is a 
little slower than we would like.
    Mr. Horn. I would think they would leap at the opportunity 
of having a check deposited and sitting there for days before 
somebody might use it. And we all know what they can do in 
gaining a little interest over the weekend. So I'm sort of 
amazed if they aren't jumping at it.
    What's your reaction? Do you think----
    Mr. Hawke. Oh, I agree. Just as a general principle, we 
would like to see float eliminated from the payment system; 
but, in effect, float is going to be the mechanism for 
absorbing a lot of the costs that might otherwise be passed on 
to customers here.
    Mr. Horn. Well, I thank you all for coming. Mrs. Maloney, 
who made our quorum, told me she has no questions for you. 
She's going between four or five meetings this morning, as we 
all are, and the full committee will be meeting shortly.
    So we thank you.
    Mr. Catlett. Thank you.
    Mr. Horn. And you all did a good job, and we appreciate 
having the latest information on this since we think this is a 
tremendously important opportunity.
    Mr. Hawke. Thank you, Mr. Chairman.
    Mr. Horn. We're going to call one witness out of order, 
because she has a plane to catch, and we are never sure between 
bells ringing on the floor or in committee when we're going to 
have to leave. So if Marcelyn Creque, the volunteer director of 
the American Association of Retired Persons, will come forward 
out of order. Ms. Creque, if you would just stand, we'll give 
you the oath. All witnesses here are under oath.
    [Witness sworn.]
    Mr. Horn. OK the witness does affirm.
    We're glad to accommodate you. Where are you going back to 
today?
    Ms. Creque. Chicago, just for tonight. Then I'll be off for 
North Dakota tomorrow.
    Mr. Horn. Well, I hope things are coming along out there. 
That's a sad situation.
    Ms. Creque. Yes. We have been actively involved in helping 
people try to restructure their lives.

  STATEMENT OF MARCELYN CREQUE, VOLUNTEER DIRECTOR, AMERICAN 
                 ASSOCIATION OF RETIRED PERSONS

    Ms. Creque. Mr. Chairman and members of the committee, AARP 
appreciates this opportunity to present our views regarding the 
impending implementation of mandatory electronic funds transfer 
or EFT. My name is Marcy Creque, and I am the regional 
volunteer director for AARP's Midwest region. On behalf of the 
association, thank you for drawing attention to this important 
issue.
    Mr. Chairman, AARP has been active in the debate regarding 
mandatory conversion to EFT prior to the enactment of the law, 
and we were pleased to work with you on this issue.
    While we recognize that direct deposit was a desirable 
option for many, the association did not favor mandating EFT 
for all recipients of Federal payments. We believed and still 
believe that this would impose undue hardship on many 
recipients. Congress made a decision to go ahead with EFT, 
however. Since it did, we were pleased that a hardship 
exemption and other provisions were included in the act in 
response to concerns raised by AARP and others.
    We want to work with this committee and the administration 
to ensure that the transition to this paperless system is as 
smooth and painless as possible. But this system must be 
designed to work for Federal payment recipients, not for the 
convenience or profit of financial institutions.
    Today, I want to talk about who is affected by mandatory 
electronic funds transfer and summarize a few of the major 
points that are discussed in our full statement. We have 
elaborated on these points in comments submitted to the 
Department of the Treasury.
    First, who will EFT affect? The Treasury Department 
estimates that over 10 million recipients of Federal payments 
are unbanked; that is, they do not have bank accounts. Some 80 
percent of these persons are recipients of Social Security, 
veterans' benefits, or other Federal retirement pensions or 
payments. According to the latest survey of consumer finances, 
some 9 percent of families headed by persons over age 60, about 
2.5 million families, have neither a checking or savings 
account.
    What do we know about these families? The survey tells us 
that the incidence of older families age 60 and older without 
checking accounts is heavily concentrated among those with 
incomes below $10,060 and those headed by older women and 
minorities.
    The survey also notes that families without bank accounts 
tend to have lower educational levels. Another source found 
that households with deposit accounts average 12\1/2\ years of 
education, compared to only 10 years for households without 
deposit accounts. Literacy and familiarity with banking 
technology will become critical factors as large numbers of 
persons are required to use ATMs and point-of-sale [POS] 
terminals for the first time to access their benefits.
    Among those age 65 to 74 without checking accounts, 
difficulties in managing and balancing accounts are one of the 
chief reasons for not having one.
    About 33 percent of Social Security recipients and 68 
percent of Supplemental Security Income recipients do not 
receive benefits via direct deposit. The State of California, 
Mr. Chairman, is one of several where Social Security 
recipients who receive their benefits by checks are heavily 
clustered. Given the vulnerability of so many of the unbanked, 
AARP has encouraged the Treasury Department to take the 
following actions.
    First, define ``authorized payment agent,'' preferably 
through a separate rulemaking. The definition should provide 
for accountability and assure the safety of recipient funds. 
Recipients in areas lacking banks are often forced to use 
alternative check-cashing outlets or other options that may 
charge up to 25 percent or more of the check's face value. 
Personal safety can also be a concern with such operations. 
Businesses that lack adequate consumer protections and promote 
predatory lending practices should not qualify to participate 
in EFT.
    Second, limit the use of transaction and account fees 
related to EFT. Banks and businesses cite as a major concern 
the cost of EFT systems implementation. While AARP recognizes 
that some investment will be necessary to adapt services to the 
unbanked population, we are concerned that these costs not be 
simply passed on to new customers who will be forced to use EFT 
under the Treasury regulation. Many of these persons cannot 
manage any additional charges.
    According to the Treasury, Federal payments must be made by 
electronic transfer by January 1, 1999. That will amount to 
more than $240 billion annually. Given the advantage of the 
float and paperless deposits, financial institutions must not 
be allowed to impose unreasonable fees for receiving Federal 
EFTs.
    Third, requires financial institutions to offer minimal 
banking accounts with specific consumer protections. Such 
accounts should address the needs of persons currently without 
bank accounts. Further, these accounts should not label or 
stigmatize the account or account holder as a less desirable 
part of the mainstream banking system, which AARP believes may 
be the effect of Treasury's recent proposed rulemaking 
regarding EBT.
    Many seniors, veterans and Federal retirees correctly 
equate EBT with State-administered public assistance, which the 
Congress expressly excluded from the Regulation E banking 
protections. Mandatory EFT accounts, however, will have 
Regulation E coverage. Given that Congress has spoken on EBT, 
it is incumbent on Treasury to ask Congress for authority to 
reclassify mandatory EFT accounts as EBT and prevent any undue 
recipient and regulatory confusion.
    Fourth, ensure hardship waivers especially where current 
service needs are not met. Waivers should not be reserved only 
for the most extreme cases, but should apply to anyone who 
truly will suffer a hardship according to their individual 
situation and condition.
    Finally, provide adequate public education and notice about 
the impending change. Each Federal payment recipient must be 
notified repeatedly well before January 1, 1999, in mailings 
containing benefit payments and other forms of communication 
that future payments will be made by electronic funds transfer. 
The notice must explain in plain, simple-to-understand 
language, including a Spanish translation, what electronic 
funds transfer and related terminology means, since many 
recipients will be unfamiliar with these terms.
    In conclusion, AARP believes it is critical that basic 
consumer protections be in place well before January 1, 1999. 
This is particularly important for those recipients of Federal 
payments who do not currently have bank accounts. Federal 
payments may be the primary or sole source of income for these 
unbanked consumers. Therefore, Congress and relevant Federal 
agencies must ensure that these individuals are protected from 
unfair, deceptive, or abusive practices as well as from a 
reasonable hardship.
    AARP stands ready to work with you in this critical 
endeavor.
    Mr. Horn. We thank you for that very detailed and thorough 
statement.
    [The prepared statement of Ms. Creque follows:]




    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    Mr. Horn. Since our family is a member of AARP, I should 
say that on the record this next statement does not represent 
that membership. It's just a thank you, because your staff 
worked very closely with our committee staff in developing the 
consumer protection report language that we had. And we look 
forward to working with you and other senior citizen groups, 
there's a number of them, in terms of protecting all our 
citizens from unreasonable fees. So we share that concern.
    I think electronic transfer will save thousands of senior 
citizens from being robbed every month of their benefit 
payments. And they--this is the way you protect them. And----
    Ms. Creque. Except----
    Mr. Horn. We don't want unintended consequences to go, but 
I think, frankly, hundreds of millions of dollars will go to 
senior citizens, not crooks, after this is done.
    Ms. Creque. Agreed. But we do have some concerns currently 
about the locations of ATMs. Some are in isolated lobbies. Many 
are right out on the sidewalk. Finally, we have to also take 
into consideration some of the problems that we have as we grow 
older; our eyesight, arthritic fingers. So we do have some 
concerns about safety.
    Mr. Horn. As a senior citizen, I understand that.
    Are you concerned that the banks will have a monopoly on 
the 10 million new clients represented by those individuals 
without bank accounts? What's your feeling on that? Have you 
looked at that as to how many people actually have bank 
accounts that are in your membership?
    Ms. Creque. We did look at the number of people in our 
membership that had direct deposit and what their experience 
had been with direct deposit. And some of their experiences 
involved errors in transmission and a long period of time it 
took to resolve those errors. When your income is based solely 
on that payment, you cannot afford a lengthy period of time to 
resolve those errors. So that is one area that we have looked 
at.
    Mr. Horn. This was an error in the amount of deposit that 
had come through electronically?
    Ms. Creque. The amount of deposit that either came through 
or the account to which it was deposited, because, you know, 
transposition of one number can create quite an error.
    And the other thing that occurs with seniors is trying to 
resolve that type situation. They encounter another piece of 
electronic equipment called voice mail, which they literally--
--
    Mr. Horn. It frustrates me every day, and I didn't have to 
hit 66 to be frustrated. I was frustrated by that years ago.
    Ms. Creque. That's another point of frustration in trying 
to resolve the errors, because sometimes they get caught in a 
catch-22. The bank says, our records show this. You go back to 
the originator. So there is some difficulty.
    But one of our concerns pertaining to the banking industry, 
if people are mandated to accept EFT transfers. We don't want 
them to be stigmatized; and that can be done in many ways. It 
can be subtle. For example, people could be assigned to use a 
specific ATM machine, or they could use different colors of ATM 
cards, and we do not want to subject any of our senior citizens 
or any citizen to that type of indignity.
    Mr. Horn. Well, I think you're right. And I think, frankly, 
a bank that is aggressive and wants to serve its clientele will 
do what you're talking about and make sure there's security 
there and 20 cameras focusing on various angles of that ATM, so 
if anybody does make mischief, there's a fairly good record of 
them. And I think that would assure a lot of senior citizens 
about the security. I think, let's face it, senior citizens, 
correctly in many cities, are worried about going out at night.
    Ms. Creque. That is true.
    Mr. Horn. And it isn't just senior citizens; 25-year-old 
people are worried about going out at night in an ATM, as you 
suggested, in a dark area. And this is where people have to 
call--that's a good thing local AARP people can do, because a 
lot of them are looking for things to do. They can go sit down 
with the bank president, say, look, this doesn't make any 
sense. What can we do to get this thing in a place where you 
serve people and they don't have to fear for their life?
    Ms. Creque. We agree. And that could be done under what we 
call our connections project. Under Connections, we know that 
seniors want to remain independent, so we provide services like 
the banking service, writing checks to help them remain 
independent.
    Mr. Horn. What are your organization's plans to conduct an 
education campaign regarding direct deposit? What are you 
planning to do on that?
    Ms. Creque. First, we would work with the committee to set 
up the instruction campaign. Then we have various outlets 
available. We currently have a couple of programs addressing 
financing and telling people how to write checks and how to 
manage their finances. It would be undertaken like any other 
program that AARP would undertake. We would train people to go 
out and speak before senior centers. We would have meetings. 
And through our many publications, we would alert seniors to 
what is coming up. And then we have the one-on-one volunteer 
services that would be available.
    Mr. Horn. Yes. I would think Modern Maturity has about 33 
million people, or is it more than that now that it goes to?
    Ms. Creque. The membership of the association is about 32 
million.
    Mr. Horn. Thirty-two. They all get a copy of Modern 
Maturity, right?
    Ms. Creque. Right. Plus the bulletin.
    Mr. Horn. Yes. A couple of full pages there on direct 
deposit, maybe the cover, direct deposit. You can't miss it. 
You at least look at the front cover or the back cover. And I 
think that would be a great service to everybody in terms of 
educating them. At least it's a start.
    Would you like to respond to any of the issues that you 
heard from the three Government witnesses?
    Ms. Creque. I was interested in the Treasury Department--in 
negotiating these accounts with the bank, and our concern about 
the possibility that you could have ATMs in nursing homes and 
assisted living facilities. Our concerns are from the 
standpoint there is no protection for the consumer. An employee 
could abscond with the money, or a concern go bankrupt. So we 
are concerned that these agencies be both federally regulated 
and federally insured. Because if your total income is coming 
from the Government, you cannot afford to become a party to a 
bankruptcy action, for example, and wait for your money.
    Mr. Horn. Regarding your advice concerning check-cashing 
firms and their role as a possible payment agent, would that be 
true if those check-cashing firms offered a more reasonable or 
cheaper and more convenient service to its customers?
    Ms. Creque. Again, we would be concerned about protection 
of the consumer and the transmittal of the money to the check-
cashing agencies. By the way, with this EFT-99 service as it's 
proposed, with the debit card of the ATM, seniors would incur 
not only ATM expense after the first debit card withdrawal, but 
in taking care of their living expenses. They cannot pay in 
cash in some instances. So they're going to have to go 
somewhere, whether it's back into the bank or to a check-
cashing agency, to get money orders or checks, because their 
account as it's currently set up does not give them check-
writing privileges.
    Mr. Horn. In our looking at the welfare problems around the 
country, we found billions of dollars that were being misspent, 
and some of it was related to checks, being able to go to a 
bar, for example, and the bartender cash the check, and 
obviously the person bought quite a bit of alcohol before 
leaving the bar, so they didn't have much left on the rest of 
the monthly benefit payment.
    And so you raise legitimate questions here on some of the 
circumstances of these firms and where they're located and why 
that might be disturbing to a senior citizen or anybody that 
doesn't want to get into a lot of trouble just by going through 
that door, because that's the only place you can cash a check. 
So how do you suggest we deal with that problem?
    Ms. Creque. Again, we're looking for institutions that will 
be regulated. And there has to be some criteria set up and 
really a good look at all of the participating institutions. 
There will be a lot of people, like when welfare reform 
occurred, that want to hop on the bandwagon because they see an 
opportunity to make some money for their businesses.
    Mr. Horn. Yes.
    Ms. Creque. But our No. 1 concern, is that for many people, 
90 percent of their household income is a Federal payment, like 
Social Security. They're living from hand to mouth. They cannot 
afford a loss of their money.
    And the other thing, Mr. Chairman, to be realistic, there 
are group of senior citizens and some younger people that will 
never accept electronic funds transfer. You have some seniors 
who are a carryover from the Depression when banks failed, and 
they don't trust banks. You also have the language barrier 
problem. Somehow, people want the money in their hand; they 
want to count it. Another aspect is we still have a group of 
people that go and pay bills in person. They need to see that 
transaction. They need to have that piece of paper in the hand 
that says this has been done. So I think we need to be mindful 
of that.
    Mr. Horn. Well, I grew up in a household that had exactly 
those views, and I'm well aware that you're right when you talk 
about people who have lived through the Depression and had 
mortgage foreclosures and everything else. They're not going to 
take any chances. But I think also when the chips are down, 
electronic deposit is a safer way to make sure their money is 
deposited than the way it is now for the average system.
    Ms. Creque. Agreed.
    Mr. Horn. And that's how we want to educate them.
    Ms. Creque. With some training, as you know, because many 
seniors do not readily accept something just because it's new.
    Mr. Horn. Yes.
    Ms. Creque. You have to prove to them what the benefits are 
when accepting it.
    Mr. Horn. And that's where the AARP can be most helpful.
    Well, we thank you for your testimony. It has been very 
helpful, and we wish you well on the trip.
    Now the full Committee on Government Reform and Oversight 
has scheduled a meeting this morning, and under the rules of 
the House, the subcommittee cannot conduct its hearing once the 
full committee has come together. So we're going to recess 
until 2:30 p.m., here in this room, I believe. Hopefully the 
full committee will have quit by that time.
    And so the three other witnesses we have, Elliott McEntee, 
the chief executive officer for the National Automated 
Clearinghouse Association; Dina Nichelson, president of the 
American League of Financial Institutions; and Margot Saunders, 
managing attorney, National Consumer Law Center, we will start 
precisely at 2:30. And we're sorry we can't finish everything 
in the morning, which I think we might have, but the rules of 
the House are the rules of the House. So we're in recess until 
2:30.
    [Whereupon, at 11 a.m., the subcommittee recessed to be 
reconvened at 2:30 p.m. the same day.]
    Mr. Horn. May I ask our witnesses to rise and raise your 
right hands.
    [Witnesses sworn.]
    Mr. Horn. All right. Recess is over. It is approximately 
2:49, and the Subcommittee on Government Management, 
Information, and Technology will come to order.
    We are delighted to have here the witnesses in both panels 
two and three, and one is Ms. Nichelson, the president of the 
American League of Financial Institutions, and another is 
Elliott McEntee, chief executive officer, National Automated 
Clearing House Association and Margot Saunders, the managing 
attorney for the National Consumer Law Center.
    Why don't we just go down the line in alphabetical order, 
Mr. McEntee. Welcome. Please give us your testimony.

 STATEMENTS OF ELLIOTT McENTEE, PRESIDENT AND CHIEF EXECUTIVE 
 OFFICER, NATIONAL AUTOMATED CLEARING HOUSE ASSOCIATION; DINA 
      NICHELSON, PRESIDENT, AMERICAN LEAGUE OF FINANCIAL 
INSTITUTIONS; AND MARGOT SAUNDERS, MANAGING ATTORNEY, NATIONAL 
                      CONSUMER LAW CENTER

    Mr. McEntee. Thank you, Mr. Chairman, and it is a pleasure 
for me to be here testifying on behalf of the National 
Automated Clearing House Association on the Federal 
Government's EFT mandate.
    Last year, the Congress approved legislation that would 
achieve three major objectives: Significantly improve services 
that the Government provides to its citizens; substantially 
reduce the cost of sending payments to individuals and 
businesses; and set the stage for improving the competitiveness 
of the United States in the world marketplace. During the next 
5 minutes, I will explain why the EFT mandate will achieve 
these objectives.
    Requiring the Federal Government to send payments to 
individuals by direct deposit will result in substantial 
benefits to consumers. Direct deposit is the safest and most 
convenient way to receive funds. With direct deposit, payments 
are not lost or stolen. In the 20 years the Social Security 
Administration has offered this service, not a single direct 
deposit payment has ever been lost or stolen. In contrast, 
thousands of payments made by check are lost, stolen, and 
forged every month.
    With direct deposit, consumers have access to their funds 
at the opening of business on the payment date, and interest 
begins to accrue immediately, if the money goes into an 
interest bearing account. Because of these benefits, over 80 
percent of all new Social Security recipients are voluntarily 
signing up for direct deposit.
    How will consumers that do not have a bank account react to 
receiving Government payments electronically? To answer this 
question let's look at the recipients of food stamps and 
welfare payments in those States that provide those benefits by 
electronic funds transfer. Several surveys have shown that over 
80 percent of the consumers participating in EFT programs 
prefer this method of payment compared to receiving paper 
coupons and paper checks.
    Up to 500,060 companies that sell goods and services to the 
Federal Government will be required to receive their payments 
electronically. In addition to the benefits I just described 
for consumers, companies will be able to receive the remittance 
information that is needed to reconcile a payment in electronic 
form. This will enable companies to substantially reduce the 
cost of reconciling the payment.
    The Federal Government will also benefit from the EFT 
mandate. The cost to send payments will decrease by over 90 
percent, according to the Treasury Department. The expense of 
researching lost and stolen payments will be eliminated. For 
every dollar that the Federal Government saves in this manner, 
we move one step closer to balancing the Federal budget, 
without reducing services to the public.
    The United States is a recognized world leader in using 
electronic technology for thousands of applications. 
Unfortunately, sending and receiving payments is not one of 
those applications. Almost 80 percent of the noncash payments 
made in this country are made by check. In contrast, in many of 
the countries that we compete with, electronic payments are 
used far more frequently than checks. If electronic payments 
usage in the United States was the same as in those countries, 
we could save up to $50 billion a year. If the Federal 
Government takes the lead in phasing out checks, then you can 
be assured that the private sector will follow that lead and 
those potential cost savings would start to materialize.
    Because of the benefits I just discussed, the National 
Automated Clearing House Association urges the Congress not to 
modify the law that created the EFT mandate. We would like to 
bring a related matter to the attention of the subcommittee. 
The Treasury Department has announced that it would not proceed 
with implementing the next group of businesses required to 
deposit Federal employment taxes through EFTPS, thus reducing 
the ultimate number of depositors by over 4 million taxpayers. 
The Treasury plans to take this action because of concerns 
expressed by the small business community. Rather than 
exempting small businesses from paying taxes electronically, we 
would urge the Treasury Department and the Congress to deal 
head on with the real concern businesses have with paying 
Federal taxes electronically.
    Under current law, if the payment is late, the IRS can 
impose penalties, up to 10 percent of the taxes due. This law 
should be changed. The IRS should be permitted to charge only 
for the interest income lost because the payment was late. 
Under this proposal, the IRS could only impose higher penalties 
to chronic late payers or when fraud is involved. By making 
this change, the Treasury would not have to exempt the 4 
million businesses from paying taxes electronically, thus, 
saving both businesses and the Federal Government a substantial 
amount of money. Attached to the written testimony, we provided 
some details on that proposal.
    That concludes my remarks and I will be glad to try and 
answer any questions you may have.
    Mr. Horn. That is an excellent statement you have submitted 
and I appreciate your precise summary. We are going to go down 
with the other two witnesses and perhaps we can have a dialog 
between the three of you and the committee.
    [The prepared statement of Mr. McEntee follows:]


    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    Mr. Horn. Ms. Nichelson.
    Ms. Nichelson. Good afternoon, Mr. Chairman. It is my 
pleasure to testify before you this afternoon and offer the 
views of the American League of Financial Institutions, also 
known as ALFI.
    ALFI is a national trade association chartered in 1948 to 
represent the legislative interests of minorities on savings 
banks and savings and loan associations. ALFI was first formed 
by a group of seven, then building and loan executives. They 
determined that they needed a voice to express their concerns 
among banking regulators and Members of Congress in Washington. 
They formed what was then known as the American Savings and 
Loan League, and at the time there were seven building and loan 
institutions and that grew to 72 savings and loan associations 
in 1978. They kept unique office hours because many of the 
depositors were domestic laborers who only had Thursday off. As 
a result, they were only open on Thursday evenings.
    In 1989, the American Savings and Loan League amended its 
bylaws and renamed the organization the American League of 
Financial Institutions. There are currently 41 minority savings 
banks and savings and loan associations, representing $5 
billion in assets, with 109 branches and approximately 1,200 
employees. They are located throughout the United States in 
urban and emerging communities, and they rank in asset sizes 
from our largest minority-owned institution, which happens to 
be the largest minority-owned institution in the country, 
Carver Federal Savings Bank in New York, with assets totaling 
$360 million, to the smallest, Ideal Federal Savings Bank in 
Baltimore, which has assets of $7 million.
    We are delighted to have this opportunity to share our 
views with you and the subcommittee regarding the electronic 
benefits transfer funds program. We understand the need to 
streamline the process of disbursing Government benefits to 
those deserving Americans. Many recipients of these benefits 
are located in the same urban communities as our member 
institutions. Minority savings institutions are all unique in 
their business strategies for growth and are all unique in 
their individual goals toward more products and services to 
their customers. Electronic banking can only enhance their 
ability to reach a broader market and increase their 
competitive advantages within their communities.
    We feel it is important that Treasury encourage recipients 
of Government payments to voluntarily agree to transfer those 
payments to financial institutions under the current electronic 
direct deposit program and that Treasury encourage banks to 
create electronic-only accounts, known as Direct Deposit Two. 
Inasmuch as the electronic benefits transfer, EBT, option is 
not available through most depository institutions, we urge 
that be the option of last resort on Treasury's plans to 
convert paper payments to electronic funds transfers.
    Mr. Chairman, I would like to share a few strategies of 
some of the members of ALFI with you which represent a variety 
of the approaches to the future of electronic banking. For 
instance, a members' institution in your home State of 
California recently announced a unique alliance. Broadway 
Federal Bank, located in Los Angeles has assets totaling $114 
million. Broadway has three branches, one appraisal center, 
plans to open another branch in July, and has 51 employees. 
Although subject to OTS approval, Broadway Federal and the Nix 
Check Cashing Facility in south central Los Angeles have formed 
a proposed alliance. This pilot relationship is the result of 
what Broadway saw as an opportunity to expand its banking 
services to whom some call the unbanked. Because this proposed 
legislation will mean the end to what traditionally recipients 
have known as a physical check in the mail, Broadway would be 
one of many minority financial institutions well-suited to 
disburse these funds.
    It further represents the opportunity for recipients of 
electronic funds transfer to begin the process of assimilating 
into basic cultural management their financial life-styles to 
the extent that these recipients would now be positioned to 
establish checking accounts, credit cards, and use ATM cards.
    Another ALFI member, Carver Federal Savings Bank in New 
York is exploring the possibility of opening its own check 
cashing company under its holding company. Carver's plan will 
include providing other products and services such as money 
orders and bill payment services. Carver is also exploring the 
possibility of offering check cashing services to noncustomers 
through a software vendor. Although these plans are in their 
infancy, they further validate Carver's commitment to reach all 
consumers in their communities.
    We think it is important that certain protections for the 
consumer be included in this proposed legislation as well. The 
fees associated with managing these electronic benefits should 
be regulated by Treasury so that the consumers are not unfairly 
charged by a single vendor. It is our recommendation that 
Treasury be authorized to promulgate regulations that protect 
EBT fund recipients and require all financial institutions to 
report the EBT funds by volume, by community, and that the fees 
they receive in connection with the transfers be reported on a 
quarterly basis.
    There should be significant training requirements for all 
custodians of EBTs, which includes sensitivity training and the 
requirement to work with churches and community groups. 
Education will play a vital role in Treasury's EBT program. 
Why? Because as a local retailer likes to say, an informed 
consumer is our best customer.
    Consumers who have managed their entire lives on a cash 
basis will need to learn how to live electronically. Treasury 
should look to minority savings institutions to help in this 
process by jointly sponsoring educational seminars in local 
community centers, churches, and in some instances the minority 
institutions themselves.
    Many minority institutions have bilingual tellers, 
brochures in several languages, and regularly attend community 
events where English is a second language. It should be noted 
that all minority savings institutions have many services in 
place, such as direct deposit, Social Security, and retirement 
direct deposit. Many of these institutions also have automatic 
teller machines, located in branches and in shopping centers in 
their communities; therefore, minority institutions have 
already established an infrastructure that could facilitate the 
electronic transfer of funds to the appropriate recipient.
    The new generation of consumers, as a result of welfare 
reform, will understand the value of their benefits and the 
need to ultimately move beyond Government assistance. It is 
important to the membership of ALFI that this new generation 
understand they can have the same availability of financial 
services as traditional banking customers.
    In conclusion, Mr. Chairman, we believe that the electronic 
funds transfer program has value. We want Treasury to remember 
the importance of encouraging recipients of the funds to 
voluntarily agree to transfer their benefits to a financial 
institution. Further, it is our hope that Treasury will 
encourage financial institutions to create electronic-only 
accounts through this program. These programs represent a great 
opportunity for consumers who were previously unbanked to 
become traditional bank customers, thereby availing themselves 
of an array of banking services. These programs ultimately 
provide a new customer base for financial institutions.
    I thank you for this opportunity to comment and I await 
your questions.
    Mr. Horn. Well, thank you very much. We appreciate that 
statement.
    [The prepared statement of Ms. Nichelson follows:]


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    Mr. Horn. Ms. Saunders.
    Ms. Saunders. Thank you, Mr. Chairman. We very much 
appreciate the opportunity to testify today as EFT-99 holds the 
potential for great benefit and also for great trouble to our 
low-income clients and their communities. I offer my testimony 
today not only on behalf of the low-income clients of the 
National Consumer Law Center, but also on behalf of the 
Consumer Federation of America, the National Community 
Reinvestment Coalition, and the Organization for New Equality, 
three other organizations that represent low-income people and 
consumers.
    There are numerous issues which will affect the unbanked 
recipients of Federal benefits. One is the extent to which 
Treasury forces the unbanked to use accounts which cost them 
too much. Another extremely important issue is which kind of 
institution, regulated and insured, or unregulated, Treasury 
authorizes to be the providers of the Federal payments to 
payees. This issue is important, not only because of the fees 
which could be charged, but also because of the other services 
that these alternative providers would try to force upon the 
Federal payees.
    A third issue, which I won't address further in my 
testimony today, but one which is also very important, is the 
extent of hardship exemptions that are allowed under the 
statute--excuse me, under the regulations that are promulgated. 
Treasury is saying that they need to allow check cashers and 
finance companies to partner with banks in order for the 
delivery of Federal payments to be made. And they are proposing 
that this could be done in one of two ways. One, individuals 
could choose alternative providers as authorized agents--there 
is no way, Mr. Chairman, I will be able to read all my 
testimony, so I will be paraphrasing--one is as authorized 
agents, and, two, if they fail to make a choice and the bank 
becomes a default bank, the bank would offer to provide the 
services through the alternative providers, such as check 
cashers or finance companies. This is what we are particularly 
concerned about, either one of these choices.
    We believe the statute used the words ``alternative 
authorized agent'' as a synonym for only those words like 
guardian, alternative payee, or other words which are used in 
current benefit statutes, such as Social Security and veteran's 
benefits, all of which have a fiduciary duty to the individual. 
We are very concerned that Treasury would allow check cashers 
or finance companies to advertise to the low-income population, 
allow us to be your conduit for the Federal payments, come pick 
up your payments every month.
    Well, that might work for month after month, until one day 
the individual goes to the finance company and says, well, I 
think I do need some money to pay my utility bill and gets a 36 
percent or 40 percent interest rate loan because the loans from 
the financial providers are very often unregulated and even 
where they are regulated, the interests and the terms are very, 
very high. If they fail to make those payments or they have 
problems making the payments, they still have to go back, month 
after month, unless they change their authorized payment agent, 
and that is the scary part to us. There is no prohibition in 
the Social Security law against set off; there would be nothing 
that would stop that finance company from taking the entire 
Social Security payment to be put toward the payment of a 
finance--of a high cost loan. And that shouldn't be the way 
Treasury delivers its Federal payments.
    On the other hand, other than the banks that Miss Nichelson 
represents, most banks are saying, not all of them, but many 
banks are saying, we are not sure that we can find that it is 
financially feasible, despite the float that will be available, 
to provide services. So Treasury's response is, well, we may 
need to allow banks to partner with check cashers and finance 
companies to provide the services in low-income communities 
where there are no other banks, where there are no financial 
institutions. And that, to us, is also a tremendous concern.
    I represent low-income people all over the country who have 
been the victims of abusive practices of check cashers, 
pawnbrokers, and finance companies. I have in my testimony in 
the appendix, just a few stories of the abusive practices that 
low-income people are subject to.
    We don't think anybody but federally regulated and 
federally insured providers should be the conduits of Federal 
payments, one way or the other. The use of check cashers as one 
method to access the funds is fine. We don't want to prohibit a 
bank from, say, establishing a default account for a number of 
individuals and providing access at the bank, at the grocery 
stores, and at check cashers. That would be fine. It is the 
exclusive use of the check casher, of the alternative provider, 
that scares us so much. I have, today, a letter that was 
signed, that was sent out, just today, to Secretary Rubin----
    Mr. Horn. Excuse me. I am going to have to recess. We have 
a vote downstairs and I have to respond to it. You will be able 
to finish as soon as I vote.
    [Brief Recess.]
    Mr. Horn. This hearing will resume. We will have a few of 
these in and outs. I apologize to you. It happens frequently 
here, and it is hard on the witnesses, and so I sympathize with 
you. Let me start--you were going to finish your final remarks 
there. Go ahead.
    Ms. Saunders. I was just going to tell you that we have a 
letter that was sent just today to Secretary Rubin of the 
Treasury, signed by 15 organizations, representing low-income 
people, disabled people, low-income communities, unions, asking 
the Treasury to clearly draw the line at regulated and insured 
depository institutions as being the conduits, and I would be 
glad to provide a copy of that letter.
    Mr. Horn. Please, without objection it will be added to the 
record at this point.
    Ms. Saunders. Thank you. I would be happy to answer any 
questions.
    [The prepared statement of Ms. Saunders follows:]



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    Mr. Horn. I have some questions for all of you and some for 
two of you. Let's start with Ms. Nichelson, and I am sure you 
heard Margot Saunders' testimony advocating excluding from the 
definition of ``authorized agent,'' the category or term she 
calls ``alternative financial providers,'' such as check 
cashing firms.
    Do you have any comments on that suggestion?
    Ms. Nichelson. Well, I do believe since check cashing 
facilities are not regulated, that they shouldn't be involved 
in the process of being the recipients of these funds. I think 
financial institutions, especially those located in those urban 
areas, are best suited to help disburse those funds. And so in 
that respect I do agree with her comments. I do have concerns 
about facilities such as check cashing companies.
    Mr. Horn. Anything else you want to add to that, Ms. 
Saunders?
    Ms. Saunders. Yes, I want to clarify, we don't have a 
problem with a bank, as Ms. Nichelson is proposing, a bank 
setting up an office in the check cashers outlet and using 
their brick and mortar as a method of getting banking services 
to low-income people; we think that is a terrific idea. I know 
there were some concerns that we would disagree, but I think 
the more we talk, the more we find we are agreeing. We want to 
see the unbanked get into banks, and whether it is through 
check cashers or not, it is fine. It is the exclusive use of 
check cashers or the alternative providers that concerns us.
    Mr. Horn. I am delighted to hear you say that, Ms. 
Saunders. If I took you downstairs with me, there is a room 
where they have been talking all day and they aren't agreeing 
yet; namely, the full committee.
    Mr. McEntee, any thoughts on this question?
    Mr. McEntee. Just one brief thought on this question. We 
believe that the Treasury Department only has the legal 
authority to place the funds in a financial institution. I 
think the basic question that surrounds the relationship 
between the consumer, the third party, and the financial 
institution, is should the consumer be permitted to set up an 
account, which would not be an insured account, but should they 
be permitted to set up an account at a third party. I think 
there is an area of debate surrounding that issue, and I think 
financial institutions, check cashers, and consumer groups will 
be sorting that issue out for the next few months. I am not so 
sure we have a clear-cut answer right now as to how that is 
going to play out, other than we firmly believe the Treasury 
needs to get the funds initially into the financial institution 
and the arrangement between the third parties, the financial 
institutions, and consumers would have to be determined and, 
again, I don't have a specific answer as to how that should 
work right now.
    Mr. Horn. Ms. Nichelson, are you engaged in any sort of 
education campaign with your membership to inform them about 
the new law?
    Ms. Nichelson. Yes, sir, we are. We hold an annual 
conference in October and November. However, we have already 
begun the process of sending information to the member 
institutions on the various proposals before Treasury, and this 
issue in particular has really sparked a great amount of 
interest.
    My oral testimony didn't expand into the numerous comments 
that I have received from the 40-member institutions who have 
real concerns about some of the provisions. They do prefer 
educating the consumer before this process takes place in 1999. 
They do understand the fact that there will be persons who 
would like to remain unbanked, who don't want a relationship 
with the bank, but they do believe that because of the new 
welfare reform and the new generation of people who are 
currently receiving public assistance, and those peoples' 
ultimate goal to become more of a contributing entity to 
society and not so reliant on Government, that those will be 
the people who ultimately will establish a working relationship 
with the bank. And the banks further have begun the process of 
going to communities, going to churches, and offering free 
seminars on credit counseling and on just educating the 
consumer to how it can work. Banking can be very intimidating 
if you don't understand it, but if you can streamline the 
process and let people know that you don't sign your life away 
because you apply for a checking account, or even with ATM 
cards, it is just another way of you beginning the process of 
managing your financial life-style.
    Mr. Horn. That is very helpful.
    Mr. McEntee, what sort of educational campaign or 
conferences does your organization schedule for banks and other 
financial institutions?
    Mr. McEntee. We have been focusing on delivering 
educational message to financial institutions, businesses, and 
consumers that are going to be affected by this legislation. We 
have worked very closely with the Treasury Department and have 
mailed out--actually, the Treasury Department mailed out 50,060 
letters to financial institutions all around the country 
informing them of the requirements of the mandate. We have 
gotten responses back from about 3,500 of those financial 
institutions.
    We have regional associations around the country. They have 
been putting on seminars and conferences on the EFT mandate. 
The American Bankers Association has been doing the same thing. 
We have been working very closely with several trade 
associations that represent the interest of the business 
community and they have been putting on educational programs as 
well.
    We are also working with the Treasury Department to develop 
public service announcements and video news releases, and some 
of those would be released at the end of this year and early 
next year. The purpose of those messages is to communicate 
directly to consumers, so we are working very closely with the 
financial institutions, the business community, and the 
Treasury Department, to get the word out on the EFT mandate 
requirements.
    Mr. Horn. Well, that is helpful.
    Ms. Saunders, do you want to add anything to the discussion 
on education and how to go about it?
    Ms. Saunders. No, sir.
    Mr. Horn. OK.
    Mr. McEntee, your testimony noted that the biggest 
challenge in vendor payment comes from attaching payment 
information with payments, so-called financial electronic data 
interchange or financial EDI. How many banks are currently able 
to take advantage of financial EDI?
    Mr. McEntee. In our estimate, there is about 9,060 
commercial banks that provide services to vendors, that provide 
services to the Treasury Department and other government 
agencies. There are a little less than 2,060 financial 
institutions or commercial banks today that have that 
capability. There have been a lot of developments in the 
marketplace over the past year to develop inexpensive software 
packages where small banks can install these software packages 
on PCs that process information electronically and pass that 
information electronically or through the mail or through a fax 
system to the vendor depending on what the vendor is looking 
for.
    I would like to say we are in place today, that the banking 
industry is ready today, but I cannot do that. We are fairly 
optimistic that sometime before January 1, 1999 the vast 
majority of commercial banks will be in the position to provide 
that remittance service information to the business community.
    Mr. Horn. Can you give us an idea of the cost of the 
software and how does it vary? Does it vary by the number of 
transactions or do you just get a basic system, whether it is a 
small bank, medium sized bank or a large bank?
    Mr. McEntee. Software companies have been producing 
services for the large banks for several years now so the 
problem is not with the larger financial institutions, it is 
basically with the small community banks.
    We have worked very closely with a couple vendors to 
develop a service called Rapid EDI and Rapid EDI can be 
purchased for as low as $10 a month, where the financial 
institution basically signs up for the subscription service and 
the third party that we have under contract basically goes into 
the personal computer that the financial institution has, 
extracts the remittance information, and then transmits the 
remittance information directly to the business customer. If 
the financial institution is interested in doing more of the 
processing on their own, they could lease the software package 
for $50 a month and that way they can provide a number of 
different options to the business customer, delivering the 
remittance information by mail, by fax, or electronically. So 
the software packages that have been developed for small 
financial institutions are relatively inexpensive.
    The problem right now is that a lot of those institutions 
are not interested in purchasing or leasing the software 
packages because there is no demand for that service. The 
demand will be there, however, when this EFT mandate goes into 
place.
    Mr. Horn. Any other thoughts on software and need for any 
of the people you relate to?
    Ms. Nichelson. I would just suggest, Mr. Chairman, that 
although you are talking software within the banks, I hope that 
once a lot of this written information is sent to the consumer 
that you consider that a lot of people use English as a second 
language and you should consider some bilingual brochures and 
bilingual options when you are attempting to really reach these 
people in hopes that they will become part of the process prior 
to 1999.
    Mr. Horn. One of the problems is the urban area I come 
from, and I suspect you come from, there are 70 languages 
spoken in the schools. There is no way you can communicate in 
70 languages.
    Ms. Nichelson. I agree with you, Mr. Chairman. However, I 
suggest if you start with Spanish and with some of the Chinese 
speaking languages, you would reach a large segment of those 
people.
    Mr. Horn. You wouldn't in my community. You better start in 
Khmer. It is the largest community of Cambodians outside of 
Cambodia.
    Ms. Nichelson. I think it is interesting, Broadway Federal 
Bank in south central Los Angeles, they have now over half 
their staff is bilingual. They speak Spanish and they speak 
some Chinese and some other dialects, and Paul Hudson, the 
president of the bank, would probably share with you that that 
has really helped him to broaden his outreach to the people 
directly within his community.
    Mr. McEntee. Mr. Chairman, let me try to respond to that 
question. We have produced some of the public service 
announcements in Spanish, geared directly to a lot of the urban 
communities, so we are sensitive to the need to try to 
communicate in more than English, but I agree with you it would 
be impossible to produce this information in 70 different 
languages.
    Mr. Horn. Mr. McEntee, the Federal Government will save, 
presumably, their estimate was $130 million per year under this 
new law. Beneficiaries are expected to save $1.6 billion per 
year and you note that $1 will be saved by banks per electronic 
transaction in reduced teller cost. How much does that result 
in reduced cost to the banking industry each year as a result 
of this law? Has anybody ever worked the numbers on that?
    Mr. McEntee. As you were talking, I was trying to work out 
the numbers, but my mind is not working fast enough. If I 
recall, I think there is about 300 million transactions that 
the Government will be making to consumers by direct deposit, 
assuming all government recipients get paid by direct deposit 
on January 1, 1999, so that would work out to precisely $300 
million a year in cost savings. There still should be some cost 
savings for vendor payments as well, so I think you are talking 
about a cost savings of roughly $325 to $350 million a year.
    Mr. Horn. So if we add that to the Government's $500 
million over 5 years, and this is $300 million a year, you are 
saying, basically, annually. You would be doing pretty well, 
almost get us up to $1 billion at that rate.
    Let me ask Ms. Saunders, you used the term ``alternative 
financial providers'' in your testimony. I assume this refers 
to check cashing outlets among other institutions, and Ms. 
Nichelson described a partnering arrangement between a bank and 
check cashing outlet. As I understand it, you don't mind a bank 
going into any place if it is going to render service to the 
community.
    Ms. Saunders. That is right.
    Mr. Horn. And sort of an outreach approach, which I think 
is an intriguing idea.
    Do you have any other thoughts on banks and where they 
ought to go and spend some of their time with the customers?
    Ms. Saunders. The consumers and community advocates feel 
strongly--we are very much hopeful that EFT-99 will be the--
finally be a true opportunity to get the unbanked people and 
banks together. We think that if Treasury takes the initiative 
and holds the line and, in fact, uses this opportunity, the 
unbanked will have the use of banks for several new ways. One, 
they will be able to develop savings accounts, and we have 
already seen--there is a trial, EFT trial in Texas that 
Treasury has been going through for several years. And even 
though the people in that trial have been traditionally 
unbanked and living month to month, they have seen the 
development of many savings accounts little bits saved month to 
month, whereas before there were no savings accounts, so the 
development of savings accounts is a very important 
opportunity.
    Second, the possibility the individuals will begin to see 
the banks as their financial institution, so they turn to the 
banks, rather than the alternative providers, for other 
services, is very important.
    And, third, by using the banks, they will be able to use 
the electronic payment system more readily. We are just at the 
beginning of the electronic payment system. Some of us now use 
modems to pay our bills. But low-income people pay cash or by 
money orders. If they use banks to--if they see banks as their 
financial provider, they may also begin to participate in the 
electronic banking process.
    Mr. Horn. Let me quote, Ms. Saunders, from your prepared 
statement. ``If alternative providers of financial services are 
permitted to be conduits of Federal payments, that would 
constitute the Federal Government's blessing of grossly abusive 
practices against low-income people.''
    Let me lay out a scenario for you, an alternative financial 
service provider charges the same or less than a bank for an 
ATM card and is more convenient to the customer's house. Do you 
have any reaction to that?
    Ms. Saunders. The question is to whom--with whom does the 
individual have the account. If the individual has the account 
at the bank and chooses to use the ATM, the bank's ATM, or the 
network's ATM machine at the check casher, that is just fine, 
but it is not only the fees charged for the access to the 
Federal money, it is all of these other issues as well. So, 
yes, my and the other group's answer is unequivocally, we still 
would go with the bank's and only the bank's.
    Mr. Horn. Ms. Saunders, your concerns seem to be focused on 
individuals also without bank accounts, and is that a fair 
characterization? Do you have any comments on those with bank 
accounts who do not use direct deposit currently?
    Ms. Saunders. I think that those people who have bank 
accounts and do not use direct deposit will find that their 
Social Security check or their other Federal payment will be 
automatically deposited in their bank account. I cannot imagine 
that Treasury would force them to use a default system that 
does not use their already existing bank account.
    Mr. Horn. Mr. McEntee, I note you are part of a public 
education partnership with Treasury's Financial Management 
Service, which has high praise from us, the Social Security 
Administration, a well-organized group, and the Department of 
Veteran's Affairs. Can you describe that effort, what is 
happening with it?
    Mr. McEntee. Yes, we have a multifaceted effort under way 
to provide education to financial institutions and their 
customers and the unbanked as well. As I mentioned before, the 
focus is to get banks educated through conferences, seminars, 
and we are actually running a major nationwide seminar here in 
Washington, DC, in September where all the major trade 
associations representing the banking industry are cosponsoring 
that effort, and there are several Federal Government agencies 
that will be speaking at that conference.
    As I mentioned before as well, we think the key to 
communicating to consumers will be partially met through public 
service announcements and video news releases, and we are 
working with those Government agencies to produce those right 
now.
    Mr. Horn. Very good.
    Do any of you have questions of each other, after listening 
to the testimony, anything you want to add? Anything I should 
have asked if I knew what I was talking about?
    Ms. Saunders. You clearly know what you are talking about.
    Ms. Nichelson. Clearly.
    Mr. McEntee. I think you are asking all the right 
questions.
    Mr. Horn. Without objection, I guess, I have got here the 
American Bankers Association, the National Association of Check 
Cashers have sent statements into the subcommittee for 
inclusion into the record. I am sorry our witnesses haven't had 
a chance to see them, but without objection, we will put them 
in the record at this point.
    [The information referred to follows:]



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    Mr. Horn. So if there are no other questions, what I would 
like to have is the staff list of who has helped on this 
hearing. J Russell George, the staff director and chief counsel 
in back of me here; Mr. Mark Brasher, professional staff member 
that prepared for this hearing; Andrea Miller, the faithful 
clerk to our majority staff; And Grant Newman, the intern. We 
have to have an intern category, folks, this is summer almost. 
So Mr. Newman, we appreciate your help, and if the teacher 
doesn't think so, tell him to read the hearing record. OK; 
David McMillen, professional staff member for the minority, he 
is downstairs, Jean Gosa, clerk for the minority, and our three 
court reporters that have been in and out today, Katrina 
Wright, Vicky Stallsworth, and Tracy Petty.
    I thank the three of you again for the excellent statements 
you submitted and the summary of your testimony and your 
response to our questions. Thank you very much for coming.
    With that, we are adjourned.
    [Whereupon, at 3:50 p.m., the subcommittee was adjourned.]
    [Additional information submitted for the hearing record 
follows:]


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