Electronic Transfers: Use by Federal Payment Recipients Has	 
Increased but Obstacles to Greater Participation Remain 	 
(12-SEP-02, GAO-02-913).					 
                                                                 
In 2001, the Department of the Treasury made 764 million payments
valued at $549 billion to beneficiaries of federal programs,	 
primarily programs administered by the Social Security		 
Administration. Of these payments, 76 percent were made using	 
electronic funds transfers (EFTs), potentially saving the	 
government millions of dollars in costs associated with 	 
disbursing paper checks. In 1996, Congress passed legislation	 
which required that federal payments except tax refunds be made  
electronically as of January 1999. The act also required that	 
each person affected by this mandate have access to an account at
a financial institution at a reasonable cost and with certain	 
consumer protections. To meet this requirement, Treasury	 
developed the Electronic Transfer Account (ETA). Most recipients 
of federal benefits have their payments deposited electronically.
The number of recipients using EFT climbed steadily throughout	 
the 1990s, rising from around half to more than three-quarters of
all beneficiaries. Treasury and the Social Security		 
Administration (SSA) have undertaken activities to increase the  
use of direct deposit, including developing marketing material	 
and directly notifying check recipients of the advantages of	 
using EFT, particularly safety and convenience. Although	 
information describing the characteristics of these EFT users is 
limited, GAO determined that participation rates are highest for 
those 65 and older. The primary obstacle to using EFT was that	 
many federal check recipients did not have a bank account. GAO's 
analysis of the Survey of Income and Program Participation's 1998
data indicated that 11 million benefit recipients, over half of  
all federal benefit check recipients in 1998, were unbanked. The 
ETA has not been widely accepted by banks or unbanked		 
beneficiaries despite Treasury's efforts to promote it. Since	 
initiation of the program in 1999, 36,000 ETAs have been opened, 
representing fewer than 1 percent of unbanked beneficiaries.	 
Based on discussions with representatives from Treasury, SSA,	 
financial institutions, and consumer groups, GAO identified	 
several approaches that Treasury could consider to increase the  
use of electronic transfers. These approaches include increasing 
cooperation between banks and local SSA offices to more 	 
effectively enroll beneficiaries for ETAs; exploring other	 
electronic payment options besides the ETA to deliver benefits;  
partnering with banks to provide information on the general	 
availability of low cost banking products, especially in areas	 
with low ETA coverage; and conducting further research to	 
determine why certain states have low direct deposit		 
participation rates.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-913 					        
    ACCNO:   A05007						        
  TITLE:     Electronic Transfers: Use by Federal Payment Recipients  
Has Increased but Obstacles to Greater Participation Remain	 
     DATE:   09/12/2002 
  SUBJECT:   Bank deposits					 
	     Beneficiaries					 
	     Electronic funds transfer				 
	     Federal social security programs			 
	     Financial institutions				 
	     Program evaluation 				 
	     Census Bureau Survey of Income and 		 
	     Program Participation				 
                                                                 
	     Old-Age and Survivors Insurance Program		 
	     Social Security Disability Insurance		 
	     Program						 
                                                                 
	     Supplemental Security Income  Program		 
	     Treasury Automated Clearing House			 
	     Lock-box Network					 
                                                                 
	     Treasury Electronic Transfer Account		 

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GAO-02-913

Report to the Subcommittee on Oversight and Investigations, Committee on
Financial Services, House of Representatives

United States General Accounting Office

GAO

September 2002 ELECTRONIC TRANSFERS

Use by Federal Payment Recipients Has Increased but Obstacles to Greater
Participation Remain

GAO- 02- 913

Page i GAO- 02- 913 Electronic Transfers Letter 1

Results in Brief 2 Background 5 Governmental and Private Efforts Have
Increased EFT Usage 9 Lack of a Bank Account, Cost, and Personal Concerns
Keep Some

Beneficiaries from Using EFT 16 The ETA Has Had Limited Success 25
Opportunities May Exist to Increase EFT Participation 38 Conclusions 42
Recommendations 43 Agency Comments and Our Evaluation 44

Appendix I Objectives, Scope, and Methodology 46

Appendix II Example of Check Insert Used to Promote ETAs 51

Appendix III Direct Deposit Use by State, 2002 52

Appendix IV Characteristics of Unbanked Federal Beneficiaries and the
Unbanked Population at Large 54

Appendix V Location of the Unbanked by Region 64

Appendix VI Comments from the Department of the Treasury 66 Contents

Page ii GAO- 02- 913 Electronic Transfers Tables

Table 1: Number of Monthly Treasury Payments to Benefit Recipients in 2001
(in millions) 8 Table 2: States with the Highest and Lowest Direct Deposit

Participation Rates 16

Figures

Figure 1: Increase in Electronic Transfer Use, 1990* 2001 10 Figure 2:
Example of Check Inserts Used to Promote Direct

Deposit 11 Figure 3: Direct Deposit Use by SSA Program 14 Figure 4: Direct
Deposit Use by Age of Beneficiary 15 Figure 5: Direct Deposit Sign- Up
Rates by SSA Program,

1995* 2001 24 Figure 6: Direct Deposit Use by Representative Payee 25
Figure 7: The ETA*s Required Features 27 Figure 8: ETA Branches by State,
as of June 7, 2002 30 Figure 9: Number of Unbanked Adults and Federal
Beneficiaries,

1999 55 Figure 10: Proportion of Unbanked U. S. Adults and Federal

Beneficiaries, 1999 56 Figure 11: Unbanked Recipients and Income Level 57
Figure 12: Unbanked Recipients and Educational Level 58 Figure 13:
Unbanked Recipients and Ethnic Group 59 Figure 14: Unbanked and Banked
Beneficiaries Grouped by Marital

Status 60 Figure 15: Unbanked Recipients and Age Group 61 Figure 16:
Unbanked Recipients and Gender 62 Figure 17: Regions of the United States
64 Figure 18: Unbanked Recipients and Regional Location 65

Page iii GAO- 02- 913 Electronic Transfers Abbreviations

AARP American Association of Retired Persons ACH Automated Clearing House
ATM automated teller machine CRA Community Reinvestment Act DI Disability
Insurance DOL Department of Labor EBT Electronic Benefit Transfer EFT
electronic funds transfer ETA Electronic Transfer Account FRB Dallas
Federal Reserve Bank of Dallas NCRC National Community Reinvestment
Coalition OASDI Old- Age, Survivors, and Disability Insurance OASI Old-
Age and Survivors Insurance OCC Office of the Comptroller of the Currency
OPM Office of Personnel Management RRB Railroad Retirement Board SCF
Survey of Consumer Finances SIPP Survey of Income and Program
Participation SSA Social Security Administration SSI Supplemental Security
Income U. S. PIRG U. S. Public Interest Research Group VA Department of
Veterans Affairs

Page 1 GAO- 02- 913 Electronic Transfers

September 12, 2002 The Honorable Sue W. Kelly Chairwoman The Honorable
Luis V. Gutierrez Ranking Minority Member Subcommittee on Oversight and
Investigations Committee on Financial Services House of Representatives

In 2001, the Department of the Treasury made approximately 764 million
payments valued at $549 billion to beneficiaries of federal programs,
primarily programs administered by the Social Security Administration
(SSA). Of these payments, about 76 percent were made using electronic
funds transfers (EFTs), potentially saving the government millions of
dollars in costs associated with disbursing paper checks. In 1996,
Congress passed the Debt Collection Improvement Act, 1 which required that
federal payments except tax refunds be made electronically as of January
1999. The act also required that each person affected by this mandate have
access to an account at a financial institution at a reasonable cost and
with certain consumer protections. To meet this requirement, Treasury
developed the Electronic Transfer Account (ETA). The ETA, designed
specifically for federal beneficiaries who do not have bank accounts,
allows account holders to receive federal benefits electronically and to
make withdrawals but not to write checks. Based on congressional concerns
about a more stringent wavier provision, Treasury*s final regulations
provided that a recipient may continue to receive checks by mail if
payment by EFT would impose a hardship and allowed individuals to
determine for themselves if payment by EFT would impose a hardship. 2 In
2001, Treasury was still disbursing about 24 percent of all its federal
benefit payments by check.

1 Pub. L. No. 104- 134, Title III, S:31001( x) (1996). 2 The statute
provides Treasury with the authority to waive application of the EFT
requirement for those individuals with a hardship. Treasury*s final
regulations define hardship to be a physical or mental disability; a
geographic, language, or literacy barrier; or a financial hardship.
Treasury*s final regulations do not require that this determination of
hardship be made in writing.

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 02- 913 Electronic Transfers

Concerned about the possibility that the government is not capturing all
the potential cost savings from EFT, you asked us to examine the status of
EFT usage and the ETA program. As agreed with your offices, this report
(1) provides information on the extent of EFT usage, the steps taken by
federal agencies and others to promote EFT, and characteristics of EFT
users; (2) identifies obstacles to greater use of EFT and characteristics
of recipients who do not have bank accounts (the unbanked); (3) provides
information on the current status of the ETA program, including steps
taken by the government to promote it; and (4) identifies approaches that
Treasury could consider to increase the use of EFT.

To provide information on the extent of EFT usage and the steps taken to
promote it, we obtained and analyzed Treasury data on the number of
payments made by EFT and check and reviewed available information from
Treasury and SSA, financial institutions, and consumer groups on the
implementation of the EFT program. Because Treasury issues about 90
percent of its benefit payments for SSA programs, our review focused on
these payments. We obtained and analyzed SSA data on individuals who
receive payments under SSA programs in order to identify the
characteristics of EFT users. To identify obstacles to EFT use, we
analyzed the most recent available data from the 1998 and 1999 Survey of
Income and Program Participation (SIPP) conducted by the Bureau of the
Census. Data from SIPP, which was designed to obtain information enabling
evaluation of initiatives affecting programs like Social Security, allowed
us to estimate the number of unbanked federal recipients and identify some
of their characteristics. To identify why federal recipients may be
reluctant to open a bank account, we reviewed studies of the unbanked in
the general population and analyzed EFT usage data supplied by SSA. To
describe the status of the ETA program and the government*s efforts to
promote it, we obtained and analyzed data from Treasury and interviewed
representatives of Treasury, other federal agencies, financial
institutions, and nonprofit consumer groups. To identify alternative
approaches for promoting the use of EFT* including expanding the ETA
program* we interviewed program experts and reviewed available data
provided by financial institutions, federal agencies, and nonprofit
consumer groups. Appendix I provides additional details on our scope and
methodology.

Most recipients of federal benefits have their payments deposited
electronically. The number of recipients using EFT climbed steadily
throughout the 1990s, rising from around half to more than three- quarters
of all beneficiaries. This high participation rate can be attributed to
the Results in Brief

Page 3 GAO- 02- 913 Electronic Transfers

combined promotional efforts of Treasury, SSA, the banking industry, and
consumer groups. Treasury and the SSA have undertaken activities to
increase the use of direct deposit, including developing marketing
material and directly notifying check recipients of the advantages of
using EFT, particularly safety and convenience. We found that the
proportion of recipients in each SSA program who used EFT varied widely,
ranging from 68 percent for the disabled to 82 percent for retirees. While
information describing the characteristics of these EFT users is limited,
we determined that participation rates are highest for those 65 and older.
EFT usage for all SSA program benefit recipients is uniformly lowest in
the southeastern states.

We found that the primary obstacle to using EFT was that many federal
check recipients did not have a bank account. In determining how many
recipients were unbanked, we used two sources of data: SIPP, because it
was designed specifically to assess benefit program participants, and
Treasury*s own estimates of unbanked beneficiaries. Our analysis of SIPP*s
1998 data indicated that about 11 million benefit recipients, over half of
all federal benefit check recipients in 1998, were unbanked. This estimate
is substantially higher than Treasury*s 1997 estimate, which showed that
24 percent of federal beneficiaries (5.2* 6.5 million) lacked bank
accounts. This difference in estimates could have profound implications
because it is more difficult to persuade beneficiaries without bank
accounts to use EFT than to persuade those who already have a bank account
to do so. While no estimates of the number of unbanked beneficiaries are
available for 2001, our analysis of the SIPP raises significant concerns
about Treasury*s most recent estimate of 3.3 million. Our analysis of the
SIPP data also indicated that unbanked recipients had lower incomes and
less education than banked recipients and were more likely to be single.
Other research indicates that individuals often chose not to have a
checking or savings account for a number of reasons* for example, some
preferred another method of cashing checks and saw banks as too expensive.
For check recipients who were banked but chose not to use direct deposit,
the obstacles were less obvious. Some of these recipients strongly
preferred to receive a check in hand because they had always operated that
way, while others, given the choice of using or not using EFT, elected not
to use it.

The ETA has not been widely accepted by banks or unbanked beneficiaries
despite Treasury*s efforts to promote it. Since initiation of the program
in 1999, 36,000 ETAs have been opened, representing fewer than 1 percent
of unbanked beneficiaries whether using estimates based on our analysis of
the SIPP or Treasury*s research. Treasury*s efforts have

Page 4 GAO- 02- 913 Electronic Transfers

included taking steps to convince banks to offer ETAs, establishing a
database of ETA providers (including their locations) to assist in
enrolling beneficiaries in an ETA, and nationwide marketing of the ETA
directed at benefit recipients. For example, Treasury periodically mails
information on EFT and ETA to federal check recipients when distributing
benefit checks. While some of the largest banks in the country offer ETAs,
most banks do not, and ETAs are largely unavailable in some areas of the
country. Officials from banks that offer ETAs often emphasized that they
viewed the account as a community service. Many banks, especially larger
ones, viewed the ETA as unprofitable and tended to limit their marketing
efforts. In contrast, smaller banks and those that focused on a specific
community or ethnic group were more likely to make special efforts to
promote the ETA, including coordinating enrollment with local Social
Security offices. Several factors influenced federal beneficiaries who
were unwilling to open an ETA, including satisfaction with current
checkcashing methods and a preference for an account that allowed check
writing. Because less than 1 percent of potential unbanked federal
beneficiaries have opened ETAs, it is uncertain whether the ETA will
generate savings sufficient to offset the costs of maintaining and
promoting the program.

Based on our discussions with representatives from Treasury, SSA,
financial institutions, and consumer groups, we identified several
approaches that Treasury could consider to increase the use of electronic
transfers. These approaches include increasing cooperation between banks
and local SSA offices to more effectively enroll beneficiaries for ETAs;
exploring other electronic payment options besides the ETA to deliver
benefits; partnering with banks to provide information on the general
availability of low- cost banking products, especially in areas with low
ETA coverage; and conducting further research to determine why certain
states have low direct deposit participation rates. We recognize that
these approaches could be difficult to implement without further
exploration because those who would be responsible for implementing them
sometimes have conflicting interests. For example, Treasury is concerned
with saving money and preventing fraud, banks are concerned with capturing
any profits on products they offer, and recipients are interested in
convenience and costs. However, because the ETA is unlikely to prove
successful as the sole means of persuading unbanked beneficiaries to use
electronic transfers, these approaches warrant further consideration.

This report contains two recommendations. First, we recommend that
Treasury revisit its estimate of the number of unbanked federal check

Page 5 GAO- 02- 913 Electronic Transfers

recipients. In doing so, we further recommend that Treasury explore use of
Census SIPP data as a means to obtain a better estimate of the extent of
federal beneficiaries who are unbanked and to better understand the
characteristics of the unbanked population. Second, we recommend that
Treasury use the information on the extent and characteristics of unbanked
federal check recipients to consider alternative approaches, including
those discussed in this report, to develop a strategy that offers a
greater likelihood of attracting that portion of the unbanked population
that chooses not to open an ETA.

We obtained written comments on a draft of this report from Richard L.
Gregg, Commissioner of Treasury*s Financial Management Service, that are
presented in appendix VI. SSA did not provide comments. Treasury generally
agreed with our recommendations, outlined how it would respond to each of
them, and made three clarifying points. We modified the text as
appropriate.

As part of the Debt Collection Improvement Act of 1996 (1996 Act),
Congress decided to take advantage of the benefits that could result from
the greater use of EFT payments and required that EFT be used to make all
federal payments, except tax refund payments. 3 EFT was defined as any
transfer of funds, other than transactions originated by cash or checks
that authorized a financial institution to debit or credit an account. EFT
payments include payments made through the Automated Clearing House 4

3 While this report focuses on the delivery of payments to federal
beneficiaries, the law specifies that all of the following payments must
be made by electronic fund transfer: (1) federal wage, salary, and
retirement payments; (2) vendor and expense reimbursement payments; and
(3) benefit payments.

4 The ACH network is a funds transfer system governed by a specific set of
rules that provides for the interbank clearing of electronic entries for
participating institutions. Both the Federal Reserve System and the
private sector provide ACH services. A 1997 GAO report on the U. S.
payment system provides additional information on the ACH network
(Payments, Clearance, and Settlement: A Guide to the Systems, Risks, and
Issues,

GAO/ GGD- 97- 73, June 20, 1997). Background

Page 6 GAO- 02- 913 Electronic Transfers

(ACH) network for the direct deposit 5 of payroll or Social Security
benefits. The 1996 Act also instructed Treasury to ensure that individuals
have access to an account at a federally insured financial institution,
that such an account have the same consumer protections provided to other
account holders, and that it be provided at a reasonable cost. But the
1996 Act permitted Treasury to waive the EFT requirement under certain
conditions, for example, when compliance would pose a hardship to a
federal check recipient, for certain types of checks, or in other
circumstances.

The 1996 Act mandated that Treasury implement the EFT requirement in
phases. During the first phase, recipients who became eligible to receive
federal payments on or after July 26, 1996, would receive their payments
by EFT unless they certified in writing that they did not have an account
with a financial institution or an authorized payment agent. Treasury
implemented an interim rule on July 26, 1996, for these requirements. The
interim regulation remained in effect until January 1, 1999, at which time
all federal payments were to be made by EFT unless Treasury granted a
waiver. Treasury*s final regulation (issued on September 25, 1998) was
intended to bring Americans who did not use the financial system to
receive funds or make payments into the financial mainstream. In July
1999, Treasury issued a notice that established the required features of
the ETA, a low- cost account Treasury designed for unbanked federal
beneficiaries. 6

Prior to implementing these final regulations, Treasury sponsored research
and obtained the viewpoints of interested parties, including financial
institutions, consumer groups, and others, during field hearings and as
part of the regulatory comment process. The positions these groups held on
the implementation and final design of the ETA were sometimes

5 In this report, we often refer to electronic funds transfers (EFT) as
*direct deposit** the term Treasury and SSA use in their marketing
materials. However, Treasury*s final regulation on EFT, issued September
25, 1998, differentiates between direct deposit and what are called
electronic benefit transfers (EBTs). EBTs include federal payments made
through (1) an electronic transfer account and (2) a debit card such as a
benefit security card. Direct deposits are made into accounts for which
Treasury assumes no responsibility. But under the EBT system, Treasury
authorizes financial institutions to act as its agent in overseeing
accounts that receive transfers.

6 Treasury published a final rule implementing the use of direct deposit
(Management of Federal Agency Disbursements, 31 C. F. R. 208, September
25, 1998). This rule became effective on January 2, 1999. In addition, on
July 16, 1999 Treasury published a notice describing the required features
of the ETA that went into effect immediately.

Page 7 GAO- 02- 913 Electronic Transfers

very different. For example, from the beginning consumer groups were
concerned that some benefit recipients would be negatively affected if the
1996 Act*s waiver policy was strictly enforced. Treasury responded by
establishing a flexible waiver policy that permitted individuals to
determine for themselves whether direct deposit would cause them a
hardship. However, establishment of this policy caused some
representatives of financial institutions to anticipate that few unbanked
beneficiaries would voluntarily enroll for ETAs. These officials asked
Treasury for the flexibility to set their own monthly account fees, a
request opposed by consumer groups wanting to ensure that the accounts
would remain low cost. In designing the ETA, Treasury also commissioned
studies to determine why people chose not to use direct deposit (including
why they remained unbanked) and to identify an electronic account that
could be offered to the unbanked at a reasonable cost. 7

On July 16, 1999, Treasury published a notice in the Federal Register that
established the required features of the ETA, such as the amount of the
maximum monthly fee ($ 3.00) that an ETA provider could charge a customer
and the minimum number of free withdrawals the account was required to
include. The notice also set the amount of money Treasury would reimburse
each ETA provider ($ 12.60) for opening an ETA.

Treasury makes payments on behalf of several agencies; the largest
percentage (90 percent) of benefit payments is for SSA. The majority of
SSA*s payments fall under the Old- Age and Survivors Insurance (OASI) and
the Disability Insurance (DI) programs. These programs combined are
commonly referred to as Social Security, or the Old- Age, Survivors, and
Disability Insurance (OASDI) program. In addition, SSA administers the
Supplemental Security Income (SSI) program. Descriptions of these programs
follow.

 OASI provides payments to retired workers or the survivors of workers
who have paid into the Social Security trust fund. The trust fund is
financed through payroll taxes paid by workers, their employers, and the
self- employed. To qualify for OASI benefits, workers must have paid
Social Security taxes for at least 10 years or an equivalent.

7 Treasury asked Booz. Allen & Hamilton, Shugoll Research, and Dove
Associates to conduct these studies, which were in part based on research
that surveyed the check recipient population. According to Treasury
officials, these studies did not survey benefit recipients under the age
of 18.

Page 8 GAO- 02- 913 Electronic Transfers

 DI provides payments to disabled workers who have paid a minimum amount
into the Social Security trust fund. To qualify for DI, workers must have
a medically determinable physical or mental impairment that prevents them
from engaging in substantial gainful activity. These benefits provide an
income base for eligible workers who have qualifying disabilities and for
eligible members of their families.

 SSI is a means- tested program that provides qualified recipients with
monthly cash payments sufficient to raise their income to a predetermined
level guaranteed by the federal SSI program. The program is financed from
general tax revenues and provides aid to aged, blind, and disabled
children and adults who have limited income and resources. SSI benefit
recipients may also qualify for other benefits, such as food stamps and
social services.

Besides administering payments for SSA, Treasury makes retirement and
compensation payments on behalf of the Department of Labor (DOL) for
victims of black lung disease, the Office of Personnel Management (OPM)
for retirement benefits for federal employees, the Railroad Retirement
Board (RRB) for retired railroad workers, and the Department of Veterans
Affairs (VA) for benefits paid to veterans or their survivors. Table 1
identifies the number of payments by type (EFT or check) Treasury made for
each federal agency in 2001.

Table 1: Number of Monthly Treasury Payments to Benefit Recipients in 2001
(in millions)

Number of payments Authorizing agency Benefit type EFT Check Total

OASDI 39.1 10.8 49.8

SSI 3.6 3. 7 7.3

VA/ OPM/ RRB/ DOL Compensation and Pensions 5.5 1. 0 6.6 Total 48.2 15.5
63.7

Source: Treasury, Financial Management Service Web site.

When determining the number of check recipients likely to enroll for an
ETA, an important question to consider is how many of them do not have a
bank account. 8 One of the best sources for this estimate is the Bureau of

8 In this report, by bank account, we mean a checking, a savings, or a
transaction account like the ETA.

Page 9 GAO- 02- 913 Electronic Transfers

the Census* national SIPP. 9 The SIPP provides information on the
demographic and economic situation of individuals and households in the
United States. This survey includes specific questions that ask whether
individuals receive income from government programs and if they have
checking or other types of accounts. Other well- known surveys, such as
the Survey of Consumer Finances (SCF), sponsored by the Federal Reserve,
can be used to produce estimates of the unbanked population but not
estimates of individual unbanked federal benefit recipients. 10

In 2001, most federal beneficiaries who received payments directly from
Treasury received their payments electronically. Use of electronic
transfers increased steadily throughout the 1990s, especially between 1996
and 2001. This increase can be attributed to a combination of efforts
undertaken by the public and private sector to promote direct deposit. In
particular, Treasury and SSA initiated and continue activities to advise
check recipients of the safety and convenience of receiving their benefits
by electronic transfer and to facilitate switching check recipients to
direct deposit. We found that direct deposit participation varies widely
among recipients in each SSA program. Today, the OASI program has the
highest EFT participation rate at 82 percent. Information on the
characteristics of benefit recipients who use direct deposit is limited,
but our analysis of studies and SSA data suggest that EFT users tend to be
older and that participation rates are generally lower in the southeastern
states.

Over the past decade, EFT usage has increased significantly. As shown in
figure 1, in 2001, Treasury made 578 million (76 percent) of all federal
benefit payments to beneficiaries through EFT compared to 315 million (47
percent) of the benefit payments it made in 1990. In 2001, Treasury made
about 186 million check payments to about 14 million benefit recipients.
This increase in EFT use was markedly greater after enactment of the 1996
Debt Collection Improvement Act. Specifically, between 1991 and 1996, EFT
usage by federal benefit recipients increased by 8 percentage points (from
48 percent to 56 percent) and, between 1996 and

9 We used the SIPP to make these estimates for a previous report. U. S.
General Accounting Office, Banking: Government Check- Cashing Issues, GAO/
GGD- 89- 12 (Washington, D. C.: Oct. 7, 1988).

10 More information about this survey can be found in appendix I.
Governmental and

Private Efforts Have Increased EFT Usage

EFT Use Has Increased in Response to Public and Private Efforts

Page 10 GAO- 02- 913 Electronic Transfers

2001, by 20 percentage points (from 56 percent to 76 percent). Also, after
declining steadily since 1990, the reduction in payments Treasury made by
check mostly leveled off since 1999 and, since then Treasury continued to
pay, on average, over 180 million check payments per year to federal
recipients.

Figure 1: Increase in Electronic Transfer Use, 1990* 2001

Source: Treasury, Financial Management Services.

To promote direct deposit, Treasury and SSA have jointly developed
marketing campaigns and distributed promotional materials to financial
institutions, SSA field offices, and nonprofit organizations. These
materials include public service announcements for radio, television, and
printed publications; posters for distribution to financial institutions
and SSA field offices; and check inserts to accompany benefit checks.
These promotions emphasize that direct deposit is *safe, quick, and
convenient,* and materials are often available in both English and
Spanish. Treasury

Page 11 GAO- 02- 913 Electronic Transfers

considers these check inserts, such as those shown in figure 2, to be one
of its most important methods of promoting direct deposit, because these
inserts reach beneficiaries directly.

Figure 2: Example of Check Inserts Used to Promote Direct Deposit

Source: SSA.

SSA also undertakes its own activities, some of which were initiated
before the Debt Collection Improvement Act was signed into law. For
instance, in the early 1990s, SSA streamlined the direct deposit
enrollment process by introducing a toll- free enrollment number for
benefit recipients and establishing a program to allow benefit recipients
to enroll in direct

Page 12 GAO- 02- 913 Electronic Transfers

deposit at a financial institution more easily. As a result of the 1996
Act, SSA further strengthened its direct deposit enrollment procedures by
instructing staff to use a line of questioning that presumed a recipient
would use direct deposit. During 1997 and 1998, before Treasury
established a flexible waiver policy, SSA also told individuals with bank
accounts that they were required to sign up for direct deposit.

Other organizations and financial institutions have also promoted direct
deposit, providing additional publicity to encourage federal beneficiaries
to use it. Nonprofits such as the American Association of Retired Persons
(AARP) and the National Community Reinvestment Coalition (NCRC) promote
the use of direct deposit as part of their financial literacy programs
because of the benefits (such as safety and convenience) it could yield to
their constituencies. For example, AARP officials told us that they
conducted a three- year educational campaign starting in about 1997 that
involved cooperating with banks and community groups to promote direct
deposit and using mass mailings to reach their constituency. In addition,
these organizations have cooperated with federal agencies such as
Treasury, banking associations, and other consumer groups to compile a
training guide that provides financial education to people with minimal
knowledge of the banking system. 11 This guide includes fact sheets on the
advantages of direct deposit and a description of how individuals can
receive benefits electronically (for example, with an ETA).

Financial institutions complement these efforts by sponsoring direct
deposit campaigns, and some banks provide free checking accounts in
exchange for using direct deposit. Banks are highly motivated to promote
direct deposit because checks are more costly to process than electronic
transfers. For example, major banks we spoke with reported that it cost
them about .05 cents to process an ACH transaction and more than a dollar
(one major bank reported $1.19) when a customer comes to a teller window
to cash a check.

Despite these ongoing efforts by Treasury and others, the annual increase
in EFT usage by benefit recipients has slowed down over the last few
years. For example, between 1999 and 2000, EFT use increased by only two
percentage points, from 73 percent to 75 percent, and between 2000

11 *Helping People in Your Community Understand Basic Financial Services,*
developed by the Financial Services Education Coalition.

Page 13 GAO- 02- 913 Electronic Transfers

and 2001, EFT use increased by only one percentage point, from 75 percent
to 76 percent. In contrast, between 1996 and 1999, EFT use had been
increasing by about six percentage points annually.

Although SSA has limited data on the characteristics of direct deposit
users, we used available SSA data to identify program participation rates,
the age of direct deposit benefit recipients, and participation in direct
deposit by state. 12

OASI recipients were more likely to use direct deposit than were DI or SSI
recipients. These benefit recipients had the highest participation rate*
82 percent. In contrast, 68 percent of DI recipients and 51 percent of SSI
recipients used direct deposit. However, because the OASI program has a
larger number of participants, it also has a higher number of check
recipients than the other two programs. (Figure 3 provides additional
information on direct deposit usage for each program.) SSA officials said
that they do not tailor their marketing by program type and could not
identify factors contributing to the lower use of direct deposit among DI
and SSI recipients. They noted that SSA was in the process of conducting a
survey of beneficiaries to better understand why people are not using
direct deposit. However, the officials said that the survey results were
unlikely to distinguish reasons for nonparticipation among benefit
recipients.

12 We also analyzed participation by gender but did not find meaningful
differences. Federal Beneficiaries Who

Use Direct Deposit Share Certain Characteristics

Page 14 GAO- 02- 913 Electronic Transfers

Figure 3: Direct Deposit Use by SSA Program

Source: SSA, OASI and DI data for April 2002 and SSI data for March 2002.

As shown in figure 4, SSA data suggest that age is not an obstacle to
direct deposit. Benefit recipients 65 and older have high direct deposit
participation rates. For example, among OASI recipients, 83 percent of
those 65 and older used direct deposit compared with 79 percent of those
18* 64 and 65 percent of those under 18. However, most OASI check
recipients (5.6 of 7 million total check recipients) are 65 and older.
Since other factors, such as a disability or use of a representative payee
by those under age 18, might contribute to lower electronic transfer use
by younger recipients, any comparison of usage by age should be done with
caution.

Page 15 GAO- 02- 913 Electronic Transfers

Figure 4: Direct Deposit Use by Age of Beneficiary

Note 1: It would be misleading to show direct deposit participation rates
for DI recipients who are 65 and older because most DI recipients
transition to OASI when they become 65. As a result, we do not show their
participation rates.

Source: SSA, OASI and DI data for February 2002 and SSI data for March
2002.

While higher direct deposit use is not associated with any one region of
the United States, direct deposit use is generally lowest in the
southeastern states, including Alabama, Kentucky, Louisiana, North
Carolina, and West Virginia. 13 These states have OASI direct deposit
participation rates of 68 to 77 percent, compared with states such as

13 States with the highest OASI participation include Arizona, Florida,
Idaho, Oregon, Washington, and Wyoming. States with the highest DI
participation include Alaska, Hawaii, Nebraska, North Dakota, Oregon, and
South Dakota. States with the highest SSI participation include
California, Hawaii, Massachusetts, New York, North Dakota, Oregon,
Pennsylvania, and South Dakota.

Page 16 GAO- 02- 913 Electronic Transfers

Arizona, Oregon, and Washington, where participation rates range from 90
to 91 percent. We asked Treasury and SSA officials if they could identify
any factors that could explain why direct deposit use was lower in the
southeastern states, but they could not. As indicated in table 2, of the
three programs SSI shows the widest variance in direct deposit
participation rates across states from a high of 67 percent in California
to a low of 31 percent in West Virginia. Appendix III identifies direct
participation usage by state for each SSA program.

Table 2: States with the Highest and Lowest Direct Deposit Participation
Rates State with highest participation rate

Direct deposit participation

(%) State with lowest participation rate

Direct deposit participation

(%)

OASI Washington 91 West Virginia 68 DI North Dakota 80 West Virginia 53
SSI California 67 West Virginia 31

Source: SSA, OASI and DI data for February 2002 and SSI data for May 2002.

We found that the major obstacle to using direct deposit was being
unbanked* that is, not having a bank account. Importantly, we also found
that the number of unbanked federal beneficiaries may be higher than
earlier estimates suggest. Our analysis of the Census Bureau*s SIPP
showed, for example, that the number of unbanked beneficiaries may be
twice as high as Treasury*s estimate. Our analyses also indicated that
unbanked federal beneficiaries are more likely to have lower income and
educational levels than banked beneficiaries and are more likely to be
unmarried. We used studies of both unbanked federal beneficiaries and the
unbanked population at large to determine why some federal check
recipients remain unbanked and to identify obstacles to bringing them into
the banking system. Our analysis of relevant studies conducted by federal
agencies and other researchers showed that unbanked federal beneficiaries
and unbanked individuals at large have practical reasons* including cost
and convenience* for not opening a bank account. But lack of a bank
account is not the only reason beneficiaries choose not to use EFT. Some
federal beneficiaries who have bank accounts do not use direct deposit, in
part because of the availability of the opt- out provision and in part
because of concerns about receiving payments, accessing money, and
resolving problems, among other things. Lack of a Bank

Account, Cost, and Personal Concerns Keep Some Beneficiaries from Using
EFT

Page 17 GAO- 02- 913 Electronic Transfers

Determining the exact number of unbanked federal beneficiaries is
difficult because federal agencies do not document whether or not their
recipients have bank accounts. 14 However, determining the correct
percentage of federal check recipients who are unbanked is an important
ingredient in developing a strategy on how best to attract federal check
recipients to EFT. An underestimate of the percentage of federal check
recipients who are unbanked could have profound implications on the
success of any program to attract federal check recipients because it is
much more difficult to persuade beneficiaries without bank accounts than
those who already have a bank account to use EFT.

In 1997, to prepare for the ETA program, Treasury sponsored its own
research that estimated that about 5.2 to 6.5 million federal
beneficiaries* approximately 24 percent of check recipients* were
unbanked. 15 Treasury still uses this percentage in determining the number
of unbanked check recipients and, in early 2002, placed that figure at 3.3
million. However, we analyzed data from the Census Bureau*s SIPP 16 from
1998 to determine the number of adult federal recipients without bank
accounts and found that for 1997 Treasury may have underestimated the
number of the unbanked who received federal benefit checks. Specifically,
we estimated that about 11 million federal beneficiaries, or over half of
all federal check recipients

14 SSA officials reported that applicants for SSI are required to identify
their financial assets. However, these officials said that SSA does not
centralize this information in a way that allows it to be used to
determine the number of SSI recipients without bank accounts.

15 These estimates were derived by Dove Associates (ETA Initiative Final
Report, June 15, 1998) based on research conducted by Booz. Allen &
Hamilton, Shugoll Research (Mandatory EFT Demographic Study, April 22,
1997). Treasury contracted for this threephase research, and additional
research based on this work by Dove Associates, as part of its
preparations for implementing the EFT program. While the Shugoll study
provided useful information about the characteristics of unbanked federal
beneficiaries, it had a number of limitations with regard to estimating
the number of unbanked beneficiaries. For instance, it was conducted only
in English and relied in part on telephone surveys that could have
excluded low- income households without telephone service. Treasury
officials told us that the mail portion of the survey indicated that 27
percent of the check recipients did not have bank accounts.

16 SIPP was designed specifically to assist in creating and evaluating
programs like those administered by SSA. It provides information on the
demographic and economic situation of the civilian, noninstitutionalized
adult population of the United States. For the purpose of assessing the
accuracy of Treasury*s 1997 estimates, we analyzed SIPP data from 1998. In
addition, to identify whether changes may have taken place since 1998, we
analyzed 1999 survey data from the SIPP. The 1999 survey data are the most
recently available from the Census that allowed us to define a bank
account to include noninterest- bearing checking accounts as well as other
accounts such as savings and interest- bearing checking. A summary of
these data can be found in appendix IV. Lack of a Bank Account Is

the Major Obstacle to Using EFT

Page 18 GAO- 02- 913 Electronic Transfers

in 1998, did not have a bank account (see appendix I for details of our
analysis). Of this number, almost all received benefits from SSA or a
combination of benefits from SSA and other agencies. In addition, our
analysis of more recent SIPP data indicated that, in 1999, the number of
unbanked federal beneficiaries was closer to about 11.5 million, including
about 8.7 million OASDI recipients and from 3.0 to 3.9 million SSI
recipients. 17 This same analysis indicated that about 37 percent of
unbanked SSI recipients also received OASDI. While no estimates of the
unbanked are available for 2001, our analyses of the SIPP data raise
significant concerns about Treasury*s most recent estimate of 3.3 million.

Our analysis of the SIPP data indicates that Treasury officials may be
planning their EFT marketing based on an estimate of the unbanked that is
too low. When we discussed our estimates with Treasury officials, they
told us that they were unaware of the availability and benefits of using
the SIPP data to estimate the size of the unbanked population. They
acknowledged that if the unbanked recipient population was significantly
larger than their estimate, the goal of enabling this group to receive
funds electronically would be more challenging than had originally been
thought and therefore might call for developing new strategies to attract
the unbanked.

While the SIPP does not contain information on why individuals have
decided to be unbanked, our analysis of the SIPP data allowed us to
identify certain characteristics of unbanked federal benefit recipients.
Identifying such characteristics could contribute to developing strategies
to increase ETA and EFT use. Using survey data from the 1999 SIPP, we were
able to identify the following characteristics:

 Low- income recipients were less likely to have a bank account than
highincome recipients. For example, 35 percent of OASDI recipients with
family incomes of less than $15,000 were unbanked, compared with 16
percent of those with incomes of $30,000*$ 45,000. About three- quarters
of unbanked OASDI and SSI recipients had family incomes of $30,000 or
less.

 Recipients with less schooling were less likely to be banked. For
example, 36 percent of OASDI recipients who did not complete high school
were unbanked, compared with 20 percent who had at least a high school

17 See appendix I for an explanation of how we arrived at our estimates
and what factors may affect those estimates. Confidence intervals for
estimates for based on the 1998 SIPP are +/- 6 percent or less. Confidence
intervals for the estimates based on the 1999 SIPP data can be found in
appendix IV and appendix V.

Page 19 GAO- 02- 913 Electronic Transfers

diploma and 16 percent with at least some college experience. Most
unbanked OASDI and SSI recipients had no more than a high school diploma.

 Ethnic minorities, including African Americans and Hispanics, were more
likely to be unbanked than white recipients. For example, 52 percent of
African- American OASDI recipients were unbanked compared with 18 percent
of white recipients. However, because most OASDI recipients are white,
they accounted for 66 percent of all unbanked OASDI recipients.

 Single OASDI and SSI beneficiaries were more likely to be unbanked than
married recipients. For example, 30 percent of unmarried OASDI recipients
were unbanked compared with 16 percent of married recipients. For both
programs, the majority of all unbanked beneficiaries were unmarried.
Eighty percent of unbanked SSI recipients and 62 percent of unbanked OASDI
recipients were unmarried.

 For both OASDI and SSI, younger benefit recipients were less likely to
be banked than older ones. For example, 63 percent of OASDI recipients 18*
35 were unbanked compared with 19 percent between the ages of 65 and
older. However, because most OASDI recipients are 65 and older, they still
represented the majority (66 percent) of unbanked OASDI recipients.

 Federal beneficiaries in the southeastern and southwestern states were
more likely to be unbanked than those in other parts of the country.
Around 35 percent of recipients in the southeast and 36 percent in the
southwest did not have a bank account, compared with 22* 25 percent in
other parts of the country. 18

Appendix IV provides figures showing more detailed information about the
characteristics of unbanked OASDI and SSI recipients. While additional
research could provide other insights into why some federal recipients are
unbanked, this type of information is still useful because the more
Treasury and other program officials know about unbanked benefit
recipients, the more equipped they will be to develop a workable strategy
for increasing the use of EFT. Appendix IV provides figures showing the
same detailed information about the characteristics of the unbanked
population at large to provide a broader context within which to
understand the characteristics of unbanked federal benefit recipients.

18 We classified the southeastern states as Alabama, Florida, Georgia,
Mississippi, North Carolina, South Carolina, Tennessee, Virginia, and West
Virginia. The southwestern states include Arkansas, Louisiana, Oklahoma,
and Texas. For the purpose of statistical analyses, we limited the number
of regions into which we divided the United States. See appendix V for
information on how we classified other parts of the country.

Page 20 GAO- 02- 913 Electronic Transfers

To identify some of the obstacles to bringing unbanked federal
beneficiaries into the financial mainstream, we relied largely on existing
studies of the unbanked population. 19 While research on the unbanked is
fairly limited and often restricted to a specific geographic location,
these studies still provide useful insights. Collectively they indicate
that the unbanked have a number of practical reasons for preferring their
current check- cashing and payment arrangements. For example, because
these recipients frequently have low incomes, the minimum balances
required by banks and the potential for incurring overdraft fees may deter
the unbanked from opening bank accounts.

Treasury- sponsored research completed in 1997 indicated that federal
check recipients were unbanked largely because they believed that they did
not have enough money to establish an account, felt that they did not need
an account, and believed that bank fees were too high. 20 The researchers
noted that fees were a problem because low- income recipients could have
trouble maintaining a minimum balance and thus could incur service or
overdraft charges. More than half of unbanked recipients reported that
they cashed their checks at financial institutions or grocery stores.
Responses to the 1998 Federal Reserve Board*s SCF, which queried a sample
of the population at large, also indicated that the unbanked have
practical reasons for not having checking accounts. The respondents said
that they would not write enough checks, did not have enough money to
establish an account, and thought that service charges and minimum balance
requirements were excessive. 21

Other studies evaluating the unbanked population at large indicate that
the unbanked make decisions that take into consideration their limited
income and the cost of financial services. These researchers evaluated
both the costs of maintaining a bank account and the cost of paying bills.
For example, based on a survey sponsored by the Office of the Comptroller
of the Currency (OCC), a researcher estimated that the

19 These studies include Treasury- sponsored research that focuses
specifically on federal beneficiaries and studies sponsored by federal
agencies and academic institutions that examine the unbanked population at
large. All used some mechanism, such as focus groups, to obtain the views
of unbanked individuals.

20 Booz. Allen & Hamilton, Shugoll Research. 21 Arthur B. Kennickell,
Martha Starr- McCluer, and Brian J. Surette, *Recent Changes in U. S.
Family Finances: Results from the 1998 Survey of Consumer Finances,*
Federal Reserve Bulletin (January 2000). This research was based on a
triennial survey of income and other demographic characteristics of U. S.
families sponsored by the Federal Reserve. Concerns about Cost and

Convenience Prevent Some Unbanked Beneficiaries from Using EFT

Page 21 GAO- 02- 913 Electronic Transfers

unbanked used both check- cashing outlets (71 percent) and banks (23
percent) to cash checks, and noted that those using a bank were able to do
so at little or no cost. 22 However, to make payments (for example, by
purchasing money orders) almost all the unbanked surveyed preferred using
places other than financial institutions, such as check- cashing outlets
and post offices, to arrange for payments. The researcher noted that many
unbanked might operate outside the banking system in order to save money,
but the survey results indicated that minimum balances required to open an
account may pose a significant problem for many of the unbanked. Another
researcher, using research sponsored by the Federal Reserve, also noted
that a checking account could be expensive for low- income individuals,
because they would be likely to maintain a very low balance and could
therefore incur overdraft fees. 23 This same study forecasted that ETAs
would not be widely adopted because the unbanked* except in urban areas
where check- cashing outlets are costly* would prefer their current
arrangements, which allow them to cash their checks and pay bills at the
same time. Another researcher concluded as well that unbanked households
may favor financial service providers such as check- cashing outlets
because the unbanked cannot meet the high minimum balances required to
open a deposit account and are averse to paying the monthly maintenance
fees generally imposed on accounts with small balances. In addition, this
researcher also noted that check- cashing outlets selling money orders and
cashing checks for the general public may be more effectively tailoring
their services to the needs of the unbanked. 24

While researchers recognize that the unbanked may have practical reasons
for not having a bank account, they also recognize the important

22 Constance R. Dunham, *The Role of Banks and Nonbanks in Serving Low-
and ModerateIncome Communities* (paper presented at *Changing Financial
Markets & Community Development* held in Washington D. C., Federal Reserve
System, April 5- 6, 2001) pp. 31- 59. This research is based on a survey
sponsored by OCC in 1998* 2000. It included about 2,000 randomly selected
individuals living in low- and moderate- income neighborhoods in Los
Angeles County and New York City, areas with some of the highest numbers
of federal check recipients in the United States.

23 Edward S. Prescott and Daniel D. Tatar, *Means of Payment, the
Unbanked, and EFT *99,*

Federal Reserve Bank of Richmond Economic Quarterly, Volume 85/ 4 (Fall
1999). The basis for this study was a review of existing literature and
focus group interviews conducted in Richmond, Virginia.

24 John Caskey, Lower Income Americans, Higher Cost Financial Services
(Madison, Wisconsin: Filine Research Institute, 1997). This study
summarizes the findings of a telephone survey of 900 low- income
households in 3 different states.

Page 22 GAO- 02- 913 Electronic Transfers

connection between owning a bank account and saving money. For example,
researchers have identified a variety of benefits attributable to savings,
including the ability to save money over the short term for emergencies
and over the long term for home ownership and to avoid the sometimes high
cost of using check- cashing outlets. 25 However, in discussions with us,
officials from nonprofit organizations and community banks indicated that
the unbanked population needs financial education and *hand- holding* in
order to understand the benefits of owning a bank account and to learn how
to manage one without incurring fees. Some studies have also suggested
that what may be required is changing the way financial institutions have
traditionally provided services to low- income families. 26 One author
noted that these customers may value the ability to cash checks, purchase
money orders and stamps, and pay utility bills at one location. 27 While
check- cashing outlets offer these services, banks do not.

Although many individuals do not have traditional bank accounts, some
federal beneficiaries have been receiving payments through debit cards. In
January 2002, GAO reported that Electronic Benefit Transfer (EBT) cards
were used to deliver food stamp benefits to 80 percent of recipients, or
about 14 million individuals. 28 The EBT is a plastic card resembling a
bankissued debit card that recipients use to pay for their food at
authorized retail stores. An increasing number of states have also decided
to use this card to provide cash welfare benefits. 29 The money for these
cash welfare

25 Jeanne M. Hogarth and Kevin H. O*Donell, *Banking Relationships of
Lower- Income Families and the Governmental Trend Toward Electronic
Payment,* Federal Reserve Bulletin vol. 85, no. 7 (July 1999): 459- 473;
Constance R. Dunham, *Savings Instruments and Savings Goals in Poor Urban
Communities,* in draft (Oct. 2002); Michael Barr, *Access to Financial
Services in the 21st Century: Five Opportunities for the Bush
Administration and the 107th Congress,* Capital Exchange (June 2001).

26 Barbara Good, *Bringing the Unbanked Onboard,* Economic Commentary,
Federal Reserve Bank of Cleveland of Cleveland vol. 100, no. 1 (Jan. 15,
1999); John P. Caskey,

*Bringing Unbanked Households Into the Banking System,* Capital Xchange
(January 2002).

27 Good, *Bringing the Unbanked Onboard.* 28 U. S. General Accounting
Office, Food Stamp Program: Implementation of Electronic Benefit Systems,
GAO- 02- 332 (Washington, D. C.: Jan. 16, 2002). The Personal
Responsibility and Work Opportunity Reconciliation Act of 1996 (P. L. 104-
193) required each state to implement a statewide EBT system by October
2002.

29 In Texas, the state government requires welfare recipients to use EBT
cards. In California, over half the counties have chosen to use an EBT
card to deliver cash welfare benefits.

Page 23 GAO- 02- 913 Electronic Transfers

benefit transactions is held in a pooled bank account by a state agency,
and individuals are authorized to withdraw a certain benefit amount. These
cash benefits can be withdrawn at an automated teller machine (ATM) or
spent at a retail outlet with a point- of- sale terminal. 30 Many private
sector initiatives are also under way that involve using debit cards to
transfer wages to unbanked workers. Financial institutions we interviewed
indicated that firms with high numbers of unbanked workers, such as fast
food and home improvement chains, were likely to consider this option.

Treasury research and our interviews with organizations familiar with the
check recipient population identified several factors that kept some
recipients with bank accounts from using direct deposit. The concerns most
frequently cited in Treasury*s 1997 survey research included uncertainty
about when the payment would arrive, fear of being unable to access
disputed money (for instance, during a divorce), and resolving problems.
31 However, this study concluded that lack of awareness of or perceived
difficulty in signing up for direct deposit were not major obstacles. An
SSA survey of check recipients in 1993 reported that some people simply
preferred to receive checks. 32 Representatives from AARP commented that
some level of distrust would always exist about electronic payments,
especially among low- income recipients.

SSA data also indicated that another obstacle to increasing direct deposit
use may have been permitting recipients with bank accounts to opt out of
using direct deposit. As shown in figure 5, these data show that sign- up
rates for direct deposit among new applicants for benefits peaked between
1997 and 1998 but decreased thereafter. For example, enrollment rates for
new OASI recipients peaked at 86 percent in 1997 but decreased to 76
percent in 2001. 33 SSA officials said that the 1997 increase was most
likely the result of strengthened enrollment procedures in anticipation of
a mandatory direct deposit requirement and noted that some field office

30 Federal Reserve System, Retail Payments Research Project, (2002). 31
Booz. Allen & Hamilton, Shugoll Research. 32 Fiscal Year 1994 Customer
Satisfaction Survey of Initial Awardees, sponsored by SSA. 33 In 2001,
about 1.9 million (5 percent) of all OASI recipients were new enrollees,
along with about 776,000 (11 percent) of all DI recipients and 403, 000
(6. 2 percent) of all SSI recipients. Concerns about

Convenience Prevent Some Banked Beneficiaries from Using EFT

Page 24 GAO- 02- 913 Electronic Transfers

staff advised new benefit applicants that participation was mandatory.
However, once Treasury regulations specified that enrollment was optional,
it became easier for new applicants to opt out of signing up for EFT.

Figure 5: Direct Deposit Sign- Up Rates by SSA Program, 1995* 2001

Source: SSA.

SSA data also indicated that benefit recipients with representative payees
34 *both individuals and institutions such as nursing homes* were less
likely to use direct deposit than those without (see fig. 6). We asked SSA
officials why representative payees would be less likely to use direct
deposit, but the officials could offer no explanation. Treasury officials,
however, suggested one possible explanation. They told us that the way in
which SSA makes electronic payments to institutional representative payees
could make it difficult for those organizations to identify an individual
payment. Financial institutions are not required to pass along to

34 A representative payee is an individual or institution that receives a
benefit check on behalf of the actual beneficiary. In 2002, about 7
percent (2. 9 million) of OASI recipients, 33 percent (2. 3 million) of DI
recipients, and 35 percent (2. 3 million) of SSI recipients had
representative payees.

Page 25 GAO- 02- 913 Electronic Transfers

the organization information contained in a separate record that
accompanies these types of electronic payments. Thus, for instance, if the
name of the intended recipient is truncated on the payment record, the
institutional representative payee may not be able to identify the person
for whom the payment is intended. The institutions, therefore, find it
easier to receive a check for each individual for whom they are the
representative payee.

Figure 6: Direct Deposit Use by Representative Payee

Source: SSA, OASI and DI data for February 2002 and SSI data for March
2002.

Despite Treasury*s efforts to market the ETA program, since the program
was initiated in July 1999, about 36,000, or fewer than 1 percent, of
unbanked federal beneficiaries had opened ETAs by June 2002. Most
financial institutions do not offer them. Because some of the nation*s
biggest banks, which typically have the greatest number of branches, have
enrolled in the ETA program, opportunities to reach ETA prospects have The
ETA Has Had

Limited Success

Page 26 GAO- 02- 913 Electronic Transfers

increased. But these banks often market the ETA only on a limited basis,
as they do not see the account as profitable. Smaller banks that focus on
specific community or ethnic groups often do make special efforts to
market the ETA but open fewer accounts. Further, potential ETA users may
choose not to participate in the program because they prefer other means
of cashing their checks or feel that the ETA does not offer enough
features* for example, a payment mechanism. Given the current number of
ETA holders, it is unclear whether the ETA can generate savings sufficient
to offset the costs of maintaining and promoting the program.

Treasury considers the ETA important because it is the preferred method of
fulfilling the 1996 Debt Collection Improvement Act*s intention that
unbanked benefit recipients use EFT to receive their payments. However,
providing low- cost electronic services that are attractive to both the
unbanked recipient population and financial institutions presented
Treasury with a major challenge, especially when EFT became optional. In
response to congressional concerns and concerns expressed by consumer and
community- based organizations, federal agencies, and recipients, Treasury
established a broad waiver policy emphasizing consumer choice, essentially
allowing beneficiaries to decide for themselves whether they wanted to
open an ETA.

The ETA is not a checking product and therefore has fewer features than a
traditional checking account (see figure 7 for a listing of ETA features).
For example, while an ETA has a maximum monthly fee of $3.00 and requires
no minimum balance, it does not provide a bill- payment mechanism, such as
check writing. Treasury made a deliberate decision not to include check
writing, in part, because of concerns raised by both financial industry
and consumer advocacy groups about the potential for account misuse,
including overdrafts. As ETA providers, financial institutions are
required to offer the account as described by federal regulation 35 and to
make it available to anyone receiving federal benefits,

35 Financial institutions that decide to offer the ETA are designated as
Treasury*s financial agents and enter into agreements to provide the ETA.
Treasury Promotes the

ETA to Banks and Federal Check Recipients

Page 27 GAO- 02- 913 Electronic Transfers

even applicants with a history of check misuse or fraud. 36 To help defray
the costs of opening an ETA, Treasury reimburses financial institutions
$12.60 for each account opened.

Figure 7: The ETA*s Required Features

Source: Notice of Electronic Transfer Account features, 64 Fed. Reg.
38,510 (July 16, 1999).

Since the notice establishing the required ETA features was published in
July 1999, Treasury has undertaken a number of promotional activities.
Treasury*s first step was to enroll or certify financial institutions to
offer

36 Banks typically use the ChexSystems database to screen applicants for
history of check fraud or other types of account abuse. Maintained by the
check- printing company, Deluxe Corporation, the ChexSystems database
tracks the records of customers whose checking accounts have been closed
due to fraudulent activity or overdrafts. Banks that enter into
contractual arrangements with ChexSystems report the names of customers
whose checking accounts are closed. In return, these banks have access to
the ChexSystems database. According to a report by the National Community
Reinvestment Coalition, about 80 percent of the country*s depository
institutions currently use ChexSystems.

Page 28 GAO- 02- 913 Electronic Transfers

the account. According to Treasury officials, recruitment efforts included
making personal contacts with major banks, attending conferences to
generate interest in offering ETAs, and advertising the ETA in trade
publications. However, both Treasury and bank officials told us that banks
were slow to offer the ETA for several reasons, including having to
prepare their computer systems for the year 2000 problem before developing
a new product and wanting to *field test* the account before offering it
nationwide. Some banks delayed enrolling because they were merging with
other banks.

After some financial institutions began offering ETAs, Treasury began a
nationwide marketing campaign to educate check recipients about the
benefits of the ETA. This campaign, which is still under way, includes
promotional inserts that are included with benefit checks (see app. II).
In addition, Treasury developed materials, such as an educator*s guide and
video that could be used by community based organizations to educate check
recipients about the ETA. Treasury*s other efforts include developing ETA
promotional materials such as brochures, posters, and pens with the ETA
logo for distribution to financial institutions and community
organizations promoting the ETA, as well as public service advertising for
newspapers, radio, and television. In addition, Treasury sponsors what it
calls *Strategic Alliance Meetings* about a dozen times a year at
different locations around the country. At these meetings, Treasury
educates representatives of community- based organizations, ETA providers,
financial institutions, local federal program offices (for example, SSA
and VA), and local government officials about the benefits of the ETA and
promotes collaborative efforts locally.

In addition, Treasury contracted with the Federal Reserve Bank of Dallas
(FRB Dallas) to maintain a database of ETA providers that ETA prospects
can access on the Web. FRB Dallas also maintains a toll- free telephone
number that provides the names of local ETA providers to ETA prospects and
in some instances transfers callers directly to the financial institutions
that offer telephone enrollment. FRB Dallas and Treasury have reported
that they are seeking to simplify enrollment because estimates show that
only a small number of those who inquire about the ETA actually sign up
for it. FRB Dallas reported that, in between June 2001 and May 2002, it
has received approximately 148,000 inquiries, but only 19,400
beneficiaries had actually enrolled for ETAs.

We could not determine whether these promotional activities were effective
in reaching the unbanked recipient population because such an assessment
would have required us to interview large numbers of ETA

Page 29 GAO- 02- 913 Electronic Transfers

prospects. However, Treasury provided us with information showing that
mass mailings of promotional brochures, along with checks, coincided with
an increased number of ETA inquiries on the toll- free number, suggesting
that this method is an effective tool for reaching potential ETA users.

As of July 2002, Treasury had entered into agreements with approximately
597 financial institutions with 17,977 branch locations to offer ETAs. 37
Although this number includes 6 of the country*s 10 largest banks, it
represents only about 3 percent of all financial institutions and 23
percent of all bank branches in the country. In addition, some states have
fewer providers, especially states such as Mississippi and Alabama, which
have an exceptionally low number of ETA providers. Treasury officials
indicated that the number of banks enrolling in the ETA program has
leveled off, and they believe that not many more banks are likely to
enroll. Figure 8 shows the number of financial institution branch
locations available in each state as of June 7, 2002.

37 Of 597 financial institutions currently offering the ETA, approximately
83 percent are commercial banks, 11 percent are credit unions, and 7
percent are savings institutions. Relatively Few Financial

Institutions Offer ETAs Despite Treasury*s Promotional Efforts

Page 30 GAO- 02- 913 Electronic Transfers

Figure 8: ETA Branches by State, as of June 7, 2002

Source: Federal Reserve Bank of Dallas.

In addition, data compiled by the Federal Reserve Bank of Dallas show that
the number of ETA providers varies in the 100 counties with the highest
number of check recipients (as measured by checks authorized by SSA).
Looking at coverage in areas such as counties or cities is more useful
than looking at coverage by state because the measurements for smaller
units are more specific. We found that in Dallas, Texas, and Maricopa
County, Arizona, for instance, the proportion of bank branches

Page 31 GAO- 02- 913 Electronic Transfers

offering ETAs was 55 percent and 76 percent, respectively. In contrast,
only 5 percent of bank branches in Philadelphia, Pennsylvania, and 13
percent of those in Dade County, Florida, offered ETAs. 38

While many financial institutions told us that the ETA was a good product
for the targeted market* unbanked individuals, often with a poor credit
history* they added that they were initially reluctant to offer the
account because they did not see the product as profitable, given its
limited market volume and account restrictions (for example, the $3
maximum monthly fee). Several banks pointed out that the ETA was not
providing them with any interest earnings because ETA holders tended to
withdraw their money quickly and thus had low balances. Bank officials we
spoke with reported average balances ranging from $50 to $500. Some banks
also indicated that ETAs did not provide them with cross- selling
opportunities, because customers using these accounts tended to have
limited incomes. Other banks said that they were hesitant to offer the ETA
because of concerns about account misuse and fraud, although most banks
reported that relatively little of this activity materialized, if only
because of the account*s design and their preventive efforts. 39 Most
large financial institutions we interviewed reported that the $12.60 fee
that Treasury reimbursed did not cover their costs for opening an ETA,
although some smaller institutions reported that the fee was definitely an
incentive and was enough to maintain the account.

Large financial institutions we interviewed that chose to offer the ETA
despite its perceived lack of profitability were more likely to cite their
intention to serve the low- income community or to receive Community
Reinvestment Act (CRA) credit as a factor in their decision. 40 Financial

38 These data were provided by FRB Dallas. It compared ETA providers with
the total number of branches in these counties. The locations cited in
this paragraph number among the 15 counties with the largest number of
check recipients. The total number of branches in each county is measured
using National Information Center data, which allow the Federal Reserve to
track the number of banks and other financial institutions by county.

39 According to Treasury data, of approximately 5,170 ETAs that had been
closed as of May 2002, about 309 or 6 percent* of ETAs were closed owing
to account misuse or fraud. 40 The Community Reinvestment Act (CRA),
passed by Congress in 1997, encourages financial institutions to help meet
their communities* needs through safe and sound lending practices and the
provision of retail banking and community development services. Currently,
a bank*s overall CRA rating is determined on the basis of three weighted
criteria. Fifty percent of the rating depends on lending, while service
and investment each account for 25 percent. Offering ETAs can help a bank
meet its service test, which examines areas such as the accessibility of
delivery systems, changes in branch locations, and community development
services.

Page 32 GAO- 02- 913 Electronic Transfers

institutions can receive CRA credit for offering the ETA, but institutions
that did not offer the ETA were satisfied that they served the community
by other means and were meeting their CRA obligation. One major trade
group indicated to us that many banks lost interest in the program once
Treasury decided that participation would be optional, because banks had
thought they would make profits based on volume. Banks also cited other
concerns about offering the ETA, including the cost of reconfiguring their
computer systems, in part to prevent account misuse. In fact, many of the
large financial institutions we interviewed considered this
reconfiguration as a sizeable investment, given that they were unlikely to
earn profits on this account.

Most large financial institutions we interviewed limited their marketing
of the ETA for the same reasons they were reluctant to offer the ETA in
the first place. Institutions said that they lacked financial incentives
to justify extensive marketing because the accounts were not profitable,
given their limited market potential and account restrictions. Banks said
they viewed the ETA as a product intended primarily for those with poor
credit histories, adding that the ETA*s $3.00 maximum monthly fee was too
low and that they did not see the potential to earn profits in overdraft
and transaction fees. Some banks noted that other products they offered*
such as free checking and other low- cost accounts* were potentially more
profitable and would be offered to qualified ETA prospects. One bank said
that it did not make sense to promote a product that had such a narrow
focus* federal beneficiaries* and added that demand for ETAs had not met
original projections. As a result, many large financial institutions
limited their marketing efforts to special ETA brochures, which they
considered important because they wanted the ETA to fit in with their
brand image and be associated with their bank logo.

Other marketing efforts included promoting ETAs to those who meet the ETA
*profile* and offering financial incentives to tellers. 41 Some large
banks reported that they sought to increase ETA enrollment by helping
applicants complete the ETA application or enrolling them for direct

41 Most large banks that we interviewed indicated that they *profile* or
*screen* customers by questioning them when they enter banks to cash
checks or inquire about bank services to determine which products are
appropriate for them. Banks* Marketing of ETAs

Is Often Limited

Page 33 GAO- 02- 913 Electronic Transfers

deposit at the same time they opened an ETA. 42 In addition, a few large
banks had established telephone enrollment systems that allowed FRB
Dallas*s ETA call center to route the call directly to the bank*s
enrollment line. In some cases, customers still had to go to the bank
branch to present identification and complete the paperwork. Despite their
limited marketing efforts, large financial institutions have been able to
open more ETAs than smaller financial institutions, partly because they
have more extensive nationwide branch coverage. Over 75 percent of all
ETAs have been opened by 9 large financial institutions that are ranked
among the top 50 in the country in terms of asset size.

Like the large financial institutions, smaller financial institutions such
as credit unions or savings institutions limited their marketing of the
ETA primarily because they believed they had better products that were
more marketable to ETA prospects. However, many smaller institutions, some
located in low- income neighborhoods with little branch coverage, tended
to market the ETA in a more personal way. 43 These small financial
institutions emphasized the need to *hand- hold* and the importance of
providing financial education to ETA prospects. For example, one small
community development credit union in Pennsylvania 44 told us that the
president of the credit union went door to door handing out flyers that
described the ETA*s benefits. Another small bank in Louisiana said that
the bank held an *ETA week* during which the bank distributed ETA
promotional materials at the branch office and offered refreshments to
better facilitate communications with customers. These small institutions
were also more likely to report that they opened ETAs through community
outreach programs that involved visiting churches or senior centers. In
addition, some financial institutions* including a few large ones*

42 Most financial institutions we interviewed said they automatically
enrolled ETA applicants for the account and direct deposit at the same
time, eliminating the need for the applicants to visit the local Social
Security offices to sign up for direct deposit. However, a few large
financial institutions did not provide this service. In fact, one large
institution chose not to provide the service and closed a large number of
its ETAs because direct deposit never materialized.

43 Many of these small financial institutions* often with fewer than 10
branches* ranked among the top 30 ETA providers and have more ETAs per
branch than large banks. As of June 2002, the top 30 ETA providers
accounted for 94 percent of all ETAs opened.

44 Most credit unions are organized to serve people in a particular
community, a group or groups of employees, or members of an organization
or association. Community development credit unions are a unique form of
credit union that serve primarily lowincome members in distressed and
financially underserved areas.

Page 34 GAO- 02- 913 Electronic Transfers

reported offering financial incentives to ETA prospects to open an ETA.
These incentives included waiving the $3.00 monthly service fee for
several months or allowing unlimited ATM withdrawals or teller access at
no additional cost. Small institutions had more ETAs per branch than large
banks but fewer ETAs overall, because small banks have fewer branches.

While financial institutions generally indicated that they limited their
efforts to market the ETA, they nevertheless used a broad range of methods
to attract ETA prospects. Among the ETA providers we interviewed, banks
primarily targeting the Hispanic community often did the most extensive
outreach, perhaps helping to explain why one- third of all ETAs have been
opened in Puerto Rico. Both large and small financial institutions have
undertaken other marketing efforts, such as the following:

 One large bank that targets the Hispanic community and has locations in
both Puerto Rico and the United States emphasized that it marketed the ETA
and other products specifically for Hispanics. For example, in Puerto Rico
it sent mobile banks to reach less- populated communities. In a major
metropolitan area like New York, it concentrated on providing a
comfortable environment that included bilingual services for prospective
clients. Smaller banks that serve the Hispanic community in the United
States likewise said that they tried to build relationships with the local
community by participating in local parades, health fairs, and community
gatherings at venues such as churches.

 Several small financial institutions reported that they coordinated with
local Social Security offices to meet ETA prospects in person. These banks
indicated that they went to local SSA offices equipped with ETA brochures
and, in some cases, were able to open accounts on the spot. Two large
banks said that such collaboration could help promote the ETA, because a
one- step enrollment process would make it easier for ETA customers to
open an account.

 One large bank emphasized the importance of personal contact to persuade
people to open accounts. This bank was one of the few that we interviewed
that cashed government checks for free. Further, this bank trained its
tellers to promote the ETA and had at one point used coordinators to
direct and encourage those standing in line to cash checks to open the ETA
(staff reductions have eliminated this position). Bank officials told us
that they found this strategy to be highly effective and reported opening
a large number of ETAs during the months when

*coordinators* were in use.

Page 35 GAO- 02- 913 Electronic Transfers

As of June 2002, about 36,000 ETAs had been opened, a figure representing
fewer than 1 percent of unbanked federal beneficiaries. 45 We found this
figure to hold true regardless of which estimate we used for the number of
unbanked beneficiaries. Treasury officials indicated to us that it was too
soon to evaluate the success of the ETA because the program was less than
3 years old. But the low enrollment we found is consistent with feedback
we received from some banks, including community- oriented banks, that
told us the ETA had limited appeal. Treasury*s own market research
indicated that only 276, 000 to 818,000 federal beneficiaries would
voluntarily enroll in an ETA, given the account*s current attributes. 46
Current ETA enrollment thus represents only 4* 12 percent of Treasury*s
original demand projection for the 3 years the ETA has been in operation.

Because information about the characteristics of ETA holders* as well as
of non- ETA holders* is limited, it is difficult to describe all the
factors that affect individual decisions to open an ETA and to determine
which of Treasury*s promotional activities have proved effective in
persuading people to open an ETA. 47 However, using information from
research studies, financial institutions, and consumer groups, we
identified the following factors that may influence the decision to open
an ETA:

 Personal preference: As previously noted, many unbanked people decide
not to open a bank account because they prefer the way they are already
cashing their checks. A 1999 Treasury study found that most unbanked

45 In addition, as of June 2002, about 6,000 (17 percent) of ETAs had been
closed. This figure may include ETAs that were closed by account holders
in order to open other bank products. Neither Treasury nor any of the
financial institutions we interviewed had any data on such conversions.

46 Treasury*s demand projection was based on a study conducted by Dove
Associates that sought to estimate the demand for various low- cost
account configurations for unbanked federal beneficiaries. This study
predicted that at a given monthly service fee, demand would increase with
more options and decrease with fewer. (ETA Conjoint Research, OMB #1510-
0071, *Final Report and Market Model, Unbanked Federal Check Recipients*,
Dove Associates, Inc., May 26, 1999).

47 In addition, to minimize the reporting requirement, Treasury did not
require financial institutions to report the location of ETAs opened.
However, based on limited information we collected from financial
institutions, we found that a higher percentage of ETAs in the United
States have been opened in Arizona, California, Ohio, and Texas than in
other parts of the country. These states also had a higher number of ETA
providers. Several Factors May Keep

Potential Customers from Opening an ETA

Page 36 GAO- 02- 913 Electronic Transfers

federal beneficiaries either did not pay to cash their checks or were
satisfied with the way they cashed their checks. 48

 Lack of a payment mechanism: Both financial institutions and consumer
groups suggested that ETA*s lack of a check- writing feature could affect
the decision to open an ETA because beneficiaries would still have to go
elsewhere to obtain a money order or pay bills.

 Limited availability of banks offering ETAs: As previously noted,
Treasury*s ETA promotional efforts have resulted in relatively few
financial institutions choosing to offer ETAs. In addition, the number of
bank branches offering ETA varies widely by state. For example, in states
with relatively few bank branches, the number of ETAs is low.

 Lack of consumer awareness: Although Treasury and Social Security
offices have been mailing check inserts and letters about the ETA to
beneficiaries, some consumer groups suggested that many recipients still
lacked information about the ETA.

 Lack of a convenient enrollment procedure: Currently, ETA applicants
must complete several steps to open an ETA. First, they must locate an ETA
provider in their neighborhood, most likely with assistance from the ETA
call center operated by FRB Dallas. Second, many banks require that
applicants complete at least some of the paperwork in person. And finally,
while some banks will enroll the person for direct deposit, others require
that ETA holders contact SSA themselves. As previously noted, FRB Dallas
and Treasury officials told us that they were seeking to simplify
enrollment because such cumbersome enrollment procedures may be
contributing to the low sign- up rate.

One of the objectives of the 1996 Act was to save the government money
through increased EFT use. However, it is uncertain whether the ETA
program* Treasury*s preferred method of linking the unbanked to EFT* will
generate savings sufficient to offset the cost of maintaining and
promoting the program. Further, some of the costs of transitioning benefit
recipients to EFT, whether to ETAs or other accounts, have been shifted to
the banks and the benefit recipients themselves.

48 This study reported that 51 percent of unbanked federal beneficiaries
went to financial institutions to cash their checks, and that 81 percent
of those who went to financial institutions did not pay a fee to cash
their checks. (ETA Conjoint Research, OMB #1510- 0071, *Final Report and
Market Model, Unbanked Federal Check Recipients,* Dove Associates, Inc.,
May 26, 1999). However, only a few financial institutions we interviewed
cashed checks for noncustomers, either at no charge or for a fee.
Determining Cost Savings,

If Any, Is Difficult

Page 37 GAO- 02- 913 Electronic Transfers

According to Treasury*s 1997 estimate, each EFT saves the government $0.41
per payment. 49 Thus, the current enrollment of approximately 36,000 could
save Treasury roughly $177,120 annually, assuming that each beneficiary
receives 12 EFT payments each year. In comparison, based on information
Treasury provided to us, the cost of promoting the ETA program is roughly
between $1 and $2 million a year, including $722,000 paid to FRB Dallas
for managing financial institutions* enrollment and maintaining the ETA
database and call center. 50 In addition, Treasury reimburses financial
institutions $12.60 for opening each ETA account. Assuming that 12, 000
accounts are opened each year, reimbursement costs would be about
$151,000.

Treasury officials indicated that the value of the ETA program should not
be based simply on the number of ETAs opened. Some benefits are difficult
to quantify, such as the long- term benefits of bringing an unbanked
person into the financial mainstream and reductions in costs associated
with lost checks or fraud associated with checks. Other government
agencies, bank officials, and consumer groups have also acknowledged that
the ETA could provide such long- term benefits. According to Treasury, the
number of ETAs opened also may not represent the total number of new
account holders using direct deposit because some unbanked recipients may
have elected to open other bank account products. Treasury officials also
asserted that, since Treasury*s overall goal is to increase electronic
payments, it did not matter whether the recipients opened ETAs or other
bank products, so long as they were using direct deposit or other forms of
transferring funds electronically.

49 We did not verify this estimate provided by Treasury. 50 We can only
provide a rough estimate of Treasury*s annual ETA promotion costs because
Treasury does not calculate the costs of ETA separately from those of
promoting EFT. Treasury officials told us that many ETA marketing
activities have overlapped with general promotion of EFT.

Page 38 GAO- 02- 913 Electronic Transfers

Based on our discussions with representatives from the federal government,
financial institutions, and consumer groups, we identified approaches that
the Treasury could consider to further promote the use of EFT, especially
by unbanked benefit recipients. 51 These approaches, described below,
include increasing cooperation between banks and local SSA offices to
enroll beneficiaries for ETAs; exploring other electronic payment options
besides the ETA to deliver benefits; partnering with banks to provide
information on the general availability of low- cost banking products; and
conducting further research to determine why certain states have unusually
low direct deposit participation rates. Each approach has potential
strengths and weaknesses that vary based on the perspectives of different
stakeholders, such as government agencies and banks. Therefore, reaching a
consensus on the merits of each approach would require careful
consideration.

Financial institutions frequently cited cooperation with local SSA offices
as the most productive way to promote ETAs. Some bank officials told us
that, at some SSA offices, banks were able to distribute information about
their products or enroll people on the spot. This arrangement worked
because it provided a way for financial institutions to market the ETA
directly to unbanked benefit recipients who otherwise might not visit a
financial institution. For the beneficiaries, it provided the opportunity
to enroll for both an ETA and direct deposit at one location. However, SSA
and Treasury officials were concerned about this option because they
believed that the presence of a bank in an SSA office could be
misconstrued as an endorsement of that particular institution. One bank
suggested that SSA could invite banks to market the ETA on a rotating
basis one day a month to avoid any appearance of favoritism.

51 Some banking officials and bank- related trade group officials
suggested exploration of another alternative: making EFT mandatory.
However, Treasury and SSA officials did not believe this alternative was
viable since it was previously rejected when Congress gave Treasury the
authority to grant waivers to EFT. In addition, government officials and
consumer representatives generally criticized any mandatory requirement
because it would leave consumers no freedom of choice in how to receive
their government benefit in a manner that best suited their personal needs
or preferences. Opportunities May

Exist to Increase EFT Participation

Increase Cooperation between Banks and Local SSA Offices to Enroll
Beneficiaries for ETAs

Page 39 GAO- 02- 913 Electronic Transfers

Option 1: Increase Cooperation between Banks and Local SSA Offices

Pros Cons

 Provides one- stop shopping

 Allows for the personal contact that many experts have said is important
in attracting the unbanked to the financial system

 Has been proved effective by some banks

 Entails minimal additional costs

 Creates the possibility that beneficiaries would see SSA as endorsing
banks

 Requires banks to provide staff

 Would not reach current recipients or new enrollees who do not have to
visit SSA offices (most recipients)

SSA officials said that Treasury should consider sponsoring other
electronic payment options, such as a debit card. Financial institutions
we interviewed offered such cards and said that anticipated user volumes
and fees could provide the necessary financial incentives to deliver this
service, which they already provide to unbanked employees in the private
sector. Modeled on the EBT card used by some states to deliver *food

stamps* or other cash benefits, the card could be programmed to work on
most ATM networks and would allow withdrawals and point- of- sale
transactions but not deposits or check writing. 52 While the cost to
beneficiaries could be higher than the cost of the ETA, Treasury*s own
research shows that some ETA prospects, although sensitive to increases in
price, may be willing to pay a higher monthly fee for a product with more
features. 53 Costs to the benefit recipients or to Treasury could be
higher or lower than the ETA, depending on the number of free ATM
withdrawals allowed per month before recipients and/ or Treasury incurs
additional charges. Such arrangements would depend on Treasury*s contract
with the electronic payment service provider.

Treasury officials objected to this option, noting that it was similar to
the Benefit Security Card that has been used to provide federal and state
payments on the same card and that was piloted in some southern states.
Treasury officials terminated the pilot, even though the vendor did not
charge them to distribute the card, because they did not think it was
successful in all states, and it could be difficult to administer in the
future

52 Legislation enacted in 1996 required the Treasury to continue to carry
out an electronic benefit transfer pilot to disburse benefit payments
electronically to recipients who do not have an account at a financial
institution. In this program, payments were disbursed to recipients by a
financial institution acting as Treasury*s financial agent.

53 Dove Associates, Conjoint Study: Final Report and Market Model Unbanked
Federal Check Recipients (May 26, 1999). Explore Other Electronic

Payment Options, Such As an Electronic Debit Card

Page 40 GAO- 02- 913 Electronic Transfers

due to renegotiating and monitoring contracts. In addition, this product
would compete with the ETA without providing bank accounts. However, SSA
officials thought that a product similar to the Benefit Security Card
would be worth reconsidering because it would not require that individuals
open their own bank account and beneficiaries could obtain the debit card
when they first enroll. For example, in states where use of the Benefit
Security Card was highest, beneficiaries could enroll and receive a card
at the same visit. SSA officials added that they had also considered
making the Benefit Security Card available through a toll- free number,
making enrollment easier for those already receiving benefits.

Option 2: Explore Other Electronic Payment Options

Pros Cons

 Would not require opening a personal bank account and would be easy to
obtain

 Provides recipients with the safety and convenience of direct deposit

 For account holders, reduces risks of overdrafts

 Could result in high costs in ATM surcharge fees

 Requires a government agency to manage contracts with service providers

 Could be more expensive to the Treasury and/ or the recipient than the
ETA

As indicated by financial institutions and a recent study by the U. S.
Public Interest Research Group (PIRG), more banks are offering free
checking and no- frill checking products. 54 Although institutions could
charge inexperienced customers excessive overdraft and other fees on these
products, PIRG and other nonprofit organizations said that such products
could be more attractive to an unbanked person than the ETA. Further,
these free or low- cost products could be available in areas where ETAs
are not. While Treasury cannot endorse particular bank products, it could
cooperate with financial institutions to promote low- cost products in
general in much the same way that it promotes direct deposit without
mentioning specific banks. One bank suggested that Treasury broaden the
language in the ETA promotional check inserts to include a general
statement about the availability of free checking accounts and the
features customers should look for when considering these accounts.

54 U. S. PIRG, Big Banks, Bigger Fees 2001, PIRG National Bank Fee Survey
(November 2001). Partner with Banks to

Promote Other Banking Products, Such as LowCost or Free Checking Accounts,
in Addition to the ETA

Page 41 GAO- 02- 913 Electronic Transfers

Option 3: Partner with Banks to Promote Other Banking Products

Pros Cons

 Offers recipients a broader choice in a low- cost checking account
option

 Offers a banking alternative for recipients in areas where ETAs are
largely unavailable

 Could cost recipients money in the form of overdraft charges and other
fees

 Could require Treasury to conduct market research on the availability of
free checking accounts

Data clearly indicate that fewer recipients use EFT in many of the
southeastern states and that the percentage of unbanked beneficiaries in
this region is also high. Thus, additional research focused on these
states could help generate information that could assist in developing
strategies to increase the use of EFT in these states. Treasury agreed
that it might be worthwhile to have a study done specific to the
southeastern geographic area to determine why EFT participation was so
low. Consumer groups and academicians noted that the reasons for being
unbanked might differ widely throughout these states.

Option 4: Determine Why Southeastern States Have the Lowest Direct Deposit
Participation Rates

Pros Cons

 Generates information needed to develop effective strategies for
increasing the use of EFT

 Requires time and financial resources

While opportunities exist to increase EFT use, each identified approach
has potential strengths and weaknesses. Reaching consensus among the
stakeholders is unlikely to be easy because they make decisions based on
their sometimes complementary and sometimes contradictory objectives. On
the one hand, Treasury and the financial institutions promote electronic
payments not only to save money, but also to speed up transactions and
reduce fraud. On the other hand, financial institutions (other than credit
unions) are in business to earn profits and thus want to offer products
other than the ETA that allow them to collect more fee income through
higher monthly fees and overdraft charges. Finally, check recipients
consider their own interests when deciding whether to open an ETA or other
bank account. These stakeholders, who do not benefit from the savings
realized by Treasury and financial institutions, may not want an ETA or a
bank account and may seek alternative methods of cashing checks and making
payments.

The major government stakeholders in the effort to promote EFT, Treasury
and SSA, offered differing views on how best to attract check Determine
Why

Southeastern States Have the Lowest EFT Participation Rates

Achieving Agreement on Alternative Approaches Requires Careful
Consideration

Page 42 GAO- 02- 913 Electronic Transfers

recipients to EFT. Treasury officials told us they continued to believe
that the ETA was the best vehicle to offer the unbanked check recipients.
They had explored other options through pilot programs such as electronic
payment cards and said that they determined these options would be more
difficult to administer. They did, however, acknowledge that they may need
to reconsider their strategy based solely on the ETA if the numbers of
unbanked check recipients is higher than they have estimated, as we
suggest.

SSA officials stated that a variety of vehicles for receiving benefits
electronically should be available and not just the ETA. Some type of
electronic transfer of benefits provides the consumer and SSA advantages
not attainable when checks are mailed. These include the safety, security,
and the efficiencies gained by avoiding lost or stolen checks. Given these
differing viewpoints, achieving agreement on the merits of alternative
approaches would likely require careful consideration.

The number of recipients of federal benefits using EFT climbed steadily
throughout the 1990s, rising from around one- half to more than
threequarters of all beneficiaries. Correspondingly, during this period
the number of payments made by paper check has also substantially
declined. However, since 1999 the drop in the number of federal check
payments has generally subsided and during this three- year period
Treasury continued to make, on average, over 180 million check payments
per year. In 2001, these checks went to about 14 million federal
beneficiaries. This stabilization in the number of check recipients may
signal that the remaining population of federal check recipients may be
harder to convert to EFT.

The biggest obstacle to Treasury*s goal of increasing direct deposit is
that a high number of beneficiaries are without bank accounts. Our
analysis of 1998* 1999 data from the Bureau of Census* Survey of Income
and Program Participation suggests that over 11 million federal
beneficiaries, substantially more than Treasury originally estimated, were
unbanked. This difference in estimates could have profound implications,
as it is much more difficult to attract unbanked federal benefit
recipients to EFT than it is to attract recipients who already have a bank
account. Using the same Census data, we were able to identify a number of
characteristics common to unbanked federal beneficiaries that could be
useful in developing appropriate strategies to increase EFT use.
Conclusions

Page 43 GAO- 02- 913 Electronic Transfers

Because the ETA has not been widely accepted by banks or unbanked
beneficiaries, it is unlikely to prove successful as the only means to
persuade unbanked federal check recipients to use EFT. Treasury cautioned
that it may be too soon to evaluate the success of the ETA because the
program is less than 3 years old. However, using information from a
variety of sources we identified a number of factors (such as lack of a
payment mechanism) that contribute to the limited appeal of the ETA and
are important to consider when evaluating the usefulness of the ETA in
attracting the unbanked. Further, because research indicates that other
factors affect an individual*s decision, or ability, to open a bank
account, reaching this market may be difficult without knowing more about
them.

The alternative approaches outlined in this study have potential strengths
and weaknesses but warrant further exploration for two reasons. First,
experience to date has shown that it is unlikely that Treasury*s current
strategies will convince a majority of federal check recipients to switch
to electronic transfers. Second, given the limited appeal of the ETA, we
question whether the program will generate savings sufficient to offset
Treasury*s cost of maintaining and promoting the program. The alternative
approaches for further promoting EFT involve a variety of steps that could
be taken ranging from ideas to improving the efficiency of the ETA*s
enrollment process to understanding why certain sectors of the country
have lower direct deposit use. Further, we recognize that the private
sector has an important role to play in developing alternative products to
attract check recipients to electronic transfers.

To assist Treasury in pursuing its goal of convincing unbanked
beneficiaries to use EFT, we make the following recommendations to the
Secretary of the Treasury:

 Revisit the estimate of the number of unbanked federal check recipients.
In doing so, we further recommend that Treasury explore use of Census SIPP
data as a means to both obtain a better estimate of the extent of federal
check beneficiaries who are unbanked and to better understand the
characteristics of the unbanked population.

 Use the information on the extent and characteristics of unbanked
federal check recipients to consider alternative approaches, including
those discussed in this report, to develop a strategy that offers a
greater likelihood of attracting that portion of the unbanked population
that chooses not to open an ETA. Recommendations

Page 44 GAO- 02- 913 Electronic Transfers

We requested comments on a draft of this report from the heads, or their
designees, of Treasury and SSA. We obtained written comments on a draft of
this report from Richard L. Gregg, Commissioner of Treasury's Financial
Management Service, that are presented in appendix VI. SSA did not provide
comments. Treasury generally agreed with our recommendations, outlined how
it would respond to each of them, and made three clarifying points. First,
Treasury requested that we emphasize the role of the Congress in
developing the EFT waiver policy and how Treasury would have needed
congressional support in order to set a more stringent waiver policy.
Second, Treasury requested that in describing how it developed the ETA, we
note that Treasury made a deliberate decision not to include a checking
feature because of concerns raised by the financial industry and consumer
advocacy groups about potential account misuse. We added clarifying
remarks in the report that addressed these points. Third, Treasury
committed to reviewing the data from the SIPP as it relates to the number
of unbanked federal recipients to better understand the characteristics of
that population. However, Treasury expressed concerns about over reliance
on the SIPP data and stated that it would pursue a strategy that would use
SIPP data and other credible data sources in conjunction with its own
empirical data collection efforts to better understand why check
recipients are unbanked. We agree with the actions suggested by Treasury
and believe that such actions are consistent with our recommendation that
Treasury consider alternative approaches offering a greater likelihood of
attracting the portion of the unbanked population that chooses not to open
an ETA. Treasury also provided technical comments on the draft report that
we incorporated as appropriate.

As agreed with your offices, unless you publicly announce the contents of
this report earlier, we plan no further distribution until 30 days from
the report date. At that time, we will send copies of this report to the
Chairman and Ranking Minority Member of the Senate Committee on Banking
Housing and Urban Affairs, the Chairman and Ranking Minority Member of the
House Committee on Financial Services, and other congressional committees.
We will also send copies to the Secretary of the Treasury, the
Commissioner of the Social Security Administration, and also will make
copies available to others upon request. In addition, the report will be
available at no charge on the GAO Web site at http:// www. gao. gov.
Agency Comments

and Our Evaluation

Page 45 GAO- 02- 913 Electronic Transfers

If you or your staff have any questions regarding this report, please
contact me at (202) 512- 8678, hillmanr@ gao. gov, or M. Kay Harris at
(202) 512- 8415, harrism@ gao. gov. Key contributors to this report
include Sonja Bensen, Emily Chalmers, Kyong H. Lee, Grant Mallie, Mark
Ramage, and Carl Ramirez.

Richard J. Hillman Director, Financial Markets

and Community Investment

Appendix I: Objectives, Scope, and Methodology

Page 46 GAO- 02- 913 Electronic Transfers

An overall objective of this report is to describe how Treasury complied
with the 1996 Debt Collection Improvement Act*s mandate to promote the use
of electronic funds transfer (EFT) payments to federal beneficiaries and
to identify obstacles to increasing the use of direct deposit. To meet
this objective we (1) provided information on the extent of EFT usage and
the steps federal agencies and others have taken to promote it; (2)
identified obstacles to greater use of the EFT program and identified
characteristics of recipients who do not have bank accounts; (3) provided
information on the current status of the electronic transfer account (ETA)
program, including steps the government has taken to promote it; and (4)
identified options for Treasury to consider to further promote electronic
transfers.

To determine the extent of EFT usage and describe factors contributing to
the increase in direct deposits, we obtained statistical data from
Treasury and the Social Security Administration (SSA) showing the number
of payments made by EFT and check since 1990. In addition, we discussed
the agencies* promotional efforts and obtained documentation of their
activities. To identify the characteristics of direct deposit users, we
reviewed studies and obtained the most recent statistical data from SSA.
To describe how nongovernmental entities such as financial institutions
and nonprofit organizations promoted direct deposit, we interviewed banks
of all sizes and several nonprofit groups, including the Association for
the Advancement of Retired Persons (AARP), the National Community
Reinvestment Coalition, and U. S. Public Interest Research Group (PIRG).

To determine the number of unbanked beneficiaries, we analyzed data from
the Census Bureau*s Survey of Income and Program Participation (SIPP). 55
The survey population for SIPP consists of individuals (age 15 and older)
residing in the United States but does not include those in the military
and living in institutions such as nursing homes. 56 By design, SIPP
allows estimates to be made at the household, family, or individual level.
The SIPP has a number of strengths that make it a good choice for this
analysis. This survey is intended by the Census Bureau to be a major
source of primary information on income and benefit program participation.
It was specifically designed to assist in formulating and evaluating
initiatives related to federal programs (such as improvements

55 For more information on SIPP, see SIPP Quality Profile, 1998, SIPP
Working Paper Number 230, 3rd Edition, U. S. Department of Commerce,
Bureau of the Census. 56 For the purposes of our analysis we produced
estimates only for individuals 18 and older Appendix I: Objectives, Scope,
and

Methodology

Appendix I: Objectives, Scope, and Methodology

Page 47 GAO- 02- 913 Electronic Transfers

to entitlement programs such as Social Security) and to produce reliable,
national- level estimates of selected characteristics of all individuals
and families in the United States. In addition, the SIPP oversamples
lowincome households, and while the contribution of these respondents to
overall estimates are weighted (statistically adjusted) to be
representative of the entire population, the oversampling has the
advantage of improving the reliability of estimates of characteristics of
lower- income people, such as being unbanked. Finally, the SIPP is the
only national survey that we identified, with the exception of Treasury*s
1997 research, that allows us to identify the characteristics of
individual Treasury benefit recipients. 57

SIPP is a panel survey, which means that the same sampled households are
reinterviewed to track changes in their characteristics over time. SIPP
panels last about 4 years, and participating households are interviewed 12
times (once every 4 months). Each interview, conducted by telephone and
in- person (once a year), is referred to as a *wave.* The information
collected in SIPP falls into two categories: core and topical. The core
content includes questions on subjects related to demographic
characteristics, labor force participation and program participation. Core
questions are asked during every wave. Other questions collect in- depth
information on specific subjects (such as detailed asset ownership) and
are asked less frequently. Those topical questions are often found in
topical modules that occur in specific waves.

The focus of our analysis was on identifying whether individuals receiving
benefits had bank accounts. Therefore, we selected the ninth wave
(conducted between December 1998 and March 1999) of the 1996 panel and the
twelfth wave (conducted between December 1999 and March 2000) because they
were the most recently available data sets that contained the *asset,
liabilities, and eligibility* topical module that was needed to establish
bank account ownership. In particular, the ninth and twelfth waves
contained the most recently available information on the number of
respondents with noninterest- bearing checking accounts as well as other
types of accounts (for example, savings accounts). We used these survey
responses to produce estimates of the unbanked and their characteristics
(e. g., family income, education level, etc.) as of November 1998 for wave
9 and as of November 1999 for wave 12. Estimates were

57 We included the following programs as part of our analysis: Old Age and
Survivor*s Insurance (OASDI), Supplemental Security Income (SSI),
compensation and pensions by the Veteran*s Administration, retirement
benefits provided by the Railroad Retirement Board and the Office of
Personal Management, and Black Lung benefits.

Appendix I: Objectives, Scope, and Methodology

Page 48 GAO- 02- 913 Electronic Transfers

produced for both the U. S. population at large and for federal benefit
recipients. For wave 9, the SIPP included about 28,900 households, or
54,500 individuals, in its sample. 58 Of these, the unweighted number of
households receiving federal benefits in our dataset was 9,677 and the
number of unweighted individuals was 12,824. For wave 12, the SIPP
included about 28,100 households, or 53,300 individuals, in its sample. Of
these, the unweighted number of households receiving federal benefits in
our dataset was 9,565 and the number of unweighted individuals was 12,652.

Because the SIPP is based on a probability sample, the specific sample
selected is only one of a large number of possible samples that might have
been drawn. Each of those possible samples could produce slightly
different estimates. The confidence in estimates from a sample is
expressed as a 95 percent confidence interval. This is the interval that
would contain the actual population value for 95 percent of the samples we
could have drawn. Unless otherwise noted, all percentage estimates in this
report have confidence intervals of +/- 3 percentage points or less. All
numerical estimates other than percentages have confidence intervals of
+/- 6 percent or less of the value of those numerical estimates, unless
otherwise noted. 59 We also performed tests of association between
variables for which we produced cross- tabulations. As a result we only
report on relationships that were found to be significant at the .05 level
or better.

We recognize that our estimate of the unbanked population at large may be
compared to the results of the Federal Reserve Board*s Survey of Consumer
Finances (SCF). For 1998, using data from the SCF, analysts determined
that about 9.5 percent of households did not have any type of transaction
account. 60 However, these estimates are not directly

58 The sample size of the original 1996 panel was about 36, 700
households. 59 Based on our comparison of SIPP SSI estimates of the
unbanked and the number of SSI check recipients, we believe that the SIPP
estimates may be inflated because: (1) some recipients may have
inaccurately reported that they received SSI when they did not and may
also have reported that they were unbanked and (2) it is possible that
some SSI recipients, who received this mean- tested benefit, were
reluctant to report the existence of this asset. As a result, although
SIPP data suggest that about 3.7 million SSI recipients in 1998 and 3.9
million recipients in1999 were unbanked, we believe that a more accurate
number could be closer to 3.0 million.

60 The SCF*s transaction category included checking, savings, and money
market deposit accounts, money market mutual funds, and call accounts at
brokerages.

Appendix I: Objectives, Scope, and Methodology

Page 49 GAO- 02- 913 Electronic Transfers

comparable because the SIPP collects information, such as whether a person
has a bank account, from each member of a household but the SCF does not.
The SCF collects information from the household*s *primary

economic unit,* the person considered to be the economically dominant
single individual or couple in the sampled dwelling. This survey does not
collect data for individuals who are financially independent of the
primary economic unit in the sampled dwelling. Thus, this survey could
exclude subpopulations that would be included in the SIPP sample, such as
roommates, grown children, and grandparents with their own retirement
income. To the extent that these differences do not account for varying
estimates of the unbanked, certain characteristics of the SIPP make it a
more reliable source of such estimates. For instance, the ninth wave of
the 1996 SIPP included 28,900 households, whereas the 1998 SCF included
only 4,300 selected *households.*

Because the SIPP survey data did not include questions asking why
recipients chose to remain unbanked, we analyzed the findings of studies
that had surveyed segments of the unbanked population. These studies
included Treasury research that focused on unbanked federal check
recipients, as well as research on broader cross- sections of the unbanked
population. While the research methodologies varied and the analyses were
limited to specific geographic areas, these studies provided valuable
insights into the characteristics of this population, which is unusually
difficult to survey. To supplement these analyses, we interviewed a broad
range of people with expertise on the unbanked, including researchers at
the Federal Reserve and Office of the Comptroller of the Currency,
academicians (for example, at Swarthmore College and the University of
North Carolina), and consumer groups.

To describe the status of the ETA program and government efforts to
promote it, we interviewed officials from Treasury and SSA and obtained
documentation that described how these agencies have promoted the ETA
program. We also observed a promotional event in Atlanta, Georgia,
sponsored by Treasury. In addition, we analyzed data provided by Treasury
and the Federal Reserve Bank of Dallas on the number of banks and
participants enrolled in the ETA program. In addition, we interviewed a
cross- section of 21 financial institutions that included 16 ETA providers
and 5 nonproviders. In selecting financial institutions, we considered
factors such as the type and size of institution, geographic diversity,
and any special projects that institution had undertaken to promote either
the ETA or direct deposit in general. We asked each institution why it did
or did not offer the ETA, what low- cost products it offered and, if
applicable, how it marketed the ETA. We also obtained the views of several
bank

Appendix I: Objectives, Scope, and Methodology

Page 50 GAO- 02- 913 Electronic Transfers

trade associations, including the American Bankers Association and the
Community Bankers Association, on the reasons banks did or did not agree
to offer the ETA. In addition, we interviewed consumer groups such as the
AARP, U. S. PIRG, and Consumers Union to obtain their perspective on how
the ETA benefits consumers. We also analyzed various studies that Treasury
conducted when developing the ETA.

To identify options for Treasury to consider to further promote EFT, we
identified those most frequently mentioned by financial institutions based
on their experiences with promoting the ETA. We also interviewed directors
of the Electronic Benefit Transfer program who had experience with
implementing the Benefit Security Card in Florida, Georgia, and Missouri
and spoke with vendors* Citicorp Electronic Financial Services and EFunds*
that supported distribution of that card. To identify the pros and cons
associated with each option, we obtained comments from Treasury, SSA, the
Federal Reserve Board, the Office of the Comptroller of the Currency, and
several nonprofit organizations.

We conducted our interviews of banks in various locations in the Midwest
and the Northeast and did field work in Atlanta, Georgia. We conducted our
work between August 2001 and July 2002 in accordance with generally
accepted government auditing standards.

Appendix II: Example of Check Insert Used to Promote ETAs

Page 51 GAO- 02- 913 Electronic Transfers

Source: Treasury.

Appendix II: Example of Check Insert Used to Promote ETAs

Appendix III: Direct Deposit Use by State, 2002

Page 52 GAO- 02- 913 Electronic Transfers

Benefit Type OASI (%) Benefit Type DI (%) Benefit Type SSI (%)

West Virginia 67.9 West Virginia 52.7 West Virginia 31.3 Louisiana 70.9
Louisiana 55.0 Louisiana 35.1 Kentucky 75.1 Kentucky 58.7 Kentucky 36.4
Alabama 77.1 District of Columbia 61.6 South Carolina 36.7 North Carolina
77.3 Alabama 62.4 North Carolina 38.6 Arkansas 77.9 South Carolina 62.5
Alabama 40.5 Tennessee 78.1 Ohio 63.5 Georgia 41.7 Ohio 78.3 Virginia 63.8
Ohio 41.7 South Carolina 78.3 Texas 64.2 Texas 41.7 District of Columbia
78.4 Tennessee 64.4 Virginia 41.8 Georgia 78.5 North Carolina 64.4
Oklahoma 42.6 Texas 79.0 Arkansas 64.6 Tennessee 42.7 Virginia 79.6
Georgia 65.1 New Mexico 44.2 Mississippi 79.7 Mississippi 65.4 Arkansas
44.4 Pennsylvania 80.0 Maine 65.5 Connecticut 45.4 Maine 80.3 New
Hampshire 66.4 Colorado 46.0 New York 80.5 Connecticut 66.8 Indiana 46.2
Maryland 80.6 Colorado 67.5 Missouri 47.3 Indiana 80.8 Massachusetts 68.0
Maine 47.4 Connecticut 80.9 Indiana 68.2 Minnesota 48.1 Oklahoma 81.4
Illinois 68.7 Kansas 48.9 Massachusetts 81.6 Maryland 69.1 Mississippi
48.9 New Jersey 81.6 Rhode Island 69.1 District of Columbia 49.1 Rhode
Island 81.8 New York 69.6 Utah 49.2 Missouri 81.8 Michigan 69.7 Arizona
49.5 North Dakota 81.9 New Jersey 70.2 Nevada 49.5 Alaska 82.0 Missouri
70.5 Michigan 49.9 Illinois 82.2 Oklahoma 70.7 Illinois 50.3 New Mexico
83.1 Vermont 71.4 Maryland 50.6 Michigan 83.9 Pennsylvania 71.5 New
Hampshire 51.8 New Hampshire 84.3 Kansas 71.5 New Jersey 51.8 South Dakota
84.6 Wyoming 72.4 Montana 51.9 Vermont 84.7 New Mexico 72.5 Nebraska 52.3
Wisconsin 84.9 Delaware 72.8 Rhode Island 52.9 Kansas 85.1 Utah 73.0 Iowa
53.0 Minnesota 85.7 Minnesota 73.6 Alaska 53.4 Colorado 86.0 Montana 74.3
Delaware 53.5 Montana 86.6 Nevada 74.4 Wyoming 53.7 Nebraska 86.8
Washington 74.5 Wisconsin 54.2 Nevada 86.8 California 74.7 Florida 55.0
California 87.0 Wisconsin 74.9 Washington 55.3 Iowa 87.3 Iowa 75.5 Idaho
55.6 Delaware 87.7 Arizona 75.5 Vermont 56.1

Appendix III: Direct Deposit Use by State, 2002

Appendix III: Direct Deposit Use by State, 2002

Page 53 GAO- 02- 913 Electronic Transfers

Benefit Type OASI (%) Benefit Type DI (%) Benefit Type SSI (%)

West Virginia 67.9 West Virginia 52.7 West Virginia 31.3 Hawaii 88.0
Florida 75.6 Pennsylvania 56.7 Utah 88.1 Idaho 75.9 New York 56.9 Idaho
88.1 Oregon 77.1 Hawaii 57.1 Wyoming 88.6 Nebraska 78.0 South Dakota 57.3
Arizona 90.1 Hawaii 78.2 North Dakota 57.5 Oregon 90.5 South Dakota 78.6
Oregon 57.7 Florida 90.5 Alaska 79.4 Massachusetts 60.7 Washington 91.0
North Dakota 79.8 California 66.7

Source: SSA, OASI and DI data for February 2002 and SSI data for May 2002.

Appendix IV: Characteristics of Unbanked Federal Beneficiaries and the
Unbanked Population at Large

Page 54 GAO- 02- 913 Electronic Transfers

We used the Census Bureau*s Survey of Income and Program Participation
(SIPP) to estimate the number of unbanked federal beneficiaries and
determine some of their characteristics (for example, income and
educational level). Because most unbanked beneficiaries receive a benefit
from the Social Security Administration, we provide these estimates
specifically for individuals receiving Old- Age, Survivors, and Disability
Insurance (OASDI) and Supplemental Security Income (SSI) program benefits.
In addition, we analyzed the SIPP to obtain similar estimates for the
unbanked population at large, which includes OASDI and SSI recipients, and
the portion of the U. S. population that does not receive OASDI benefits.
The figures in this appendix show estimates for all of these groups.

The source for all of these estimates is from the twelfth wave of the 1996
SIPP panel, representative of November 1999. Unless otherwise noted, the
95 percent confidence intervals for all the estimates presented are +/- 3
percent or less. Appendix IV: Characteristics of Unbanked

Federal Beneficiaries and the Unbanked Population at Large

Appendix IV: Characteristics of Unbanked Federal Beneficiaries and the
Unbanked Population at Large

Page 55 GAO- 02- 913 Electronic Transfers

Figure 9: Number of Unbanked Adults and Federal Beneficiaries, 1999

Note: The 95 percent confidence intervals for Treasury, OASDI, and SSI
estimates are +/- 6 percentage points or less.

Source: GAO analysis of November 1999 SIPP data.

Appendix IV: Characteristics of Unbanked Federal Beneficiaries and the
Unbanked Population at Large

Page 56 GAO- 02- 913 Electronic Transfers

Figure 10: Proportion of Unbanked U. S. Adults and Federal Beneficiaries,
1999

Note: This figure shows that 67 percent of individual adult SSI recipients
were unbanked in November 1999. However, FMS data shows that for fiscal
year 2000, 51 percent of SSI payments were made by check. See appendix I,
footnote 59 for additional information on this difference.

Source: GAO analysis of November 1999 SIPP data.

Appendix IV: Characteristics of Unbanked Federal Beneficiaries and the
Unbanked Population at Large

Page 57 GAO- 02- 913 Electronic Transfers

Figure 11: Unbanked Recipients and Income Level

Source: GAO analysis of November 1999 SIPP data.

Appendix IV: Characteristics of Unbanked Federal Beneficiaries and the
Unbanked Population at Large

Page 58 GAO- 02- 913 Electronic Transfers

Figure 12: Unbanked Recipients and Educational Level

Source: GAO analysis of November 1999 SIPP data.

Appendix IV: Characteristics of Unbanked Federal Beneficiaries and the
Unbanked Population at Large

Page 59 GAO- 02- 913 Electronic Transfers

Figure 13: Unbanked Recipients and Ethnic Group

Source: GAO analysis of November 1999 SIPP data.

Appendix IV: Characteristics of Unbanked Federal Beneficiaries and the
Unbanked Population at Large

Page 60 GAO- 02- 913 Electronic Transfers

Figure 14: Unbanked and Banked Beneficiaries Grouped by Marital Status

Source: GAO analysis of November 1999 SIPP data.

Appendix IV: Characteristics of Unbanked Federal Beneficiaries and the
Unbanked Population at Large

Page 61 GAO- 02- 913 Electronic Transfers

Figure 15: Unbanked Recipients and Age Group

Source: GAO analysis of November 1999 SIPP data.

Appendix IV: Characteristics of Unbanked Federal Beneficiaries and the
Unbanked Population at Large

Page 62 GAO- 02- 913 Electronic Transfers

Figure 16: Unbanked Recipients and Gender

Source: GAO analysis of November 1999 SIPP data.

Appendix IV: Characteristics of Unbanked Federal Beneficiaries and the
Unbanked Population at Large

Page 63 GAO- 02- 913 Electronic Transfers

Appendix V: Location of the Unbanked by Region

Page 64 GAO- 02- 913 Electronic Transfers

Figure 17: Regions of the United States

Note: The purpose of these analyses is to provide a rough sense of how the
percentage of unbanked individuals varies across the United States because
the SIPP does not allow us to make estimates on a state- by- state basis.
Each state would have too few surveyed respondents to produce reliable
results. Thus, we divided the United States into six clusters of states
prior to performing our analyses, largely based on how one federal agency
has divided its regional offices. While we planned to estimate the percent
of unbanked individuals for the West and Midwest separately, the way in
which SIPP grouped states with too few survey respondents did not permit
us to do so. Thus, we are reporting the percent of unbanked individuals in
the west and Midwest as one region.

Appendix V: Location of the Unbanked by Region

Appendix V: Location of the Unbanked by Region

Page 65 GAO- 02- 913 Electronic Transfers

Figure 18: Unbanked Recipients and Regional Location

Source: GAO analysis of November 1999 SIPP data.

Appendix VI: Comments from the Department of the Treasury

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Appendix VI: Comments from the Department of the Treasury

Appendix VI: Comments from the Department of the Treasury

Page 67 GAO- 02- 913 Electronic Transfers

Appendix VI: Comments from the Department of the Treasury

Page 68 GAO- 02- 913 Electronic Transfers (250048)

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