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House of Representatives,
Committee on Banking and Financial Services,
Washington, DC.

    The committee met, pursuant to call, at 9:36 a.m., in room 2128, Rayburn House Office Building, Hon. James A. Leach, [chairman of the committee], presiding.

    Present: Chairman Leach; Representatives McCollum, Roukema, Bereuter, Baker, Castle, Lucas, Ryun, Snowbarger, Sessions, Manzullo, LaFalce, Vento, Kanjorski, Kennedy, Waters, C. Maloney of New York, Gutierrez, Roybal-Allard, Barrett, Watt, Bentsen, Jackson, Kilpatrick, J. Maloney of Connecticut, Carson, Weygand, and Sherman.

    Chairman LEACH. The hearing will come to order.

    Today the Committee on Banking and Financial Services convenes to review the Treasury Department's progress in implementing what has come to be known as EFT '99, the requirement that most Federal payments be made by electronic funds transfer—EFT—rather than by paper check after January 1, 1999.

    In particular, we will be addressing the proposed regulations released by the Department of the Treasury on September 16, 1997. Even though I sense that it is popular to be a naysayer these days, let me say at the outset that I support the EFT '99 mandate as long as it contains the appropriate individual flexibility for certain circumstances.
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    EFT makes eminent sense from many angles. The United States Government will save up to $100 million annually from full implementation. EFT also reduces the opportunity for crime, including violent crime against the elderly when they travel to cash their monthly checks. Treasury could also avoid costs of $65 million annually in claims for forged, altered or counterfeit checks.

    Electronic funds transfer is also convenient for recipients. Instead of waiting for a check to arrive at their home and then taking it to the bank for deposit, EFT ensures that the individual's funds are quickly, conveniently and securely transferred to their account.

    EFT can also help to bring traditionally underserved individuals into the economic mainstream. Instead of relying upon sometimes expensive alternatives, recipients will have funds delivered directly to the bank. While the unbanked must currently conduct transactions in cash, with all the security problems this entails, through EFT they could have access to ATM and perhaps debit cards, giving them the safety and convenience shared by others.

    Despite the many benefits of EFT, there are millions of Americans who have thus far declined to receive their benefits electronically. Only half of the 850 million Federal payments issued in fiscal year 1996 were made electronically. The other half were still processed by paper check.

    Clearly, the single most important ingredient to the success of EFT '99 will be the effort at public information and education. EFT '99 goals should be met through the power of persuasion, not the heavy hand of coercion. Employees on the front lines for the Social Security Administration and other agencies need to be well prepared to handle this process in a customer-friendly manner, and partnerships need to be built among Government, financial institutions and community organizations in communicating the advantages of EFT.
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    There is no question but that Treasury and other Federal agencies have a tough balancing act in weighing the requirements of the EFT '99 mandate against the potential claims of hardship. Despite what may be clear advantages to the Government in having maximal public participation, many believe individual citizens should be given as much discretion through waivers as possible to make choices for themselves.

    Particularly difficult is the challenge of providing electronic benefits to those currently without bank accounts, the so-called ''unbanked.'' By law, Treasury is charged with ensuring that the unbanked will have access to an account—which the department calls an ETA, or Electronic Transfer Account—at a reasonable cost and the same consumer protections as other depositors. Yet, despite months of meetings, research and public comment, definitive decisions have yet to be made about how to establish accounts for the unbanked.

    Accordingly, doubt is growing about the department's ability to meet the statutory deadline of January 1, 1999, with the possibility likely that the department may waive the statutory deadline for an extra year if it doesn't have an ETA in place.

    Unfortunately, delay could mean millions of dollars in lost savings from a timely transition to full EFT and might defer a potentially attractive alternative for low-income Americans currently on the economic sidelines.

    Finally, there is the issue of EFT for vendors and the disproportionate impact the requirement may have on small- and medium-sized businesses that sell goods and services to the Federal Government.
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    To help us address these and many other issues raised by the proposed regulation, we are pleased to have with us today distinguished officials from the Treasury Department and Social Security Administration, as well as experts from financial and nonfinancial institutions and representatives of beneficiaries.

    At this point, I would like to yield to Mr. LaFalce.

    Mr. LAFALCE. Mr. Chairman, I join you in welcoming all of the various witnesses to today's panel. I am especially pleased to have Mr. Hawke and Mr. Dyer as representatives of the Administration.

    This is a very important issue. It is going to raise increasing concern amongst our constituents as we approach January 1 of 1999.

    I commend Treasury for the attention it has given to the problem that is of especially serious concern to many Members on my side of the aisle and to consumers and beneficiary groups. That is the problem of making electronic payments to persons with no ongoing relationship with a financial institution.

    I understand there are more than ten million Federal beneficiaries who currently have no bank or checking accounts, and this nonbanked population is overwhelmingly poor, minority, often elderly or disabled; and their reasons for not using traditional banking services reflect not only their own personal difficulties, but also some inadequacies in our financial services system.
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    So the manner in which Treasury ultimately addresses the problems of the nonbanked could have very significant implications, not only for the role of Government in regulating financial services, but also in the way in which basic banking services are made available to consumers in the future.

    I hope we spend considerable time on that aspect of Electronic Transfer Accounts, and I thank the Chair for having this hearing.

    Chairman LEACH. Mr. McCollum.

    Mr. MCCOLLUM. I join the Chairman and Mr. LaFalce in saying that, yes, this is very important because the potential confusion is great, and I think the public needs to have us air it. Probably we will have more opportunities even before 1999, but as you progress to establish the ground rules as you are now doing, it is very good that we are having this hearing and I am looking forward to it.

    Thank you.

    Chairman LEACH. Thank you.

    Then if there are no further opening statements, then we will turn to our panel. Our first panel is composed of the Honorable John D. Hawke, who is Under Secretary of the Treasury, and with primary responsibility for developing Administration policy in a broad way on this subject.
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    Mr. John Dyer is the Acting Principal Deputy Commissioner of the Social Security Administration, which has the lion's share of beneficiaries affected by EFT '99.

    We will begin with Mr. Hawke.


    Mr. HAWKE. Thank you, Mr. Chairman and Members of the committee. I am pleased to be with you today to discuss the Treasury Department's implementation of EFT '99, and I commend the Members of the committee and the Chairman for the opening statements, which I think set exactly the right tone and identify exactly the right issues.

    EFT '99 includes four distinct elements. First, after July 26 of last year, all Federal payments, except tax refunds, to newly eligible recipients who have bank accounts, had to be made by EFT. Under this interim program, over 85 percent of all new Social Security annuitants have signed up for direct EFT payments, reflecting what we think is a very high level of acceptance of the program.

    Second, after January 1, 1999, all Federal payments, again with the exception of tax refunds, must be made by EFT.

    Third, Treasury is directed by law to ensure that individuals required to receive payments electronically will have, for that purpose, access to an account at a financial institution at reasonable cost, and with conventional consumer benefits.
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    And, finally, the Secretary is authorized to grant waivers based on recipient hardship for classes of checks or when otherwise necessary.

    Mr. Chairman, you have identified the clear and compelling benefits of EFT '99, and I won't repeat that. We think there are enormous benefits to the Government and to the public from EFT, and those underlie this entire program.

    As we analyzed the law with a view toward proposing implementing regulations, we identified four key issues that required resolution: First, what types of entities should be permitted to maintain accounts into which electronic Government payments may be made; second, who should be permitted to receive payments in such account as a representative of the beneficial owner of the payment; third, under what circumstances should we waive the requirement for EFT '99; and fourth, how do we perform our obligation at Treasury to assure recipients access to an account at a financial institution at a reasonable cost? I would like to explain our approach to each of these issues.

    First, on the question of who can maintain accounts to receive electronic fund transfers, two key factors influenced our thinking on this question. As we read the law, the definitions in the law seemed to us clearly to contemplate the establishment of a deposit relationship. Moreover, Federal EFT payments will be made primarily through ACH networks, automated clearinghouse networks, and only depository institutions are eligible to receive these transfers.

    Our proposed rules provide that electronic payments will, with one exception that I will describe, be transferred only into accounts held at institutions that are either Federally insured or eligible to apply for Federal insurance—banks, thrift institutions, credit unions and agencies or branches of foreign banks.
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    The next issue is, who can hold accounts in a representative capacity? The new law contemplates that recipients may designate authorized agents to hold accounts on their behalf for purposes of receiving the EFT payments. There is no existing Federal standard governing the conduct of entities that might act as agents for the purpose of receiving payments, and no general Federal mechanism for overseeing the conduct of such entities. Thus, if we were to interpret this term broadly, we might be facilitating broad-scale abuse of payment recipients. Unscrupulous individuals might see this as an opportunity to prey on the elderly and infirm by holding out to act as their agents for payments, and we felt we could not expose our citizens to this risk. Yet, there are clearly situations in which recipients are not able to manage their own affairs and need the help of someone who can act in a representative capacity.

    Our proposed rule addresses these concerns by limiting the definition of ''authorized payment agent'' to those representative payees or fiduciaries who are appointed or selected to act in a representative capacity under regulation of the various program agencies having responsibilities, such as Social Security, Veterans Affairs, and the Railroad Retirement Board.

    There is only one other exception to the requirement that payments be made to an account in a financial institution in the name of the recipient, and that is where payment is to be transferred to an investment or cash management account established by an SEC-regulated broker-dealer.

    The next question was, when should the requirement for mandatory EFT be waived? In considering waivers, we wanted to be responsive to two conflicting considerations. First, we recognized that there will be a great many perfectly legitimate reasons for exempting recipients from the requirements of mandatory EFT, and a heavy-handed implementation of the mandate account could not only impose significant hardships on individuals, but could very quickly undermine the base of support for the program.
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    On the other hand, excessive liberality in the granting of waivers could significantly vitiate the savings that we expect from EFT. We have proposed the following in the way of waivers: for individuals who became eligible for Federal payments before July 26 of last year and who have an account at a financial institution, the requirement to receive payment by EFT will be waived if it would impose a hardship due to a physical disability or a geographical barrier. Individuals who don't have bank accounts will be provided access to an account by Treasury, and they will have an additional basis for a waiver if using such an account would impose a financial hardship.

    Federal agencies will not be required to use EFT when political, financial or communications infrastructure does not support payment by EFT in certain overseas locations; and finally, waivers will be available where cost-benefit analysis does not justify making nonrecurring payments by EFT and where EFT would conflict with military law enforcement or national security interests.

    Let me now turn to the question of the unbanked. At present, 10 million Federal benefit recipients, or 18 percent of the total number, don't have an account at a financial institution. Instead they rely on banks, check cashers, pawn shops, money transfer agents, family members or merchants to cash their payroll or checks, frequently at high costs, and they have no convenient way to pay bills or accumulate savings.

    Our challenge is to make available low-cost accounts to these individuals that will provide the basic services needed to make EFT attractive and useful. Accordingly, Treasury will be designing an Electronic Transfer Account, or ''ETA,'' and initiating a competitive process to engage financial institutions to offer such an account in defined geographic areas. Our preliminary view is that the ETA should be an all-electronic, debit card based account held at a Federally insured depository institution, for which the recipient would be charged a fixed monthly fee. But beyond that, we have many outstanding questions, and we are seeking comment on those questions in the rulemaking.
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    The committee has asked that we address certain specific questions regarding the payments to Government vendors, and I am pleased to do that. My prepared statement goes into more detail on this, but suffice it to say that we are very much concerned about the problem of being able to transmit remittance data to vendors so that vendors who receive payments can identify the payment to a particular invoice. We think that that problem will be overcome, that the technology is advancing in that area, and that by the time EFT '99 comes on stream on January 1, 1999, that problem will be solved.

    Finally, Treasury is working closely with all Federal agencies, the Federal Reserve, the payments industries, private firms, consumer groups and others to ensure a smooth transition to EFT; and we are developing a nationwide education and marketing program. Beginning later this year, the program will encourage voluntary conversion of current Federal check recipients to EFT, stressing all of the benefits of EFT that have been recognized.

    I would like to emphasize in closing, Mr. Chairman, that the rule that we made available last week is a proposed regulation. There is a 90-day comment period on the regulation. At the end of that period, we will formulate a proposed design for the specifications for the ETA, and we will then put those out for an additional 30-day public comment, so the public will have ample opportunity to comment on the structure of the ETA that we propose to provide.

    Mr. Chairman, thank you for the opportunity to testify. This is an important subject, and we welcome the committee's interest and involvement as we go forward with this process.

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    Chairman LEACH. Thank you, Secretary Hawke. And thank you for your long interest in this subject.

    Mr. Dyer.


    Mr. DYER. Mr. Chairman, and Members of the committee, I will summarize my remarks, and I ask that my prepared statement be entered into the record.

    Chairman LEACH. Without objection.

    Mr. DYER. Thank you.

    I am very pleased to be here today to discuss the Social Security Administration's experience with electronic fund transfer and our efforts to implement the EFT provisions of Public Law 104–134. SSA has offered safety, convenience and reliability of EFT to those receiving Social Security and Supplemental Security Income benefits for more than 20 years. Today, more than 31 million of our 50 million payments that we generate each month are delivered electronically. Beneficiaries who use direct deposit have an overwhelming, positive view of this service.

    There are many advantages to direct deposit, as you mentioned before, Mr. Chairman. It is safer, it is more reliable. There are economic advantages to the beneficiaries because the money is credited to their accounts quicker and they can take advantage of it. They don't have to worry about stolen or lost checks. There are also advantages to the taxpayer in that it saves a lot of money. According to Treasury it costs about 43 cents to issue a Federal payment by check versus 2 cents per item when you pay direct deposit into the beneficiary's account. At Social Security, already we estimate saving about $156 million per year because of the beneficiaries that use direct deposit.
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    When Public Law 104–134 was enacted April 26, 1996, it included a provision that expanded the use of direct deposit for those receiving Federal payments. SSA implemented the first phase of the new requirement effective August 1, 1996. Anyone who is applying for benefits as of this date is now required to receive them by direct deposit if they indicate at the time of application that they have an account with a financial institution. This requirement is waived if the individual certifies that he or she does not have an account with a financial institution.

    SSA's experience with the initial-phase requirements has been very good. We have seen virtually no problems. As of August 1997, 85 percent of all new Social Security applicants were enrolled in direct deposit automatically from the onset of their entitlement, while 34 percent of the SSI beneficiaries were enrolled. Anyone who had established entitlement to Social Security and SSI benefits prior to August 1, 1996, is not required to use direct deposit at this time. The law does specify, however, that the Secretary of the Treasury is responsible for issuing regulations outlining how the final requirements will be implemented, including any waiver conditions in the development of electronic payment services for individuals who do not have a relationship with a financial institution.

    From our perspective, there have been two significant issues to be addressed for the regulations for this EFT '99 mandate. The first has been to identify all the exceptions, conditions under which the current and future beneficiaries with special circumstances will be exempt from having to be paid electronically. The proposed regulations for implementing the second phase of mandatory EFT, recently published by the Department of the Treasury, provide for a number of circumstances under which agencies can waive the EFT requirement, that meet the needs of beneficiaries who do not use EFT; and at this time, we are quite comfortable with the waivers that the Department of the Treasury has proposed.
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    The second issue has been to develop the program to meet the electronic payment needs of individuals without bank accounts and to develop services at the lowest possible cost. The latter has been an area that both of our agencies have been studying for a number of years. Unbanked individuals often have limited resources and are unfamiliar with how to go about maintaining an account at a financial institution.

    SSA endorses the Department of the Treasury's efforts to develop electronic payment alternatives at a reasonable cost for the unbanked. SSA and Treasury have undertaken several pilots designed to test the feasibility of establishing special types of electronic payment accounts for the unbanked beneficiaries.

    Programs have operated in the States of Maryland, Texas and elsewhere. Direct deposit benefits and special accounts have been established for participants. The funds are made available to these individuals by automated teller machines or point-of-service terminals.

    Beneficiaries participating in these special programs seem to like them. They enjoy the convenience and safety of having their monthly benefits delivered to them electronically. The monthly account fees associated with the program have not been an issue because they appear to be comparable to or less than similar fees encountered by the participants previously when cashing benefit checks.

    SSA is working closely with the Department of the Treasury to develop a feasible EFT implementation strategy. We plan to: continue to require new applicants with bank accounts to use EFT; design a robust public education program working with Treasury to convince current check receivers of the advantages of EFT; monitor the effectiveness of public education efforts to convert current check receivers to EFT by mid-1998. At that time, we would undertake a study to determine to what degree the residual check receivers are either unbanked or likely to request a hardship waiver; develop a suitable process for applying waivers to the remaining check receivers, based on the results of our study with the Department of the Treasury; and at that time, with the Treasury, we would then consider what type of written certification or other process might be needed to certify those who want to seek a waiver because of hardship. We would then work closely with Treasury to develop also the Electronic Transfer Account, the ETA program for unbanked recipients, as quickly as possible and work with the unbanked beneficiaries to convince them and work with them to convert to the electronic transfer funds program, or the ETA, as quickly as possible.
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    SSA will do all it can to work with Treasury to monitor this area, to assure that the program operates as intended and that we balance EFT requirements with a humane approach in dealing with the millions of beneficiaries who will require waivers because they are unbanked or otherwise have a hardship.

    I will be glad to answer any questions you might have. Thank you.

    Chairman LEACH. Well, thank you, Mr. Dyer.

    Let me just begin with a small concern on your statement, Secretary Hawke.

    On page 3, you make the statement that it should be no surprise that 75 percent of the unbanked indicated that the costs associated with conventional bank accounts made it economically unattractive for them. I am not sure the survey indicated precisely that. As our staff has analyzed the survey, the survey says that greater percentages, 47 percent, responded they didn't have enough money, or 27 percent didn't need an account, which is different from saying ''cost.'' And the only reason I raise this is that I think one of the probably the most profound issue that Treasury is going to have to address, and perhaps the committee as well, is the issue of fees, that banks have certain fee structures.

    Can accounts be developed with lower fee structures for this kind of service, and particularly for the unbanked? But the other alternatives are more expensive in almost every survey we have seen; that is, bank fees are pretty high. Nonbank fees are higher for getting checks cashed.
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    And so one of the questions is, if Treasury delays, isn't a delay, in effect, taking advantage of those who might well get the advantages of lower-cost alternatives? And so my query is twofold: What is Treasury doing to ensure that there will be low-cost techniques available; and second, can Treasury give us any assurance that it will not delay an extra year?

    Mr. HAWKE. Mr. Chairman, those are very important questions. Let me say, first of all, that the 75 percent number that I used in my testimony was essentially a combination of the first three categories of response in the survey. As I read those first three categories, which total up to about 75 percent, they all say, in my judgment, essentially the same thing—that given the relatively low income level of those recipients that are unbanked, the cost and fees associated with conventional bank accounts and the relatively low level of need that the unbanked have for an account, it wasn't cost-effective for them to have accounts.

    I think, in a sense, that those respondents were all saying aspects of the same thing. The fact of the matter is that for somebody with very low income and with relatively low need for a bank account, existing, paper-based accounts are not cost effective.

    We think that the whole focus on lifeline banking, which is so important for so many of our citizens, needs now to be refocused on an electronic environment, because we think that the electronic environment holds out tremendous prospects for offering basic, low-cost banking services to those who don't have banking accounts. Electronic banking will permit institutions to be able to do that in a way that does not incur the same kinds of costs and exposures that are involved in the paper-based account—the cost of overdrafts, the cost of processing paper checks and the like.
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    We are going to be designing the ETA with the thought in mind of achieving that objective. And while we are still aiming at January 1, 1999, to make that available, we are concerned about the complexity of that process and the need to get full public input on the design of the ETA before we go public with that.

    Mr. Chairman, I just wanted to show you what is involved in the design of this account. This document—it is about 2 inches thick—that I hold in my hand is the specifications for one of the EBT accounts that was designed in a competitive bid process. The process of defining and designing the ETA is an extremely complicated one, and we are approaching that with all deliberate speed. We do not want to delay this at all, for the reasons that you suggest.

    Chairman LEACH. Well, let me just say, as we have had prior private conversations, I am absolutely convinced you are looking at all of the right issues; and these are very difficult things, despite having good sense for the issues—to resolve all of those issues. And I think that everybody on the Hill is very concerned with the cost structure. And also with implications, the implications of the competitive landscape. And those are the two principal concerns.

    Mr. LaFalce.

    Mr. LAFALCE. Mrs. Carson, if you have something directly on point, I will yield to you.

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    Mrs. CARSON. The only thing I have is on point. I had a question for both the gentleman from the Treasury Department and the gentleman from the Social Security Administration, based on the comments that they made here today, based on the speech.

    Mr. LAFALCE. I will yield for one question.

    Mrs. CARSON. The gentleman from the Treasury Department acknowledges the fact that many of the unbanked individuals are very low income, and they constitute both racial and ethnic minorities. I come from Indianapolis, Indiana, where we have banks closing in the city, and people walk to the bank. Did I not hear you say this is a cheaper way of doing it, when they go to the electronic transfer apparatus, as compared to the way that they are handling their business now?

    Mr. HAWKE. Yes, we think that electronic banking offers the prospect of much lower-cost banking services.

    Mrs. CARSON. For whom? The Treasury Department or the consumer?

    Mr. HAWKE. No, for the consumer.

    Mrs. CARSON. Because you were saying just now that it costs 43 cents a check to send it out. The recipient of the check, through EFT, is going to have to pay from $3 to $4 for each transaction at the bank for a money order or cashier's check or something like that, whereas, they can walk into a supermarket and get a money order for 39 cents.

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    Mr. HAWKE. The account that we are going to develop will be available at a low and reasonable cost, and we hope it will be a lesser cost than people are paying today to cash checks; and if it is not, they will be able to get a waiver so that they can continue to receive their check.

    Mrs. CARSON. People who live in low-income neighborhoods, where the banks are closing, fleeing and leaving the neighborhoods, they will be able to get their checks in the mailbox?

    Mr. HAWKE. They will be able to continue to do it the way they are doing it today.

    Mrs. CARSON. My final question is for Social Security. Can you tell me the average check for SSI recipients?

    Mr. DYER. About $350 a month.

    Mrs. CARSON. Thank you. You have answered my question. Thank you.

    Chairman LEACH. The time of Mr. LaFalce has expired. The Chair would ask unanimous consent that Mr. LaFalce be given a minute.

    Mr. LAFALCE. You are very kind, Mr. Chairman.

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    Mr. Hawke, the legislation refers specifically, I know, to a financial institution, but I don't know that it refers specifically to a Federally insured depository institution. Have you interpreted ''financial institution'' to mean Federally insured depository institution for all purposes, without any exceptions? And what are the competing arguments?

    Mr. HAWKE. There are two contexts in which this issue arises. One is the general question of who we can make transfers to, what kind of entities we can make transfers to; and we have concluded that because the automated clearinghouse network system only provides for transfers to depository institutions, that is the way these payments will be made. We will make transfers only to depository institutions, whether insured or uninsured.

    That is the way the system works today. The direct deposit system for 20 years has worked with the transfer of payments to depository institutions, a small number of which are not Federally insured, but are State insured.

    The distinction that we draw is between accounts that are available in the marketplace for the receipt of electronic payments and the ETA, which we will provide. And we have made a preliminary judgment that for the account that we will provide, should only engage a federally-insured financial institution to act as our agent for the disbursement of Federal funds.

    Now, the open question that we have with respect to the ETA—and we have requested comment on this—is whether we could permit any ancillary kinds of arrangements with the ETA and third-party nonfinancial institution providers of payment services, like check cashers or money forwarders. We have not reached a judgment on that with respect to the ETA, and we have asked for comment on that.
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    With respect to accounts that are offered generally in the marketplace by institutions, we don't propose to put any limitations on the extent to which financial institutions might voluntarily link up with third-party payment service providers, or the extent to which individuals might use those services. We draw that distinction between the ETA, where the bank will be acting as our agent, and the account that the individual voluntarily selects, where the institution is acting as their agent.

    Chairman LEACH. Thank you.

    Mr. McCollum.

    Mr. MCCOLLUM. Thank you very much.

    Mr. Hawke, I am curious as to whether or not you are going to use the carrot-and-stick approach with regard to these ETAs as it comes to depository institutions? Are you going to require, or anticipate requiring, every depository institution to have a certain type of Electronic Transfer Account, or they will lose some benefit, or they will lose brownie points in their ratings? Or are you going to provide some kind of incentive system for them to establish the accounts that you have conceived?

    Mr. HAWKE. Mr. McCollum, some have urged us to mandate an account throughout the banking system, and we have not chosen that route. Rather, there is kind of an implicit carrot-and-stick involved, I think, in our approach.

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    On the one hand, we are trying to encourage the financial services system—depository institutions and others—to voluntarily develop low-cost, efficient accounts that will be attractive to unbanked recipients; and we are seeing some movement in that regard. Institutions are beginning to respond. I don't think the response has been yet what it might be, but I think we see movement in that respect.

    On the other hand, what we are going to do, by contract is to engage financial institutions to provide the ETA. The ETA will be a very basic, bare-bones kind of account that will provide the basic payment services that are needed to allow recipients to receive their checks.

    Mr. MCCOLLUM. When you say, you are going to contract, you are going pay these financial institutions something to develop this account?

    Mr. HAWKE. No. We will have a competitive bid process, and the bidding will be, as it has been in the EBT context, in terms of the monthly service charge that the institution will charge recipients for the account that we design.

    Mr. MCCOLLUM. If you design the account—maybe I am confused. I don't know enough about the EBT stuff, how it works, about who is paying whom. If you have a contract, somebody is paying somebody something.

    Mr. HAWKE. Yes. We will design the account. The statute says that we are obligated to ensure that individuals have access to an account at a financial institution at reasonable cost. We are going to design the account and we are going to ask institutions in a competitive bid process to tell us how much they will charge recipients to provide that account. And that is the way the EBT process has worked in the past, and we think that will result through the process of competitive bidding.
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    Mr. MCCOLLUM. In other words, they will only be eligible for this particular account if they charge within a low enough framework. They cannot have the account if they do not? I don't understand how you could competitively bid for something unless there is some reward or penalty for what you are bidding for.

    Mr. HAWKE. Well, let me describe the concept that we have at present.

    We will define geographic areas throughout the country in which we will solicit bids. And there will be a winning bidder who will be the contractor to provide the account in that territory, as we have described it.

    Mr. MCCOLLUM. So he will have an exclusive franchise? That is the idea here for this account?

    Mr. HAWKE. That is right. And the price of the account will be determined by competitive bidding.

    Mr. MCCOLLUM. So out of a hundred banks, only one or two are going to get it in the area and they will be the ones that get the electronic transfers; and all of those who are the folks who don't have bank accounts, that are too poor or whatever, are going to go to that institution that won the contract?

    Mr. HAWKE. They will have several choices. They can either elect to take the ETA as we have defined it; they can select a bank of their own if they find a more attractive account being offered at a commercial bank; or if the State has an EBT program, they can opt into the EBT program.
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    Mr. MCCOLLUM. As my time runs out, I want to know, if anything, what you might be doing about what the consumer bankers and the independent bankers suggest, and that is that Community Reinvestment Act credit be given for establishing these types of accounts or for giving assistance to those who don't have them, or for relief from periodic statement of disclosure requirements.

    Either or both of those things, you are considering doing?

    Mr. HAWKE. Absolutely. CRA credit is already available for banks that offer the Direct Deposit Too account, which is something that we have been promoting. And we will be talking with the Federal Reserve, and we expect that the requirement for monthly statements for the ETA, paper-based statements will be waived.

    Mr. MCCOLLUM. Thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Mr. McCollum. We have a vote on the floor, and the committee will then stand in recess pending the vote.


    Chairman LEACH. The meeting will reconvene. And before turning to Mr. Vento, the Chair would like to ask unanimous consent that the Members be allowed to put in opening statements. Without objection, so ordered.

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    Mr. Vento.

    Mr. VENTO. Thank you, Mr. Chairman.

    And Secretary Hawke and Mr. Dyer, we appreciate the work you are doing on this issue. We were visiting a little bit with the fact that the Treasury Department is sort of taking on the alter ego of this sort of new electronic age. And the concerns I think most of us have is that, while we recognize it is coming and the differential between charges for banking in terms of the availability of it through ATMs versus through tellers and so forth, all of this sort of comes crashing down.

    We suspect that some of the 10 million people that don't have accounts or this type of account is because perhaps they don't want it, I guess, as reflected by our colleagues' comments about 39 cent money orders.

    But in any case, there are some practical aspects to this because of what the history is. I mean, we pay close attention to this in Minnesota in terms of some of the assistance or benefit programs, and the fact that banks actually found that the days that checks came in or benefits came in that it was nearly impossible to tract any business in the bank.

    And so they tried to rationalize what was happening, in other words, that accounts today, small accounts or accounts where there is just simply a transaction taking place is expensive and costly for financial institutions.

    I note, Mr. Hawke, in terms of the unbanked, that you necessarily are moving to insured institutions. Is there any reason, Mr. Secretary, that we wouldn't in fact open this up? I mean, understanding that this isn't exactly the—in other words, banks and others are probably willing, in terms of public service, to participate here, but is there any willingness to open it up to other types of accounts?
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    Mr. HAWKE. Mr. Vento, the point that I made in my statement was that, first of all, we think that the statute contemplates the opening of an account at a financial institution. And because of ACH rules at present, we can only make electronic transfers into accounts at depository institutions. That sort of set the base-line for us.

    Mr. VENTO. Parameters.

    Mr. HAWKE. For the account that we contract for, the ETA, we felt that there was a strong public policy supporting the condition that that be an account in an insured depository institution, so that all the protections of deposit insurance, all the protections of Federal regulation and supervision, would be brought to bear on that account.

    Now, the open question that we have that we are inviting comment on in the rulemaking is whether we should, in the ETA, permit third-party nonfinancial institution providers of payment services to link up with the ETA bank and provide some kind of ancillary service.

    Mr. VENTO. Sure. One of the things that caught my attention was the fact that you provide an exception not to be paid to an individual in terms of the rep payee, which is another matter I think that more falls in the line of Mr. Dyer's, but the other is for sweep accounts, which would be, again, in financial institutions, I take it.

    Mr. HAWKE. Social Security already has about 2 million recipients who are doing this, where the payment is transferred to a bank in a master account in the name of an SEC-registered broker/dealer who then credits a subaccount in the name of an individual.
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    Mr. VENTO. But it almost seems like it facilitates, obviously, placing the dollars into another. It first has to go through a bank account, is your point, though.

    Mr. HAWKE. That is right.

    Mr. VENTO. The other issue that is going to get somewhat thorny, of course, is the fact that some of the State-administered benefit programs and you, in fact, in making the description of the Electronic Transfer Account actually get involved in talking about electronic benefits. And the issue here is, of course, that in order to facilitate a contract basis for those accounts with States and financial institutions, in the absence of any data incidentally, which I still haven't seen in terms of demonstrating that there would be a greater loss, suspended many of what I would consider, and I think all of us would consider, are consumer benefits against the various provisions of Regulation E, which provides a consumer protections in terms of limiting loss.

    And I would repeat again that I don't think there is any data that demonstrates that these particular accounts are greater, that there should be some sort of—I mean, I would suggest that if this has to—and I am interested in how you are going to deal with this.

    Will there be any differential in terms of the treatment? Obviously, if you are slipping into that electronic benefits law and that plastic that is State administered, that immediately would deny those individuals the consumer protections that they would have under the Electronic Transfer Act or under the law.
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    Mr. HAWKE. Mr. Vento, we have a very clear statutory mandate, which we will fulfill, to make sure that the ETA is offered not only at reasonable cost but with exactly the same consumer protections that other accounts at the same institution have. All the protections of Reg. E will be available.

    Mr. VENTO. But in your answer to questions, you obviously slid into electronic benefits transfer account that may be in existence under the previous. But you are saying that, in this case, then, the Reg. E requirements would be in place.

    Mr. HAWKE. I am talking about the account that we will contract for, what we call the Electronic Transfer Account. To fulfill our statutory mandate under this law, we must assure that recipients have access to an account at a financial institution at reasonable cost and with the usual consumer protections.

    Mr. VENTO. Well, I am most interested in seeing data on any type of losses from the EBT type of accounts, because I think that was done on the basis of someone's assumption rather than on facts.

    Mr. HAWKE. Even with the EBT accounts, Mr. Vento, the Federal component of EBT is subject to Reg. E. It is only the State-provided benefits that are not covered.

    Mr. VENTO. Thank you, Mr. Chairman.

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    Chairman LEACH. Thank you very much. Mr. Bereuter.

    Mr. BEREUTER. Thank you very much, Mr. Chairman, and Secretary Hawke. I am sorry to have arrived too late to hear your presentation. I appreciate our comments before we began.

    I wanted to ask you about a point you make on page 9. You point out, quote, enormous potential benefits available to financial service providers from EFT, and state your expectation: Industry should take some responsibility for developing public acceptancy of EFT.

    Is the industry being responsible enough or responsive enough, pardon me, at this point?

    Mr. HAWKE. Mr. Bereuter, we think that the industry—and you will hear from other witnesses today—is focusing attention on this education need. The American Bankers Association is initiating a broad scale public education campaign, which I am sure they will talk about.

    We have issued a challenge just last week to the industry to take up as an institutional campaign the education of the public with respect to the benefits of electronic funds transfer. We expect to see more from the industry in that respect.

    Mr. BEREUTER. You have mentioned on page 8 your own efforts to educate the public about the benefits, and I will be interested in seeing more about the details of that as you progress.
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    I wanted to go, though, to a question related to something we are told, and that is that, despite statutory prohibitions against attachment of Social Security or SSI or Veterans' benefits, some banks do allow such funds to be attached, and that the fear of attachment is a major obstacle for the unbanked. They are worried about that problem.

    What can you tell me about that? What steps have been taken or should be taken to keep things that are prohibited from in fact being accomplished?

    Mr. HAWKE. Well, we certainly think that banks ought to be observing their legal obligations with respect to attachments and that the bank regulators will be overseeing that.

    Mr. BEREUTER. Do you think there is a problem in that area? Would you say that the information we have received is correct, incorrect, or you don't know?

    Mr. HAWKE. Mr. Bereuter, I haven't seen that information, and we would be happy to look at that.

    In the context of the Electronic Transfer Account that we will be designing, one of the things we hope people will comment on is this question of whether there should be any special rules with respect to attachments. And we have very much an open mind on that question.

    Mr. BEREUTER. All right. I understand that the regulations would allow Treasury to extend the January 1, 1999, deadline until January 2000, and I would ask what legal basis the department believes it has for authorizing such an extension.
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    Mr. HAWKE. First, let me make clear that we expect to go on stream January 1, 1999, with the major portion of the program, that is, the transfer electronically of payments to those who have bank accounts. It is only with respect to the provision of an account, the obligation that we have to provide an account to the unbanked that we wanted to provide some leeway there.

    We are moving very promptly to try to develop an account for the unbanked. And at this point in time we can't be absolutely sure that that will be available on January 1, 1999, despite the intensity of the efforts that we are putting into that.

    The Act says that we can grant waivers from the requirement of mandatory EFT, and our proposal is that we would grant a very limited, time-defined waiver for the unbanked, to the earlier of the time when we have this account ready to provide to them, or the end of 1999, whichever is earlier.

    Mr. BEREUTER. But you are contending that you think you have the authorization for a general extension, if necessary, a year, to January of 2000.

    Mr. HAWKE. We think we have the authority to provide waivers in case of hardship.

    Mr. BEREUTER. But not across the board? But not across the board; is that the case?

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    Mr. HAWKE. No. We are not even proposing to grant waivers across the board. We are very much dedicated to getting this program on stream on January 1, 1999, for the major portion of the program, which is all of those people who have bank accounts.

    Mr. BEREUTER. Secretary Hawke, I appreciate the information you are providing the committee here on your effort to comply with the congressional direction, and I will look in greater detail to what you had to say in your written and oral testimony. Thank you very much.

    Mr. HAWKE. Thank you, sir.

    Mr. BEREUTER. Thank you, Mr. Chairman.

    Chairman LEACH. Ms. Waters.

    Ms. WATERS. Thank you very much, Mr. Chairman. I am sorry I was in and I had to leave. I am very, very concerned about the development of this, I guess you are referring to it as the ETA. I see here that you state that the recipient would be charged a fixed minimum monthly fee. Why not a fixed maximum fee?

    Mr. HAWKE. Well, it would be a fixed fee. When we say minimum, we mean it will satisfy the statutory definition of reasonable cost. The amount of that fee will be determined by competitive bidding. And we are presently doing our own cost estimates of where that number should be. But it will be a very modest monthly fee, Ms. Waters.

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    Ms. WATERS. You are describing a system where you would have a debit card and the recipients would be able to withdraw through ATMs. Would they then have to pay another fee for the ATM charge?

    Mr. HAWKE. Ms. Waters, our concept of the design of this account would be that for the basic monthly fee, there would be a certain number of completely free withdrawals each month. We haven't defined that, and we are asking for comment on what that should be. But within that parameter, there would be no ATM charges for the basic withdrawals.

    Ms. WATERS. All right.

    Now, let's talk about complete banking services. One of the problems we have had in underserved communities is the unwillingness of our financial institutions or the communities to be involved in full banking services. And what you are describing now is still limited. The Government is going to allow the banks to make some money, because they are going to provide a service for us, and so it is OK to pay them. But why would we design a service so narrowly tailored that we ignore the fact that these constituents are underserved, have never had full banking privileges or services? And many of the institutions have not wanted to do it because they think it is too much trouble. Why don't we use this as an opportunity to offer full banking services for communities that have not been involved in banking?

    We are talking about everything from getting people involved in the management of their lives and of their meager resources and savings and how to make loans at banks and how to do all this stuff. Why would we have a service that would further support the idea that ''my only relationship with you is to provide you this money that I am getting paid to provide to you?'' And the service is contracted with them, but ''We don't want to have anything else to do with you. We don't want to teach you how to make loans. We don't want to teach you how to be involved in savings. We don't want to teach you the full range of banking services.'' We don't want to do that; do we?
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    Mr. HAWKE. Ms. Waters, we completely agree. And we think that one of the really exciting challenges in this EFT '99 program is that it will lead to exactly what you are describing, bringing people who need basic banking services into the mainstream financial system.

    Ms. WATERS. But you have got the power now. You have got the lever. You have got the money. You have got the ability to do that. It is not something that you should anticipate 10 years from now. Because, let me tell you, if that is all that they are going to do, let's create some new ways to do it. We don't need the big boys to do this one. We can empower a lot of people to do this if that is all you are going to do. But if you are going to use your power to open up banking services for people that they have not been available to, then we can talk. And I think that some of us who have been trying to do this recognize this moment that we have. I am not interested, Mr. Hawke, in giving the banks a lot of money to pass this money through to people that they don't provide services for. And that is all I am going to tell you.

    Thank you very much.

    Mr. HAWKE. Again, we completely concur with the objectives of what you are saying. And we are asking for comment in this rulemaking proceeding as to just exactly what this account should look like.

    Ms. WATERS. Thank you.

    Mr. BARRETT. Would you yield?
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    Ms. WATERS. Yes, I will yield.

    Mr. BARRETT. Very briefly, just to clarify on ATM charges, now there are basically two ATM charges many times. The charge to get the money out of my account and the charge to get it out of the machine. When you talk about waiving those charges, are you talking about both charges?

    Mr. HAWKE. Well, I think the traditional mode right now is when an individual uses an ATM card at their own bank they don't have any charge for the transaction. They can withdraw funds without charge. The problem comes when they use their ATM card at an ATM owned by a bank other than the one that holds their account. That is the so-called ATM surcharge.

    Mr. BARRETT. Right.

    Mr. HAWKE. And what I have said is that as we design this Electronic Transfer Account we will make available to unbanked recipients, we will have a requirement that some minimum number of withdrawals, some specified number of withdrawals be permitted within the scope of the basic monthly service charge completely free.

    Mr. BARRETT. No surcharge for another system's machine?

    Mr. HAWKE. Whether the withdrawal is made at the bank that is offering the account or at a third-party bank. That obviously has cost implications, because we will be asking the bank providing the account to absorb that third-party ATM charge in the process. But we believe that since this is a mandatory program, where people who got checks are now being required to receive electronic payments, that we should not be exposing them to third-party ATM surcharges for the basic number of withdrawals that they are going to get from this ETA account.
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    Ms. WATERS. Mr. Chairman, I would ask unanimous consent, well from you to just give me 30 seconds. I have one question I did not ask.

    Chairman LEACH. Without objection.

    Ms. WATERS. As you know, one of the problems we have had with the banks, particularly in these mergers, is the problem of consolidation where they close down branch banking. They just do it to save money, what have you.

    Are you going to take a look at how you service this clientele and make sure that we come up with a configuration, or have you thought about it, where people will have access to these services and not be victimized by the exodus of branches in our community where we have to go and find people who we are paying money to service us? And what do you do in the absence of these branches that have been closed down?

    Mr. HAWKE. That is very much a concern of ours, Ms. Waters. And we will establish a threshold requirement for coverage of the area before we will treat somebody as eligible to bid for the provision of the ETA account.

    Ms. WATERS. And are you going to allow these institutions to further contract with other institutions to provide the services?

    Mr. HAWKE. That is an open question that we are asking for comment on in the rulemaking.
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    Ms. WATERS. I have got a lot of comments for you on that. OK. Thank you.

    Chairman LEACH. Mr. Baker.

    Mr. BAKER. Thank you, Mr. Chairman.

    I am very interested also in the question of the nonbank account individual by the deadline and the approach in providing services to those individuals. I certainly understand the need to bring people into the technology system and certainly understand that within some degree of accessibility those services be at least located within the community. I think there is a distinction, however, as a Government providing this service, in how far we go in mandating third parties to facilitate these transactions when it appears that we are going to significantly regulate the cost charged in association with that service. For example, if we are to require a grocery store in a community to provide this service as the third party, will their fees be regulated? Or will it only be the financial institution's fees?

    Mr. HAWKE. First, Mr. Baker, we are not going to require any institution to do anything under this program.

    Mr. BAKER. Sure.

    Mr. HAWKE. And we don't propose to try to regulate the cost of bank accounts that are available in the competitive marketplace.
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    Mr. BAKER. Right. For someone who forms the account voluntarily, they will be charged whatever the market charges might be.

    Mr. HAWKE. Our objective there is to stimulate as much competition as possible among financial institutions to provide cheap, electronic-based accounts that provide basic banking services. We think EFT '99 provides a basis for that.

    Mr. BAKER. And I am with you on that point.

    Mr. HAWKE. With respect to the account that we are obligated to provide under the statute, we have an obligation to assure access to an account at reasonable cost. We will define that account as a result of the rulemaking process and solicit bids from financial institutions who are interested in providing that account under the specifications that we have defined. And that account we expect will be a debit card-based, electronic-only account at a federally-insured financial institution, provided at a fixed monthly fee, which we are obligated to assure is a reasonable fee. So we are not going to be mandating that.

    Mr. BAKER. But take the example where the bank has engaged in a voluntary relationship for the electronic funds transfer. They are operating and have people who voluntarily open accounts. The year 2000 comes. We now have 10 million people, according to the estimates, outside the scope of activity who are going to be required to be brought in.

    As I understand your plan, you will then submit a proposal, either regionally, statewide, or by municipality, where people bid on the right to provide those services for those individuals. Will you then say to that banking organization, since it has to be an insured institution as the primary recipient and you don't have enough locations in community X, that you either have to build facilities to provide the service, or you enter into a transaction with a third party, say the local grocery store, to provide the service. In that case, will you then reach to the community grocery store and say you may or may not charge X? Or will the fee structure only be limited to the financial institution side?
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    Mr. HAWKE. We will define the attributes of the account and what is required to be provided by those who are interested in bidding on the account. And that will address, for example, the number of free withdrawals at ATM machines and the access to the account through point-of-sale terminals. And it will be up to the contractor, the bidder, to assure us, first of all, that they satisfy our basic qualifications for coverage of the area. We want to make sure that the area is covered in terms of access points for recipients—and then it will be up to them to assure that those access points meet the standards of our specifications. We are not going to try to tell grocery stores how much they can charge the financial institution for the interchange.

    Mr. BAKER. But I think there is a problem. If we are not regulating everybody from the beginning to point of delivery, you are going to have somebody in the food chain stuck with a bill he can't recoup from somebody downstream. I am not objecting to the concept, because I think it saves everyone money. I think it is obviously the way we should go. But I think the fee structure should be clearly evaluated on the level of service the participant provides in the process.

    Mr. HAWKE. That fee structure will ultimately reflect exactly those charges. And it will be up to the institution that is bidding to provide the account, to assure that arrangements have been made so that they are able to provide the account at the fixed fee that is settled on in the bid process.

    Mr. BAKER. One further competitive question. I understand that the recipients of the electronic funds transfer has to be an insured depository institution. It would appear there are a lot of business organizations that might well be able to deliver these services very competitively to the banks' position that won't be an insured depository institution, say, for example, the large insurance company or a large securities company or any large financial-in-nature company regulated either by Federal or State law. So there is no risk of loss to the recipient of their funds. Why are we limiting it only to this class of institution?
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    Mr. HAWKE. I want to make clear exactly how this works. With respect to accounts that are offered in the competitive marketplace, all we are saying is that the initial transfer of the Federal payment has to be made into a depository institution.

    Mr. BAKER. And that is what I am questioning.

    Mr. HAWKE. There are two reasons for this, as my statement pointed out: first of all, we think that the statute contemplates a deposit account. And second, under automated clearinghouse rules, we can only make transfers, electronic transfers, to depository institutions. But we are not proposing to limit in any way the relationships that can exist in the private sector between a depository institution that is the first recipient of a payment and some other provider of payment services that may link up with them and offer some competitive service to recipients. We want to see as many competitive products and approaches emerge from this process as possible so that costs get driven down by competition.

    Where we have an open question is with respect to the ETA that we provide. We have made the preliminary judgment there that the first transfer should be to a federally-insured depository institution. And we have asked for comment on whether or not we should impose any restrictions beyond that on relationships between the bank providing the ETA and third-party payment services providers.

    Mr. BAKER. I am out of time. Thank you, Mr. Hawke and Mr. Chairman.

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    Chairman LEACH. Thank you, Mr. Baker.

    Ms. Roybal-Allard.

    Ms. ROYBAL-ALLARD. I want to follow up a little bit on Mr. Baker's questions because I am not real clear. For example, in my district I have a lot of check-cashing outlets. If the third party is a check-cashing outlet, because that is what is available since there are very few branches in certain parts of my district, does that mean, then, that there is the potential that one of my constituents will have to pay a double fee, one of whatever the banking institution is going to charge, and then what the check-cashing institution will charge?

    Mr. HAWKE. With respect to the ETA, which is the account that we are providing, we certainly want to avoid that happening. We haven't made any judgment about whether we will permit check cashers to link up the banks that are actually providing the ETA. But if we were to do that, we would want to make sure that the total cost of providing payment services to the individual recipient satisfied the reasonable cost test, and that that was determined by competitive bidding. So there should not be a duplication of costs. And that allegation is exactly one of the concerns that we have.

    Ms. ROYBAL-ALLARD. OK. For example, there is a constituent who goes to a bank, gets transferred, and say they pay $2 to have that done. Another constituent has to do a check-cashing outlet. That constituent also will only pay $2. And how that is divided up between the banking institution and the check cashing is something that they have to determine. But the customer does not pay more than $2 regardless of whether it is check cashing or a bank where they go. Is that what you are saying?
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    Mr. HAWKE. We haven't yet addressed it in that level of detail, but let me again——

    Ms. ROYBAL-ALLARD. I think you are going to have to. Because the point is that the person who does not have the access to banks will then be penalized. And that is usually the person that can afford it the least.

    Mr. HAWKE. That is exactly what we want to avoid. And if anybody is presented with the prospect of having to pay more for the account that we offer, the ETA, then it would cost them to get a check cashed at a check casher, they will have a waiver. They won't have to take the account. They will be able to continue doing business exactly the way they are doing today.

    Ms. ROYBAL-ALLARD. OK. Then that leads to my next question, then. What is the Treasury Department and the Social Security going to do to ensure that these customers, many of whom are not knowledgeable about banking and various kinds of financial things, how are they going to be properly informed so that they do understand what the choices are, what the ramifications are, and how they go about getting a waiver? And will the information also be culturally sensitive, so that you do reach the vast majority of people, many of whom, as I had said, may not be sophisticated in terms of banking issues?

    Mr. HAWKE. Absolutely. We are planning a major public education and outreach campaign to not only inform the recipients of Government payments about the benefits of electronic transfer, but exactly what their choices are, what the waivers are that are available to them, and how they go about it. And we will provide materials not only in Spanish but in other languages as well.
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    May I ask also, how are you going to go about making sure that, in fact, that the information that is developed for various communities is in fact culturally sensitive and presented in a way that they will understand? Will you be doing outreach to the various groups throughout the country who work specifically with minority communities so that they will have an opportunity to have input and to review the material so that, in fact, it is meeting the specific needs of particular communities?

    Mr. HAWKE. That is exactly the kind of thing we expect to be doing within the scope of our public education campaign.

    Ms. ROYBAL-ALLARD. OK. Thank you.

    Chairman LEACH. Mr. Castle.

    Mr. CASTLE. Thank you, Mr. Chairman. And thank you, Mr. Hawke, for your attention to all these details. I did miss your presentation, but I have read it while I was waiting to ask you a question or two, and I won't take too long here. But I, first of all, am a strong supporter of what you are doing.

    And my questions that come to my mind generally fall on the same lines as almost everyone before me, the last three or four speakers from whom I have heard, and that is the nonbanked and the potential cost to them.
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    I particularly thought that your chart, which I think is attached to your testimony which shows some of these costs is indicative of why we should be enthusiastic about this in terms of what it costs for checks. People don't realize, we fly checks all over the country all night long, and it costs a minor fortune to handle them, versus the EFT there, and the matter of inquiries and claims and forgeries and counterfeit and altered checks and resolution of payment increase. I hope 24 hours is not an exaggeration but is a best guesstimate here. I mean, I think all those things are good. There probably should be another category, which is confusion, because we aren't handling things the way we were before, which would probably go more against the EFT on the side of the checks, which is one of the great things that you have to deal with.

    But one of the things that has concerned me are the ATM charges. I am not saying there is a conspiracy. But it just seems to me that those charges have really expanded recently. And I keep looking at those machines and thinking, Jeez, did they suck us into using these machines? I never go into banks anymore. And all of a sudden, when they have got people like me using them all the time, they say, well, now we are going to charge a buck 50 or $2 or whatever.

    And are we going to get into that kind of thing with respect to the nonbank account individuals, which I think are 10 million that I see in your testimony, you know, where they started off very neatly, and they charge you for after six transactions or whatever maybe. And then all of a sudden, it is a quarter here, 50 cents there.

    And the very people who can least afford these kinds of charges all of a sudden are disadvantaged. And it is fine that we, the Federal Government, are saving money for the taxpayers, but I think we have to make absolutely sure that we are protecting those who are least protected in all of this.
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    Mr. HAWKE. Mr. Castle, let me say, first of all, your perception is exactly right. And the reason for it was that the ATM networks not long ago changed one of their rules that prohibited third-party ATM surcharges. So the reason you are beginning to see surcharges imposed by owners of ATMs for withdrawals on accounts other than accounts that they hold, results from that rule change.

    What we intend to do with respect to the account that we provide is to assure recipients that for the basic monthly service charge that is charged for the account, which will be modest and reasonable, that they get some number of completely free withdrawals, so that instead of having to cash their check and turn it into cash, they will be able to get their payment electronically.

    Mr. CASTLE. I heard all of that—not to cut you off—I heard all of that before. My concern is the creeping inflation aspect of it. I mean, I want to make absolutely sure that we do that and then they don't come back to you 2 months later and say, oh, we are losing money, and now we have got to cut from six transactions to three or whatever it may be.

    Mr. HAWKE. Those charges will be fixed by contract in a competitive bid process. So they will be locked in for the term of the contract.

    Mr. CASTLE. You would be interested to know, on my own personal crusade, when I go to those banks that are charging us ATM fees, I refuse to take the money; therefore, I spend less money. So if the whole economy turns down as a result of that, I want you to take note of where you first heard about it.
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    What efforts has Treasury made to assess the cost of the unbanked to cash their checks now? I mean, it seems to me that these people, these 10 million people, are people who are already in a little bit of a dilemma or plagued with respect to their, you know, the costs to them to access the normal things that most of us have through checking accounts or whatever it may be. And, you know, how is that going to be balanced against this new technology we are going to have to make, hopefully, that we are actually going to be saving people money again versus, you know, ending up costing people more money?

    Mr. HAWKE. Well, we certainly hope so. And there are a number of surveys that have been done about the cost of providing check-cashing services. The overwhelming number of recipients of Government checks that don't have bank accounts actually cash their checks at financial institutions and grocery stores. That is a very high number. I think our estimate is something like 8 percent use check cashers. And some of the stories about fees are very troublesome, because they indicate that many recipients, and particularly in inner city areas, are paying high fees for check-cashing services.

    We really expect that the conversion to EFT is going to help drive down those costs, because we hope that mainstream financial institutions are going to be offering very cheap, cost-effective, convenient electronic-based accounts that will benefit consumers. Because the cost of processing paper will be squeezed out of the system.

    Mr. CASTLE. Well, as I yield back, I would just add, some of the other testimony we have here and some of the other speakers have mentioned in comments as well, I hope your people will be absorbing all that, too. I think this is a hearing that can have a very beneficial impact on what you are trying to do. And I yield back.
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    Chairman LEACH. Thank you. First, Mr. Kanjorski.

    Mr. KANJORSKI. Thank you very much, Mr. Chairman.

    First, may I say, you know, I am pleased to see the Treasury is doing this, because there is a need to move to the electronic transfer of funds. I do have, however, some question as to whether or not we have fully thought out some of the methodologies to be used.

    First and foremost, Mr. Hawke, most of the people I am worried about are probably over the 75-, 80-years-of-age that are going to be extremely difficult to comprehend the transactions that we are now putting them in. And when you respond with the idea that there is a waiver or waivers, that is either humorous or—it is just going to fill every congressional office in the country with a lot of word processing. Because the first thing that is going to happen, an 85-year-old lady who doesn't know exactly what happened to her Social Security check, she is going to call my office and we are going to start a process. I would assume that you are going to have to work very hard, not on the mechanism of saving money. We know that, sir. This is an educational process. And I am not sure that everybody has been alert to expect that this is going to happen.

    Some of the questions that I have, I notice that the Government saves 43 cents per check by not sending a check but in fact doing an electronic transferment, but the bank saves 75 cents to $1.25. There is going to be a tremendous savings to financial institutions out there that are no longer having to process these paper checks.

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    Has that been taken into consideration, the fact that since money is going to be forced by the Federal Government for the first time to be put into private institutions that will gain interest on that money on the float and will save money in the transaction of paper, what kind of participation the financial institutions of the country are going to make toward people in terms of setting this up and handling them?

    Now, I look at the State of Pennsylvania. And when you say you are going to contract out, I would assume two banks, two or three banks of Pennsylvania are going to bid. Many of those banks have no institutions within a remote distance of some of these senior citizens. When I say remote, 40, 50 miles. Now, where is the little old lady living 45 miles away from the nearest large bank that has this transaction with the Government, what is she supposed to do to get her money?

    Mr. HAWKE. Mr. Kanjorski, we have given a great deal of thought to exactly these questions. They trouble us every bit as much as they trouble you. And it is one of the reasons that we have taken the view toward this whole program that it has to be very user-friendly. And it has to provide the elderly recipient not only an easy way to continue to receive checks, if that is what they want to do, but ready access to their money if they want to use an electronic account.

    For the account that we provide for unbanked recipients, people that don't have their own bank accounts, we will set some threshold requirements for coverage of the area that is involved. And we will make sure that there is adequate coverage of the area before we qualify somebody to provide that account.

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    Mr. KANJORSKI. If I were a banker, a large banker, I would look at this as a potential profit dealing with the Government in large amounts of money with the float that can occur, even though it is maybe a week into the month. And I would suspect they are the ones that are best equipped to make the bid and to handle the bid, if you will.

    On the other hand, I would think it lends itself more to the community bank. Unfortunately, there aren't an awful lot of community banks left in America. I move to the next institution that seems to be everywhere in America, credit unions. And a good portion of senior citizens now have credit union accounts. However, the common bond doesn't allow these senior citizens to join the credit union.

    Now, is the Treasury going to join us and make some exemption so that credit unions can provide this by allowing the common bond amendment to expand to the local person who otherwise will not qualify to join that local credit union, they can now go down and join it?

    Mr. HAWKE. Mr. Kanjorski, without addressing the common bond issue, let me say that we think the credit unions have an important role in this whole process, for the very reasons that you described about their service to customers.

    We think that credit unions, as much as any other kind of institution, should be looking at ways to provide very cost-effective electronic accounts to their customers. We also would encourage credit unions to join together, and we understand that there is already some effort in this direction, to get involved in this process of providing the ETA so that consortiums of credit unions, perhaps working through their trade associations, will be able to become providers within the areas that we define.
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    Mr. KANJORSKI. Well, I think they can make the bid; they can provide it. I am not sure that an individual credit union with the common bond restrictions could even take your forced account of a person who doesn't have a common bond with that credit union, unless you are willing to waive that portion of the act or to change the common bond. I don't know how it can be done. And I certainly think that that is an area, and I am certain, I have talked with credit unions and community banks in my area; they are prepared to handle that.

    I am not sure the large banks really want the transactions or care, but they are the ones that are best structured institutionally to make the bids. And I am just worried what is going to happen is we are going to have the large institution making the beds and the work that have to be performed by the community banks and the credit unions and we are going to have a disconnect here.

    Mr. HAWKE. We would certainly encourage credit unions to get involved in this process. I am not sure it is going to require any changes in the common bond rules for them to be effective.

    Mr. KANJORSKI. But you are prepared if it does require that to support a change?

    Mr. HAWKE. Mr. Kanjorski, we haven't really addressed the common bond issue. We are waiting to see what the Supreme Court does on that question. They are hearing that case next week. We think the credit unions have an important role in this EFT process.
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    Mr. KANJORSKI. Very good. Thank you.

    Mr. JACKSON. Would the gentleman yield?

    I want to go back to Mr. Kanjorski's first point, Mr. Hawke. Can you explain to the audience and the committee just how much float we are talking about here?

    Mr. HAWKE. Mr. Jackson, that is a very important question and that is one of the things we are looking at. The amount of float that is involved depends on what the attributes of the accounts are. For example, if you have an account that allows only one free withdrawal per month, there is going to be a maximum incentive to take all the money up front. That will minimize float.

    Float is important because it is one of the things that is going to help to reduce the cost of this account to participants. And we expect that institutions that get involved in this process to bid on this account will make their own estimates of how much float is involved and how much that is going to contribute to the pricing of the account.

    Mr. JACKSON. It is my understanding, Mr. Secretary, that the Treasury transfers a large sum of Federal benefits to a central bank. Unbeknownst to the end recipients, that large bank sets up an electronic account with the name of the end recipient for the purpose of directing that resource or that benefit at some point in time, creating an additional step in the process. Now that bank then accrues a float that is unrelated to the direct transfer of the resources from the Treasury to the end recipient.
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    Mr. HAWKE. Mr. Jackson, that is not quite the way it would work. We will make transfers as we send out checks today. We will make transfers to accounts held in the name of individuals. And individuals will have access to that account as soon as the transfer is made. So if an individual wants to take their money out on the first of the month or the second of the month, they will be able to do that. The question is what expectations can we have about the length of time they will leave their money in that account, which will produce float, which will reduce the cost of the account in the final analysis?

    Chairman LEACH. The time of gentleman from Pennsylvania is expired.

    Mr. Sessions.

    Mr. SESSIONS. Yes. Thank you, Mr. Chairman. I would like to take just a few minutes if I can and ask some questions. I know we are getting into the cost benefit analysis of who is making the money and where all the float is.

    I am looking at some of your numbers, and specifically where you talk about the fraud that is involved. And I don't see a page number, but right here. I know that about 31 million, I believe, 31 out of 50 million people are on the payment system today. What occurs when a person dies and the money just automatically goes to the account and no one actually physically had to, through fraud, sign a check to receive that fraudulently, but it just keeps going into the account every month? I see all the things that are very positive where you talk about claims and forgeries and counterfeit and altering. What happens with the 31 million today?
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    Mr. HAWKE. I think Mr. Dyer may be in a better position to answer that.

    Mr. SESSIONS. OK. I am sorry.

    Mr. DYER. Sir, what we do is we report this to the banking system. We have interchange with the banks back and forth. So, as best we can, when we know someone has died, we send an alert to stop any action on that payment.

    Mr. SESSIONS. How does someone notify you that someone in their family has passed away?

    Mr. DYER. Quite often we will be notified that the person has died and we will contact Treasury in advance of any payment. Other times we get it from funeral directors or from States' statistical agencies. And a lot of times, the bank knows immediately through the estate that something has happened and the action is stopped.

    Mr. SESSIONS. You feel you have got a good process that is in place that avoids this circumstance?

    Mr. DYER. Yes. And we continuously work to improve it.

    Mr. VENTO. Will the gentleman yield to me, Mr. Sessions?

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    Mr. SESSIONS. I will for one minute.

    Mr. VENTO. Yes. I just wanted to point out that there is the, I think the Social Security Administration, in fact, something that I am working on is that a constituent came to me that actually ended up cashing a check of someone that was deceased. And of course the grocer lost the money because he was cashing a check without adequate verification. But, you know, so often this is done in a good faith basis.

    And the Social Security actually is trying to update their files every month now. I think currently it is a 3-month period. And so I just wanted to point this out. Because we are pursuing it. And it is difficult to put requirements on, for instance, funeral directors.

    The question is, can we get the statistics to update the files and correct these files with electronic—the deposit would be much easier than pulling checks. I just wanted to add that, because I think that is one of the areas. Thank you very much.

    Mr. SESSIONS. Good. Thank you.

    Mr. Chairman, just to make one comment. I know we have got to go vote. I bank with a larger bank. They pay me for every debit transaction that I make by using that debit card as opposed to using a check. They give me a quarter back every time. I think that this could be an opportunity for us, and it is a large bank. It is NationsBank. But they give me a quarter back for using it. And I think that is an incentive. So for those people who are in our audience who simply think it is the bankers making the money, I think there is an incentive also that could be utilized on behalf of——
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    Mr. JACKSON. Would the gentleman yield 30 seconds?

    Mr. SESSIONS. I will yield for a minute. Yes.

    Mr. JACKSON. I thank the gentleman.

    Mr. Dyer, respectfully, sir, I don't believe that this process for when someone is deceased has actually a queerer process on the electronic process than the present process. If someone is deceased in the present process, the check comes in the mail, the mail is returned ''deceased,'' and the Treasury Department checks their name off and no longer sends checks. Under this process, you go to the funeral directors, you go to the Social Security Administration, you have this money sitting in an account where there is tremendous float that is the by-product of someone who is deceased until such time as you resolve the official no longer transferring of that money.

    That is what is really a mistake, Mr. Chairman, is it remains something unresolved. And it creates extensive float in the process while we are trying to find out whether or not the person has moved, deceased while this is unresolved. Mr. Chairman, I think we have to explore it a little bit further.

    Mr. SESSIONS. I yield back the balance of my time, Mr. Chairman.

    Chairman LEACH. We have a vote on the floor, but I think we can take another question. If you would like, Mr. Barrett, I will give you the option.
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    Mr. BARRETT. I would rather return.

    Chairman LEACH. You would rather return. OK. That is Mr. Barrett's discretion.

    The hearing then is in recess pending the vote on the floor.


    Chairman LEACH. The hearing will reconvene.

    Mr. Barrett.

    Mr. BARRETT. Thank you, Mr. Chairman.

    Mr. Hawke, we have talked a lot today about the fact that financial institutions would be able to charge a reasonable charge, and I would be interested in what we are talking about. I realize you cannot put an exact figure on it, but in your mind, what is sort of the range that we are looking at here?

    Mr. HAWKE. Mr. Barrett, as you recognize, that charge is actually going to be set by the competitive bidding process, but we can tell you what we are seeing in the other programs like the EBT programs and the Texas pilot project that we kicked off with respect to direct deposit.
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    In the southern area States, the Southern Alliance, where there is a multistate EBT program going, the charge is $1.92 per month for an account that is provided. Now that has certain attributes. I think I showed before the specifications for that account, which are in a document that is a couple of inches thick. In the Texas pilot, the charge is $3 a month. And both of those are voluntary, so there is some marketplace test for those. And 35- or 40,000-people in Texas have opted into the direct deposit pilot there.

    I don't know exactly what the number is going to be, but it will depend to a great extent on a number of factors. One will be what the attributes of the account are—how many free withdrawals, whether we are providing third-party payment privilege and the like. The other will be what the expectations of the bidding institution are with respect to float. In other words, how long will people leave their funds in the account before they draw them out. That will help defray the cost of the account.

    Mr. BARRETT. But, in essence, your determination on the basis of reasonableness will be based on the bid. If the bids all come in at $50 a month or 30 cents a month, you are going to let the market more or less determine that?

    Mr. HAWKE. Well, we are doing studies of our own. We have a consultant that is doing cost studies for us based on varying assumptions about what the attributes of the account might be. So, going into the competitive bidding we will have a pretty good idea of where it ought to come out. And if it comes out at a level beyond what we think is reasonable based on our estimates of what the costs are of providing the account, we will have to take another look at it.
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    Mr. BARRETT. And your charts show that there is a considerable cost savings to the Government, 43 cents versus 2 cents. That is something that all of us like.

    Mr. Kanjorski mentioned that there is a considerable savings to the financial institutions in having direct deposit as opposed to a check. In the area, I think he said close to $1.

    I am worried about the perception that what we will have here is, in effect, a lowering of the amount that the recipients receive through the change, and again it might be a minimal charge, and that the winners are going to be the Government, the financial institutions, and you will have millions of people out there who will receive less money per month than they have received under the current system. What is your response to that?

    Mr. HAWKE. We absolutely do not want that to happen. And one of the things that we will provide, it is provided for in our proposed Reg, is that any individual who is offered the account, the ETA, who would have a financial hardship in accepting that, which means that they could get the same services cheaper by getting a paper check, they will be able to do that. So, if somebody is able to get a check now and cash it for nothing, they will not be forced to take an account, even at a very modest cost that might be attached to it.

    Mr. BARRETT. Although I would concur again with Mr. Kanjorski's comments, we are either going to have lots of calls to our offices or the people who are the least, frankly, sophisticated are not going to know how to go through the waiver procedures. I don't think in the real world that is going to happen.
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    My last point is again on the reasonable charges. That is, my concern is that what we are doing is putting, as I mentioned to you in the break, the Government's Good Housekeeping Seal of Approval on charging people who make direct deposits at the banks. Government funds direct deposits, and as everybody in this room knows, currently the direct deposit system is a winner for just about everybody. It is a winner for the person making the direct deposit because you don't have to hassle with the check. It is a wonder for the Government. It is a wonder for the financial institution again for float reasons and for paper reasons.

    But just as we all felt that the ATM experience was going to be a winner for everybody because banks were saving on personnel costs, we could get the money out, once we all got used to it, all of a sudden we started getting charged for it. And I hear that dog barking at the door, the same dog.

    Mr. HAWKE. Well, again we don't want people to have to pay for something they can get for free now, and if somebody gets a check today and get its cashed free, while we want to try to persuade them of the benefits of electronic transfer, they will not be forced to take an ETA under those circumstances.

    There are benefits to recipients that come from having an electronic account of the sort that we are describing. They have a safe repository for their funds. They don't have to take all of their money out and expose themselves to theft, and the incentive to spend cash that is in their pockets. They have much quicker error resolution if there is any problem with respect to their account. So, there are a lot of benefits that come from this account. But if those benefits are not enough to persuade people to take the account, and they can get their checks cashed at a cheaper amount, then we are not going to require them to take the account.
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    Mr. BARRETT. I yield back the balance of my time.

    Mrs. CARSON. Mr. Chairman, could I ask the gentleman one quick question? All right. I will wait.

    Chairman LEACH. I think we ought to proceed with regular order if that is OK.

    Mr. Manzullo.

    Mr. MANZULLO. Thank you. I just have a couple of questions.

    Mr. Hawke, do you envision these debit accounts as paying interest to the depositors?

    Mr. HAWKE. That is one of the things we have requested comment on. I think, as a practical matter, the average balances in these accounts are probably not going to be so great that they will warrant the payment of interest. But that is certainly something that we want to hear comment on.

    Mr. MANZULLO. Where is the comment coming from on this?

    Mr. HAWKE. The comment will be coming from interest groups and from institutions that might provide the account. Any interested party is able to comment on our proposal. We have not yet proposed anything specifically with respect to the design of the account, but one of the questions we have is whether and under what circumstances interest might be payable on the account.
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    Mr. MANZULLO. In this bidding process, I presume that the institution that is the winner will be paying the Treasury something?

    Mr. HAWKE. No.

    Mr. MANZULLO. Or is it the opposite? Who pays whom?

    Mr. HAWKE. The individual recipient will pay the institution that is providing the account. It will be a fixed monthly service charge that the individual will pay for the account.

    Mr. MANZULLO. Then why is this a bidding process? Why can't just any institution——

    Mr. HAWKE. Any institution that wants to provide an account is free to do that, and we are encouraging the private sector to develop accounts. We are only talking here about the account that we contract for so that we are sure that we can fulfill our statutory mandate to assure that there is an account available for these people at reasonable cost.

    Mr. MANZULLO. This is the special debit card account?

    Mr. HAWKE. The one that we are providing.

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    Mr. MANZULLO. In the contracting process with Treasury, the winner of this, whatever it is, is going to tell you what, if any, interest they are going to pay, what, if any, amount of service charge they are going to be paid; is that correct?

    Mr. HAWKE. That is correct. They will bid to specifications that we design. We will tell them what all of the attributes of the account are. And then they will tell us how much they will charge in the way of a fixed monthly fee to provide the account that we have designed.

    Mr. MANZULLO. So, you haven't decided whether or not you are going to request that they actually pay interest?

    Mr. HAWKE. No, that is one of the issues that we are requesting comment.

    Mr. MANZULLO. What I see happening here, there is going to be a tremendous pool of money. What is it, $11 billion a month or some figure going out there?

    Mrs. CARSON. Nine billion.

    Mr. MANZULLO. Is it $9 billion? And if a bank is awarded the contract and some areas they could have several thousands of these accounts at their institution. What you are saying is that it is possible that the institution could hold these accounts without having to pay interest. Can you give me an up-or-down answer on that?

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    Mr. HAWKE. That is possible. That is one of the things that we are requesting comment on.

    But let me explain. First of all, the institution that is providing the account has to expect that very, very quickly after the funds hit the account that they are going to be withdrawn by the individual who holds the account.

    Now, we want to try——

    Mr. MANZULLO. No, I understand that, because a person can go in there I presume on the first day and say, ''I would like to draw out all of my money.'' There would be no restrictions on that, of course. But even if the money is held for 1 or 2 days, if there is electronic transfer made on day one on several thousand accounts and all the money is taken out on day three, if it is all taken out, then the bank does not have to worry about any debit charges for the whole month because there is nothing in there; is that correct?

    Mr. HAWKE. That is absolutely correct. That imputed interest value of the funds that are in the account is something that will be taken into account in the pricing of the account.

    We found in the Texas project, for example, that the value of float to the institution was about 20 cents per month per account because the withdrawals were so front-end loaded. In other words, the money came out so quickly that the value to the institution was about 20 cents.

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    Mr. MANZULLO. So have you some data on that?

    Mr. HAWKE. Oh, yes. And one of the things I think we have to all keep in mind is that float is one of the things that is going to pay for this account. It is going to help drive the price of the account down. So, it is not a windfall to the institution. It is one of the things that will be explicitly taken into account by institutions as they formulate their pricing of the account. Their expectation for how long funds will stay on deposit with them is an important part of the pricing of the account.

    Mr. MANZULLO. And people that presently receive direct deposit will not be forced to change institutions?

    Mr. HAWKE. Absolutely not.

    Mr. MANZULLO. But will small banks in small communities—what if a small bank in a small community isn't set up to handle this type of an account? They cannot compete for the contract?

    Mr. HAWKE. What we are going to do is define the geographic areas in which we are going to do these procurements. And we haven't really figured out whether that should be a very large area or a very small area. That is, again, one of the things that we are requesting comment on. But there will be an opportunity for small institutions to join together in consortiums or networks to provide the account that we define within the geographic area. We hope that will happen. We think that is the way for small institutions to participate in this program.
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    Mr. MANZULLO. Thank you.

    My comment is maybe to those people who don't bank, if you have an institution that looks like a shoe box or sugar bowl, that people will become accustomed to banking if they are not doing that now.

    Chairman LEACH. Thank you. Mr. Manzullo represents the State of Illinois where there is a history of shoe boxes.

    Mr. Watt, I would be happy to go for another 5 minutes with you or if you would prefer to wait until the vote, it is up to you.

    Mr. WATT. I think my preference would be to wait, but I will go with whatever you would like.

    Chairman LEACH. Let me ask Mr. Snowbarger if he would like to go quickly. Let me recognize Mr. Snowbarger. Go ahead.

    Mr. SNOWBARGER. I think my question can be handled fairly quickly.

    You have had a number of questions today about recipients of benefits from the Federal Government, but my understanding is this is a broader program than that, and it would also be electronic payments to vendors to the Federal Government. And so since the other issue is being covered by others, I am not concerned about that. That is being covered pretty thoroughly.
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    My question is there is a study that has been done that shows that there is going to be potentially considerable costs to small businesses to set up these accounts to get information—particularly about remittances—as much as maybe $1,500 to get geared up and maybe $500 a year. And I would really just like to know what your studies have shown thus far about the cost for small businesses trying to use this system?

    Mr. HAWKE. Well, there shouldn't be any particular cost to small businesses. Banks may have to get the software and the programs that are available to pass on the information that is necessary. But we think that EFT will provide a real benefit for small businesses. Today when a small business vendor gets a check from the Government for goods or services that they have sold they may have an invoice number on the check and then they have to go through their records and actually link it up with precisely the invoice that it relates to.

    With EFT, when the process of electronic data interchange is developed, and we think that will be next year, the payment information that will be transmitted electronically will include a much more precise definition of exactly what the remittance relates to. So, we think there are going to be cost savings and improvements here for small businesses in this.

    Mr. SNOWBARGER. But you indicated there would probably be costs to the financial institutions to gear up to provide that information back to the customer.

    Mr. HAWKE. No, to get——

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    Mr. SNOWBARGER. Whether it is software costs or——

    Mr. HAWKE. That may be $500 for the financial institution to get the software to be able to pass on electronic data interchange information to their customers.

    Mr. SNOWBARGER. But don't you think there is going to be any increased charge to businesses from the financial institutions?

    Mr. HAWKE. We would certainly hope not. The whole idea is to make this process cheaper by getting paper out of the system.

    Mr. SNOWBARGER. I understand that, yet at the same time, it is a similar situation to those who are not familiar with doing business that way now. They have got a learning curve, and again they have got to change their bookkeeping systems and things of that nature. I think there are a lot of people who are uncomfortable handling checks and trying to track that back to a particular invoice that may be uncomfortable and, frankly, may have some costs to change the way they do business.

    Mr. HAWKE. In addition, Mr. Snowbarger, the Government is increasingly using credit cards to procure services from small businesses, which really improves that process significantly. That is something we are encouraging as well.

    Mr. SNOWBARGER. Mr. Chairman, that was my line of questioning and I appreciate it.

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    Chairman LEACH. Thank you. Then the hearing will be in recess pending the vote.


    Chairman LEACH. The hearing will reconvene.

    Mr. Watt.

    Mr. WATT. Thank you, Mr. Chairman. I have a couple of questions to ask that I believe are kind of extensions of some of the questions that have already been asked, and get to a slightly different level of those questions.

    As Members of the Banking Committee, I think we are probably justified in assuming that every American is a rational, economic person. In reality, if everybody were rational, economic people we would not have all of these check cashing entities in our communities that are thriving. Those people would already be using banks. They are cheaper, we believe.

    So, I think my theory is that human nature is driven not only by economic considerations but by convenience considerations and other considerations. Without professing to have an opinion about this one way or another, because I do not, and for that I express my appreciation to the Chairman for having these hearings early in the process so that we can really work through some of these issues, it strikes me as being somewhat counterproductive to go through a bidding process and limit this contract to one bank.

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    A community bank is not going to have branches all over the city of Charlotte, for example. They serve one community. Or a credit union is not going to have branches, so they just are not going to be able to bid because they cannot provide the convenience that would be required under the bid process, I assume.

    But the maximum of convenience is the free market that has gotten branches dispersed. Economic institutions are now, I shouldn't even refer to them as branches, dispersed because not necessarily limiting that to banks.

    I guess the question I am asking is, have you thought through the process of why even the necessity of having a bid? I mean, you have got all of the information. You know in the South, EBTs are charging $1.92 on average for EBT accounts. You know that some other places they are charging $3 a month on EBT accounts. What I did not hear you say was what they were charging, on average, on people who already have EFT accounts already. But it seems to me that we are setting up a whole second-class bank account system simply for this group of people.

    Why wouldn't we just decide what made sense and expect all banks to get into the system for the sake of convenience and provide this service? And then be more aggressive with the recipients on the other end? We are being aggressive with them anyway. We are saying, look, you have got to do this. But right now you are saying you have got to do it and you have got to take a bus possibly all the way across town to get to a money machine or get to a branch bank that may not be in your community. At least there are some banks in most communities, some financial institutions, some check cashing institutions.

    What is the rationale for the bid process? Is there a way to do this without the bid process? And what is the rationale for limiting this to just insured banks as opposed to other financial institutions?
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    Mr. HAWKE. Mr. Watt, I think those are tremendously important questions and those are the very questions that we dealt with when we first tried to come to grips with the statutory mandate that Congress gave us to assure that all recipients who were required to receive payments electronically, in the words of the statute, have access to an account at a financial institution at reasonable cost and with the same consumer protections that are available to others.

    The first question we asked is, how do we fulfill that mandate? And we started by dealing with exactly what you suggested: Going to the private sector and trying to encourage private institutions to develop account alternatives.

    It would have been our fondest hope that the private sector would have developed a whole range of products and services that were available to recipients so we could have said that there was nothing that we had to do. But as time went on, we became concerned that we were not going to be able to fulfill the mandate that Congress gave us unless we were more proactive and that is what gave rise to the concept of developing a bare bones account that we would be able to provide on a kind of a safety net basis so that if the private sector had not completely penetrated the market of the unbanked, made accounts available, that we had something that would be available to fulfill our mandate. That is how we got there.

    Now, in terms of community banks being able to participate, we are very anxious to have community banks participate, and I think it is important to recognize that it is not necessarily the institution's own branches or their own ATMs that are going to be points of access. Institutions that are wired into networks and point-of-sale terminals at retailers are going to be able to provide access points even beyond the branches and ATMs that they themselves own and have deployed out in the community.
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    It may be possible, quite readily possible, for a small community bank, either on its own or in a consortium with other banks, and through networks of ATMs and POS terminals, to be able to provide a wide-range of access points for recipients who might be offered the Electronic Transfer Account that we design.

    We are going to be exploring that in the process of designing this account. But we went through exactly the same kind of thought process that you are suggesting in getting to where we are today.

    Mr. WATT. It seems to me you have gotten to the point now you are going to do a bid. That question is over, I think.

    Mr. HAWKE. We did not see any other way that we could be assured that we were going to fulfill the congressional mandate of being able to assure access to an account at reasonable cost.

    Mr. WATT. Thank you, Mr. Chairman. I think my time has expired.

    Chairman LEACH. Mr. Bentsen.

    Mr. BENTSEN. Thank you, Mr. Chairman.

    Mr. Hawke, back on the question Mr. Watt raised, there is nothing, of course, that would preclude any bank or thrift or insured depository institution from developing a bare bones account, and there is nothing that would preclude Treasury from agreeing to transfer the funds to them, right?
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    Mr. HAWKE. Oh, absolutely.

    Mr. BENTSEN. Even after you did a bid with one institution or a consortium of institutions?

    Mr. HAWKE. Absolutely. And we have had in place for some time a voluntary program that we call Direct Deposit too, in which we define a kind of account and encourage banks to offer it. It has not had a great deal of reception yet, but we are doing exactly what you suggest.

    Mr. BENTSEN. In your testimony you say that the account that you are trying to develop would be a debit card based account. And you mentioned in your testimony—or in later discussion that you would assume that there would be fee-free withdrawals allowed and maybe some checking and all. And I would encourage you to pursue it. I am not one who thinks we ought to ban ATM fees. I think that is a market function.

    But we are talking about a very market sensitive part of the population here. Particularly those in Mel's district or parts of my district where there really aren't lots of institutions and that is why they are using other types of financial services.

    But I want to raise another issue. We had an exhaustive hearing yesterday on the whole issue of debit cards. Are you talking in terms of just traditional ATM cards or are you talking about debit cards with Visa or MasterCard that can be used or are you silent on that issue?
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    Mr. HAWKE. Well, this would not be a Visa or MasterCard. It would be a debit card that would be issued probably with an ETA logo on it. We would define the attributes of the card and it would be offered by our contractor.

    Mr. BENTSEN. But it wouldn't be a debit card like this where not only could they use it at the ATM with a PIN code, but they could also go to the grocery store or book store or wherever and have a signed authorization rather than a PIN authorization? Or you just don't really address that issue?

    Mr. HAWKE. Well, they could use it at any point-of-sale terminal as an online debit card.

    Mr. BENTSEN. Well, because I think this is where you are going to get—I am not necessarily opposed to these cards, either. Although this morning after the hearing yesterday, I made sure I knew where both of them were. The problem I have got—and these cards, as you know, are not credit cards and therefore they are governed by EFTA and not TILA but they are a gray area between EFTA and TILA and I have some concern that there is risk to the consumer where—not a PIN code risk, but where somebody goes out and buys a lawn mower or whatever and you didn't get it.

    Now, the companies, as you may know from yesterday's hearings, and Treasury didn't testify, but the companies have set a standard which is equivalent or better than TILA, saying that the liability of the consumer would not be $500, but would be zero dollars and that, I think, is very good. But I think Treasury ought to look at both in terms of general consumers, but in particular these consumers, because we are talking about somewhat vulnerable consumers, this issue. Because the problem that exists, I think, even though you have a zero-dollar liability, that the consumer in this case, unlike a credit card, somebody goes out and purchases $500 worth of stuff that I didn't purchase, if they do that to Ken Bentsen, and I can probably get by for the month while I go back to the bank and argue over the issue and get my money back and get any fees back or whatever, but for the average Social Security recipient in Texas, which I think brings in about $750 a month, that may be a different matter. And that is my real concern.
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    Mr. HAWKE. Mr. Bentsen, our card would be an online PIN-based debit card. The recipient would be able to use it at any point-of-sale terminal but it would have to be with a PIN number. It would not be the kind of offline card that you are describing where anybody who came in possession of the card could use it without having the PIN number.

    Mr. BENTSEN. Well, I appreciate that. And let me just ask, which you can provide for the record, if you will, and you may have addressed this in Mr. McCollum's comments and this may be stating the obvious, but banks which provide this service, in particular banks if you go to a bid and have a contract, banks which are not part of that but choose to provide this service, presumably this would be included as part of the service issue for purposes of the CRA?

    Mr. HAWKE. We would expect so, yes.

    Mr. BENTSEN. Thank you. Thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Mr. Bentsen.

    Mr. Jackson.

    Mr. JACKSON. Thank you, Mr. Chairman. Needless to say, Mr. Chairman, I have a lot of problems with some of what has transpired here today. And I want to pick up on Mr. Bentsen's last question by saying that I understand that banks may receive some CRA act credit for participating in the EFT process and legislation will make similar credit available to all participating banks.
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    What is your rationale for this, Secretary Hawke? And are they then to expect that participating banks will be relieved of their obligation to invest in communities where recipient populations are concentrated simply because we have made the process of transferring their benefits to them more efficiently?

    Mr. HAWKE. The answer to that last question, Mr. Jackson, is emphatically no. But under the existing CRA regulation there is a provision for giving some CRA credit for services provided by institutions within their communities and this would fall within the scope of the existing regulation. It would most definitely not be a replacement for the actual community investment obligations.

    Mr. JACKSON. But it does satisfy part of the requirement?

    Mr. HAWKE. It is one of the things that can be taken into account in determining the CRA rating of the individual institution, just as it is under today's regulations.

    Mr. JACKSON. Let me say, Mr. Chairman, that before I became a Member of this institution, in my other life I considered going into this business. I was approached by several industries who indicated that they wanted me to participate and work with them on this particular process. And there should be no doubt in our minds as Members that the profit derived in this process comes from the float that is created by the time within which the Treasury disburses these benefits and the time within which the actual end recipient receives them.
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    And I am wondering as a result of that anticipated float, and that is why I would imagine there have been so many bankers who I have had an opportunity to work with on other issues present today but not oftentimes present when it comes to distributing resources to poor historically, I am wondering is there any possible way, Mr. Hawke, that the Treasury Department has considered that that float should be attributed or given directly to, as interest, to the end recipient of that Federal benefit since it is their money?

    Mr. HAWKE. Mr. Jackson, the first question is really what expectation for float will there be with respect to these accounts, and the experience that we have had in the Texas pilot program, as I mentioned before, indicates that the expectations for the float, depending on how the account is configured, might be very small. In Texas, the calculation that we have got is that the value of float was like 20 cents a month per account.

    Whatever the value of float is—whether there is or is not float—is going to depend on what the attributes of the account are, and we expect that the bidding institutions are going to take that into account in factoring their bids. In other words, what their expectation is for float is going to reduce the price that they charge.

    Mr. JACKSON. Presently, the Department of the Treasury sends a Social Security check to a recipient. The float is obviously 2 or 3 days, depending upon what the mail is, but it is in the check. No institution is controlling it. There is no interest to be gained from that particular check. But now if we go to the electronic process, you are telling me that someone's $200 check might end up with an ATM fee or some interest accrued to the institution that doesn't make it back to the person whose $200 check is actually being held by the financial institution.
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    You are telling me that with their debit card they can withdraw money up to a certain point and then there may be a transaction fee associated with receiving their $200 check. I am seeing a series of fees that are associated with a $200 Social Security check for an end-using recipient that presently does not exist if the Treasury sends the recipient their money directly.

    Mr. HAWKE. Mr. Jackson, that is not quite right. The present system of disbursing checks is really quite complicated, but suffice it to say that checks are mailed to arrive on the payment date, and float is taken into account in the timing of the funding of those checks. We try to absolutely minimize the availability of float in the disbursement of Government checks today. And in the ETA, the account that we are going to develop, we expect that the availability of float, whatever it is, is probably going to be quite little. Our consultants are doing analyses for us right now on that subject. But this is going to be one of the things that is going to reduce the cost of this account to the individuals. There is no free lunch here.

    Mr. JACKSON. Let me make, if I can, Mr. Secretary, respectfully I want to make one other point and, Mr. Chairman, thanks for your indulgence.

    Presently, and I am not a big fan of currency exchanges that exist in my district or anywhere in the country for that matter, but if a $200 Social Security check arrives at a currency exchange, the end user, the recipient may take their $200 check and at that time they may seek four or five different money orders for the purpose of paying their respective bills, rent, heat, utilities, phone bills, and so forth.

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    I would imagine, however, though, if they are now receiving their benefits through ATMs or receiving their benefits through a bank that there is now some fee associated with receiving money orders from a bank, if in fact they wait in a line to receive them, that may indeed be different and higher than the fees they presently receive for five or six utility related checks from their benefit.

    Isn't that another concern that this body should have with respect to the benefit transfer?

    Mr. HAWKE. Mr. Jackson, on the contrary, I think the opportunity for electronic payments out of these accounts offers consumers the ability to make payments to third parties without incurring the fees for money orders. The banks are now set up so that they can make third-party payments electronically at very, very low cost and that cost saving can be passed on to the consumers.

    One of the things that we are requesting comment on in this process is whether we should require that there be some minimum number of electronic third-party payments attached to the basic monthly charge for this account, so that individuals could pay their utilities or other payments for no additional cost or for very modest additional cost electronically. And probably it would be much less than the cost of going out and buying a money order from a conventional payment provider.

    Mr. JACKSON. Except there is one behavioral problem, and Mr. Chairman, I realize my time has expired, that for years they have been receiving their money by a check, they have sought these money orders, and now suddenly for the most part they will never see their check, they will never participate in the behavioral process that they have engaged in for years, and yet suddenly we are going to expect them just to change and the money they supposedly receive from the Federal Government is something that they technically never see.
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    Mr. HAWKE. Changing behavior is a major challenge for this process. That is one of the reasons that we are planning the extensive public education campaign, to try to persuade people of the benefits of electronic transfer because we think it offers a lot of benefits. And I stress again that anybody who would incur a financial hardship by reason of the ETA will be able to have the election to continue to receive the paper check.

    Mr. JACKSON. Unanimous consent, Mr. Chairman, that my opening statement be placed in the record.

    Chairman LEACH. Without objection.

    We have just one more Member present. I would like to turn to Mr. Sherman, give him his full 5 minutes, and then we might be able to excuse Mr. Hawke.

    Mr. Sherman.

    Mr. SHERMAN. Time is limited. I have more questions than time, so I will ask a whole list of questions and ask you to respond in writing.

    The first picks up on the gentleman's previous question, and that is the change in the float. Right now you send out a Social Security check designed to arrive on the first of the month. My typical constituent, one person is named Molly, she is 90 years old, sometimes she cashes it on the second. Sometimes not until the fifth. Now the banking system is going to get their hands on that money on the first. Hopefully, the money they make on that float is going to be passed on to consumers in lower costs for these new accounts that are going to be created, or for those who already have accounts, perhaps they will get a better deal from their banks.
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    What I would like to know is what about the Government's loss in the float? Which Government agency or account benefits from the fact that there is, I assume, an average 2-, 3-, or 4-day delay between when a Social Security check arrives and when it actually hits the Government account for payment?

    Mr. HAWKE. Can I answer that?

    Mr. SHERMAN. No, because I don't have time. I am going to ask you to respond in writing to these questions. There are too many, but I appreciate your interest in my questions.

    The second is that I hope that after this bidding process you have a plan to rebid 2-, 3-, or 4-years down the road when the dust settles, because due to the uncertainty I can see a number of financial institutions bidding very low, saying, in effect, we are not going to cut that good a deal for the consumer because we don't know how we are going to get burned 2 years down the road; they will have more float and hopefully there will be more competition after the market gets established.

    The next question I would like you to provide my office and perhaps some in the committee would be interested in the materials used by you and the Social Security Administration to tell people about the benefits of electronic funds transfer.

    One thing I do in my franked mail is try to explain Government programs in language that is hopefully slightly less boring or confusing than the average Government document. And if I can see where you are on that, I can see what I can do to try to explain things to my constituents.
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    The next issue is we have talked about the unbanked. I also represent a lot of people who are extremely well-banked. They have broker/dealer accounts, they have money market accounts, they have mutual funds. I would hope that you would allow people, if they voluntarily want to do it, to have their Social Security check credited immediately to a money market account, mutual fund, or broker/dealer account. And if that takes legislation, please, work with my office. If it does not require legislation—or can Social Security recipients do that now?

    Mr. HAWKE. That is provided for in the regulation.

    Mr. SHERMAN. So that will be allowed. Thank you.

    The next issue is basically the most powerful physical force in the universe which is inertia and this inertia can work in a number of different ways, but one of them is when a Social Security recipient dies. Right now you send out a check to someone who has died and you may find out 2 or 3 months later. The check, due to the inertia and due to the honesty of the friends and family involved, is not actually negotiated so you never lose the money out of the Government account.

    In contrast, what is going to happen now? You are going to wire the money, and you have experience with this already because you have millions of people with voluntary electronic funds transfer. You are going to wire the money into the account at least for 1 month after death, maybe 10-, 12-, or 15-months after death. It is going to cost a lot more than 43 cents to persuade the financial institution or the family involved to send you back the money. And then, of course, you don't need any forgery or any ID to steal the money from the dead person who may be the friend or the family member. All you need is that card and the knowledge of the PIN number. So, have you factored in what the additional cost could be?
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    Chairman LEACH. If I could interrupt briefly, because of the vote, I am going to ask that you put your other questions in the record in writing. We will request that the Secretary will respond in writing.

    I would just like to conclude with a comment. I want to thank Mr. Gephardt for naming to the committee what is obviously a stellar new Member, as reflected in these questions. They are as serious as any of the questions raised today, and I suspect the ones to follow will reflect the same degree of seriousness.

    I would like you to respond in writing and certainly to respond to the committee in that sense.

    Mr. HAWKE. We would be pleased to do that.

    Mr. SHERMAN. Mr. Chairman, thank you very much.

    Chairman LEACH. Let me notify the next witnesses that we will reconvene at 1:30. The hearing is in recess.


    Chairman LEACH. The hearing will reconvene. And let me apologize to the witnesses. We had a series of back-to-back votes. I thought there would be just one, but there proved to be four or five.
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    And so let me welcome the next panel, which is composed of Mr. W. Page Ogden, who is President of Britton & Koontz National Bank in Natchez, Mississippi, testifying on behalf of the American Bankers Association; Ms. Viveca Ware, who is Director of Payment Systems of the Independent Bankers Association of America, and we are sorry that Mr. Sheehan had to leave to catch a plane and we extend to him our apologies. Mr. Brian Smith, who is Director of Policy and Economic Research for America's Community Bankers will be our third panelist, and our final panelist on this panel will be Mr. Russell Chacon, who is Vice President of NationsBank in Charlotte, North Carolina, and the State of Iowa. He will be representing the Consumer Bankers Association.

    Unless there is a prior arrangement, I will go in this order. Let me ask the panelists, is that appropriate?

    Let me begin with Mr. Ogden.


    Mr. OGDEN. Thank you, Mr. Chairman. I am Page Ogden, President and CEO of Britton and Koontz First National Bank in Natchez, Mississippi. I am pleased to be here to present the views of the American Bankers Association on the implementation of EFT '99. We have submitted additional written testimony for the panel's consideration.

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    EFT '99 has an ambitious goal, to eliminate virtually all paper Government checks. It will have a big impact on millions of people who receive Government benefits and venders who do business with the Government.

    We have made good progress in some areas such as Social Security, where 65 percent of payments are currently made by direct deposit. But overall, we have a long way to go and a short time to get there.

    In my statement this afternoon, I would like to make three points about the Treasury's and the banking industry's efforts to facilitate the transition.

    First, while we have not thoroughly reviewed the Treasury proposal, our initial reaction is that their approach is reasonable and appropriate.

    Second, last year, the banking industry took an active role in educating bankers about EFT '99. Next year, we will undertake a consumer outreach and education effort. Our goal is to reach people without a banking relationship, and to help them better understand how to use a bank account.

    Third, we that believe that a new all-electronic bank account is the best way to facilitate implementation of EFT '99. Such an account may appeal to all types of bank customers, whether or not they receive Government payments.

    As you know, Mr. Chairman, the Treasury's proposal was released just last week. While we have not had sufficient time to review this proposal in detail, our initial reaction is quite positive.
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    For example, we support basing the waiver process on a self-certification of hardship rather than on a complicated application process. We believe this is a prudent and realistic approach, given the magnitude of the effort.

    The proposed rule allows insured depository institutions to partner with third parties such as grocery stores, other retail outlets, and check cashers to provide delivery of electronic payments. While we support the partnering concept, we believe that policymakers need to consider the expense of maintaining individual accounts for people who deal with third-party providers. Efficiency may suggest that a master account be permitted that would pass through deposit insurance coverage to individual beneficiaries.

    The rule proposes to offer an electronic transfer account to people without depository accounts. These accounts will be provided by banking institutions contracting with the Treasury. We believe that depository institutions are uniquely positioned to provide this service, and that competitive bidding for the Treasury contract will ensure the best services at a reasonable price.

    We agree that Treasury should not regulate prices of deposit services provided by private institutions in a competitive marketplace. Price setting has never worked. It ends up in an administrative nightmare, raising costs and limiting the availability of services. Recipients of Government payments will have many competitively priced products from which to choose.

    My second point deals with our education efforts. Over the past year, ABA has worked to prepare the banking industry to meet the requirements of the Act. In the coming year, we will focus on consumer education, which is critical to the overall success of EFT. A substantial effort will be necessary by all parties, the Federal Government, the financial services industry, consumer groups, retiree groups and automated clearinghouses to reassure benefit recipients that electronic funds delivery is both safe and efficient. However, we also have to be realistic and recognize that some recipients will never be convinced. In fact, this is why we support the self-certification waiver process proposed by the Treasury.
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    My final point is that fully electronic accounts are important not only for the implementation of EFT '99, they will also be attractive to many current bank customers whether they receive Government benefits or not. We believe that bank-provided electronic accounts will encourage more people to open an account, and will reduce the need for Treasury's special Electronic Transfer Accounts. We ask for your support, Mr. Chairman, in streamlining the regulatory environment surrounding electronic banking and addressing any statutory changes that may be necessary to facilitate the transition.

    In conclusion, EFT '99 presents many challenges. It will fundamentally change the way we use the financial system. It is the beginning of the widespread conversion from a paper-based financial system to a system based on electronics.

    We believe the Treasury's proposed rule is a reasonable and realistic approach to this mammoth undertaking. I would be glad to answer any questions the Members of the committee may have. Thank you.

    Chairman LEACH. Thank you very much Mr. Ogden.

    Ms. Ware.


    Ms. WARE. Good afternoon, Mr. Chairman. I am Viveca Ware, Director of Payment Systems for the Independent Bankers Association of America. I am substituting this afternoon for Thomas J. Sheehan, who had to depart in order to make an evening commitment. I am pleased to provide this testimony regarding the Treasury Department's proposed rule implementing the Debt Collection Improvement Act of 1996.
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    The IBAA is a long-time advocate of direct deposit, and over the years has worked closely with the Treasury's Financial Management Service and the Social Security Administration to promote the use of direct deposit by Federal benefit recipients.

    Community banks offer a broad array of financial services tailored to meet the needs of various segments within their markets. These services include cashing checks for individuals who do not maintain a bank account, basic or low-cost checking and savings accounts and numerous other products. Despite the availability of low-cost bank accounts, community banks report that the majority of individuals within their market areas without bank accounts do not take advantage of these services.

    We believe that implementation of phase 1 has not been problematic thus far. Many community banks report little difficulty convincing existing bank customers receiving checks to convert to direct deposit once the customers understand that it is the Federal Government and not the bank imposing the direct deposit requirement.

    However, there are many existing bank customers that are averse to direct deposit and will likely wait until program enrollment is an absolute requirement. To our knowledge, there are few formalized community bank marketing campaigns. Many community banks are apprehensive about moving forward with product development or marketing given the uncertainty regarding the final rules governing these accounts.

    Also, community banks typically have very small marketing budgets. As a result, many community banks are waiting for the Treasury, Social Security Administration, and other Federal agencies to develop marketing materials that will enable them to piggyback their bank's efforts on marketing campaigns launched at the national level.
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    With the goal of increasing community bank awareness of the new EFT requirements, IBAA has been active on a number of fronts. Last fall, we distributed information kits on EFT to IBAA members. IBAA member banks also participated in focus groups and surveys conducted by consultants hired by the Treasury.

    IBAA is also pleased to announce that it is in the process of adding several features to his web site which have implications for EFT. EFT will also be addressed in various educational forums.

    Consumer advocates and Members of Congress have asserted that EFT will provide financial institutions a windfall from fees paid by Federal payment recipients. The IBAA disagrees with this assertion. Financial institutions already offer low-cost account alternatives that benefit recipients currently utilize. Also EFT will not deprive payment recipients of the opportunity to shop for the most reasonably priced account.

    Finally, the proposed regulations allow payment recipients to continue to receive checks if EFT would impose a hardship. There is also concern about the potential imposition of ATM surcharges on Federal payment recipients accessing their funds at an ATM not owned by the recipient's bank.

    IBAA notes that market forces are continuing to provide alternatives for individuals sensitive to ATM surcharges. For example, a number of financial institutions, commercial banks, savings and loans, and credit unions have formed surcharge-free ATM alliances to promote the availability of surcharge-free ATMs to their customers. In addition, several ATM networks are launching programs in which participating banks would not surcharge each other's customers, but would surcharge others. We believe that market forces will continue to create innovative surcharge-free ATM access.
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    The numerous issues associated with Electronic Transfer Accounts, or ETAs, is the most problematic aspect of the proposed rule. Since the proposed rule was released on September the 16th, the IBAA has not had an opportunity to solicit comments from its members. We believe that many of the anticompetitive concerns we expressed in testimony to this committee in April 1996 regarding the solicitation process for the direct Federal EBT Program could be applicable to the ETA solicitation process. Whether these anticompetitive concerns materialize is dependent on the geographic areas covered by the solicitation process and the account attributes.

    At first blush, we believe the Treasury's proposed rule is reasonable for all stakeholders, including payment recipients, financial institutions, nonbank entities and Federal agencies. I would like to reiterate, however, that community banks could potentially have concerns regarding ETAs.

    Implementation of the act is a daunting, but achievable task. The implementation's success will depend on the Federal Government and the financial institutions working closely and cooperatively to address the concerns of Federal payment recipients. Thank you.

    Chairman LEACH. Thank you. We have nine more witnesses and so we are very concerned at getting all the statements in, but I would be happy to put your full statement in the record.

    Mr. Smith.

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    Mr. SMITH. Thank you, Mr. Chairman.

    Chairman LEACH. By the way, all of your statements will be submitted for the record.


    Mr. SMITH. Mr. Chairman it is a pleasure to present the views of America's Community Bankers on the implementation of EFT '99 and the 1996 Act. I am Brian Smith, Director of Policy and Economic Research for America's Community Bankers. Our members service millions of consumers and businesses that will be affected by this law and the Treasury regulation.

    We have tried to be proactive on this important topic, as ABA and IBAA have been. In late 1996, our research department began to compile data on the financial services offerings of our members and one of the areas covered was availability of direct deposit and basic banking services.

    Virtually every institution that we surveyed, 97 percent of them, offered direct deposit. And this is the major population for which the Treasury's financial management arm has the task of dealing with the cutting of monthly checks by the Treasury, and the reason why the industry is quite confident that we can participate fully in converting most people to direct deposit.

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    Also two-thirds of our members offer special senior citizen banking programs and that percentage goes up even more as we look to larger institutions. With appropriate consumer education, switching the currently banked but paper-check Social Security recipients should be a manageable process. The unbanked segment will be much more of a challenge.

    Fortunately, many of our members, almost 40 percent of them, already offer special lifeline banking services and again that proportion rises as you look at larger institutions and these are ready-made vehicles for serving the currently unbanked.

    Crafting an all-electronic ATM access-only account will be a simple matter for institutions, even those that don't currently offer this type of account that the Treasury is considering as the default option. It is only available in 12 percent of institutions right now, but we suspect that is more because the existing customers have not looked to that type of account, rather than any technological barrier.

    One human issue which has to be dealt with is the reluctance of certain population segments who are currently not using direct deposit to deal with depository institutions. This reluctance will not be eliminated in a sterile, impersonal, remotely served current relationship. Fortunately, our members frequently have preexisting relationships with community service organizations that can partner with the bank in outreach and service provision.

    Equally fortunately, the revised CRA regulations can at least give some weight to the provision of financial services within the institution's designated service area, so we have both an incentive and the capacity to work in tandem with the Treasury, though we also agree that the float income from these accounts will not be particularly significant and may not even come close to covering the account maintenance charges that computer service bureaus charge per account.
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    The relatively limited revenue opportunities on that score are consistent with Treasury Under Secretary Hawke's expressed concerns that perhaps the industry isn't moving quite as fast as he would like. We are, however, doing better and gearing up as the regulations come out.

    On the issue of who should be able to interact with the Treasury for the purpose for providing this service, we agree that for technological reasons of the ACH hookup, it really has to be exclusively through depository institutions. As regard to waivers, the Treasury has crafted some sensible exceptions, especially ones for natural disasters, payments to recipients overseas, or on active duty in the armed services or law enforcement.

    The other reasons for exemption focus on physical disability, geographic remoteness or financial hardship, all of which are sensible rules. Of course, however, virtually anybody that really wants to avoid EFT transfer could find a way to do so.

    As regards the account features, we think the Treasury's plan for bidding out the relationship makes sense, but we also feel that at least as a bidding tie-breaker, community presence and partnership with community groups would also make some sense as a weighting factor.

    One other thing that may be helpful in this regard is that in the event of a forced placement to an ETA, perhaps there could be some way of making that process less intimidating by finding a way to include within the notice of the assignment some other commercial banks or depository institutions in the area that submitted competitive, if not winning bids, so that the customer has some additional choices.
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    Finally, I think in this area two other technical issues arise: The Y2K, year 2000, problem may add on some problems here and we have to address those to ensure a smooth transition to EFT. The Treasury has done a very good job on the EDI and vendor issues and we think that is going to work very well. In general, the Treasury has made a good start. The industry has to respond. We will do so and ACB will play its part. Thank you for this opportunity to express our views.

    Chairman LEACH. Thank you very much, Mr. Smith.

    Mr. Chacon.


    Mr. CHACON. Mr. Chairman and Members of the committee, my name is Russell Chacon. I am Vice President of NationsBank and appear before you today on behalf of the Consumer Bankers Association. CBA's focus is on retail and financial services, including deposit and electronic services and community reinvestment.

    Our members include institutions participating in EBT. NationsBank is the country's fifth largest financial institution with more than $240 billion in assets and operates in 16 States and the District of Columbia. CBA supports the principles of EFT '99, because mandating electronic payment will generate significant savings for the Federal Government.
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    As a result, the benefits distribution system will be safer for recipients and more efficient. It also provides the Federal Government and the financial services industry a unique opportunity to address the needs of approximately 10 million unbanked Federal benefits recipients.

    NationsBank, like other CBA members, has been a leader in offering basic banking accounts to consumers. Today, we offer a series of bank accounts targeted to different market segments. As with other CBA members, our range of accounts has expanded in the last few years as we have geared our product mix to satisfy the preferences of a broader spectrum of customers.

    In addition, CBA members are offering payroll and Government check cashing services to customers without accounts in predominantly low-and moderate-income neighborhoods, are providing unbanked individuals with access to their pay via ATM networks, are educating potential customers by working with nonprofit organizations, are offering access to accounts at terminals located in areas such as check-cashing stores, are creating partnerships to encourage the use of direct deposit by previously unbanked employees and are using technology in innovative ways to reach unserved customers.

    In February, CBA and the OCC sponsored a forum to explore methods for bringing the unbanked consumer into the financial mainstream. This forum brought together bankers, Government officials, community and consumer groups and academics. It provided valuable insight into the diversity of the unbanked population, the social and economic barriers to providing access to these households and the views and experiences of the financial services industry on financial access.
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    In the marketplace today, banks provide low-cost deposit accounts. We can do so because we have the freedom to be innovative and the flexibility to change the structure of the products we offer. Such flexibility is essential to the success of EFT '99. We have learned through our efforts to reach previously unserved consumers that one size does not fit all. Age, ethnicity, location, income levels, and personal experience all play a role in determining why a person does not use a bank, and how they will use one, given an opportunity.

    In its ETA rules, Treasury should give banks the ability to respond to these different needs by mandating minimum levels of service and consumer protections, then letting financial institutions determine the optimum delivery mechanisms and features. We have questions about the Treasury proposal including: who will own and control the account? How will banks comply with consumer protection regulations like Regulation E? Will payments directed to asset management and fiduciary accounts offered by banks be permitted?

    CBA believes that protecting consumers is important. Allowing financial institutions to provide these protections through innovative means should be given fair consideration. This may require relief from certain regulatory burdens. One of the most important aspects of preparing for EFT '99 is consumer education and training. The experience of CBA members in providing EBT and other services leads us to believe that the effort to prepare consumers for EFT will require enormous commitment of human and financial resources and time. One of the lessons that the banking industry has learned about consumer education is the importance of making churches and other grass-roots organizations a conduit.

    Favorable Community Reinvestment Act treatment would go to institutions that offer ETAs. This should not be used, however, to skew a bank's loan-to-deposit ratio or expand its assessment area.
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    CBA has been and continues to be supportive of Treasury's position that Federal payments are most appropriately directed to ensured depository institutions. Restricting the receipt of electronic benefits to depository institutions addresses the appropriate safety and soundness concerns of the Treasury Department, consumers and regulators.

    The waivers proposed by Treasury appear reasonable. We agree that financial institutions should not be involved in determining eligibility. However, it would be extremely useful to know Treasury's estimate of the number of expected waivers so that account volume can be accurately projected for the bidding process.

    Thank you for this opportunity. I would be happy to answer any questions.

    Chairman LEACH. Good. I appreciate that very much.

    It would appear that one of the questions Treasury is truly open on that is of really critical significance is how they define geographic regions. Is there consensus on this panel? Do each of you have different views on this? How would you describe the appropriate way to proceed?

    Mr. Ogden.

    Mr. OGDEN. Mr. Chairman, I know there will be a lot of debate over this issue. I certainly would not favor one institution ending up with the contract. I think we want some diversity in the process. Regions would be one way to look at this.
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    Chairman LEACH. How about States?

    Mr. OGDEN. States would be another option. I think as a practical matter, you are probably going to get the larger institutions doing the bidding on this. Representing a community bank, I see there is a great deal of opportunity to offer a product that may wind up being a lot better than the bare-bones product or whatever type product that we wind up with at the national level.

    Chairman LEACH. That is very interesting that banks might compete on not just price but quality of product.

    Mr. OGDEN. Absolutely.

    Chairman LEACH. Because that really hasn't been as much in the forefront. Let me throw out a thing from my own State, and one hesitates to draw attention to a circumstance that is single-State oriented, but in my State of Iowa, all banks, or the vast majority of banks are partial owners of a delivery system that is called Shazam. That is not the case in most States. A Shazam might be a bidder. I don't know. If you go regionally, that option might be precluded. Would that be good or bad to preclude that kind of option?

    Ms. WARE. Mr. Chairman, as I understand the ETA structure, it is possible for Shazam to partner with a financial institution or a number of financial institutions to offer ETAs in the full region serviced by the Shazam network or in a smaller region.
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    Chairman LEACH. Certainly Shazam is not a Federally insured institution and so one of the assumptions is that we go through a Federally insured institution.

    Mr. Smith.

    Mr. SMITH. One of the areas where there will be tradeoffs is this issue. Ideally for the customer service issues that were raised this morning, you would want relatively small areas so that the community institutions would be viable competitors. The problem is if you do that to a great extent, you ''Swiss cheese'' the entire area so that the other segments become a relatively unattractive area for someone else to bid on.

    So that our tradeoffs between assisting particular communities and then dealing with whatever is left in perhaps oftentimes rural areas.

    Ideally, it is the same issue as which comes up when institutions failed. Fortunately, it doesn't happen that often any more. When an institution fails and you are dividing out the customer relations, can you partially subdivide the service area, or is it better to do a whole institution deal? We would certainly like the option to have coalitions that can have the fronting bank as the bidder of record, but have preestablished relationships with other entities in a consortium format.

    Chairman LEACH. Do you think this has to be done in advance before a bid is submitted or is that up to the winner of the bid to proceed? For example, I can visualize a bid circumstance that might be fractionally advantageous to the Government that could be disadvantageous to the recipients of services.
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    So how you define original bid format is of seminal significance. And so then one of the questions is do you get enough input in advance to people that design these bids to ensure that that takes place? And are your associations actively prepared to do that sort of thing?

    Mr. SMITH. As a practical matter, that would probably be done at the State level, rather than the regional level.

    Chairman LEACH. Let us say that a major regional bank gets the original bid. If the bid does not include a requirement that the winning bid has to deal in certain ways with certain circumstances, the winning bidder may choose not to. I mean, so how the rulings are set up for which the original bid takes place would appear to be of significance that all of you are going to have to put input into.

    Ms. WARE. It is our plan to go out to the broader IBAA membership in the very near future to gain more information from them as to how they believe they can best participate in the process. And then in turn, communicate those characteristics or attributes to the Treasury in the hope that they will be incorporated.

    Chairman LEACH. Does IBAA have a task force on this?

    Ms. WARE. We have a payment systems subcommittee that focuses on payment systems, and I expect that task force to be the focus group for this effort.

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    Chairman LEACH. The focal point? Good. And so, as you visualize the process working, the first State Bank of McKokna would probably then subcontract to NationsBank? Is that the way you envision it?

    Mr. CHACON. That is one potential way.

    Ms. WARE. Or the same bank, such as Grundy National Bank, could enter into a partnership with Shazam.

    Chairman LEACH. Sure, I understand. Do any of you have any particular perspectives on timing? The sense one gets is that Treasury is wrestling with all the right issues and has at the same time made virtually no decisions, and one has the sense that we are moving toward a year delay. Is that good, bad or indifferent? Do all of you feel that we ought to stick with the 1999 timeframe or would you like it to lapse for a year? Do any of you have any feelings on this?

    Mr. OGDEN. I think the sooner we resolve a lot of these problems, the better. I think there probably will be a tendency by everyone, consumers, bankers, to wait. But we know EFT is a reality and we really just need to get on with it and come to some kind of consensus on what we need to do out there.

    Chairman LEACH. Is that the view of the rest of the panel?

    Mr. CHACON. I agree with Mr. Ogden. I would also say there are a few important steps that we want to make sure to allow time for such as consumer education. That is going to be a critical element of the success of EFT '99, and it is one example of an area that we would not want to cut short. The effectiveness of the program and what it takes to build an effective program should always be considered first rather than an arbitrarily imposed date.
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    Mr. SMITH. We will only get one chance to make a first impression with these customers that are currently unbanked and it has to be done right. And there is obviously again, a tradeoff between timing and the ability to prepare, certainly at some point, if we don't make significant progress by the middle of next year, then we will have a very difficult time in dealing with a January 1, 1999 date.

    Ms. WARE. We believe the middle of next year is a reasonable timeframe for establishing a final rule. But we would also recommend that the Treasury break out the ETA provisions and move forward as quickly as possible to adopt a final ruling regarding other aspects of EFT.

    Chairman LEACH. Thank you.

    Mr. Watt.

    Mr. WATT. Thank you, Mr. Chairman. I guess I can understand why NationsBank or First Union or the larger banks would so readily buy into the bid process. It is not as clear to me yet IBAA or the community bankers would just so readily accept that notion.

    Are you doing that because it is a fait accompli and you find that inevitable? Or are you doing it because you believe that is the only way to do it and the best way to do it?

    Ms. WARE. Well, IBAA has been a long-time supporter of direct deposit. We engaged in conversations with the Treasury Department on numerous occasions about how we could get more unbanked recipients to accept direct deposit into a bank account. And as a result of those conversations, the Direct Deposit Too model was developed. And that model essentially gives banks the flexibility of designing an electronic access account.
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    And actually the banks would have some flexibility in terms of adding on other products such as bill payment services. They could accept deposits from other sources but they would not have check writing capabilities. That is the primary difference between a traditional bank account. And that is certainly one way that smaller financial institutions can compete.

    We expressed concerns about the solicitation process for EBT, and that certainly had the implications in a number of areas for our members. We remain concerned and that is why we are reserving judgment regarding the ETA process until we can get more information.

    Mr. WATT. I guess that is what I am asking about, the ETA process. It sounded to me like from Mr. Hawke's testimony, Secretary Hawke's testimony, that it has already been determined that that is going to be bid. And I understood the two of you, Ms. Ware and Mr. Smith, to basically start from that assumption.

    It seems to me that once that is bid and it goes to a bank, that is it forever. I mean, I don't see us going back and saying 2 years from now, OK, we will rebid this thing. We are going to move all of these accounts from NationsBank to First Union or from NationsBank to somebody else.

    The question I am asking is, should we be necessarily accepting the notion that the ETA accounts ought to bid, as opposed to setting up a system where all banks, regardless of size, get to participate or compete, not on a bidding basis but on an ongoing basis the way the competition is set up now?
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    Mr. SMITH. Well, our hope is—a measure of the success of the project will be if only a relatively few number of recipients ever go into the ETA process at all so that the smaller we can make that group, the better we will have succeeded in the interim.

    Mr. WATT. One way to do that is to fashion that in the same way as the accounts that are now out there existing. And then, basically, tell recipients that they are going to have to go and select a bank. That does not involve a bid process. What it involves is an education process to recipients and maybe it involves sending them a list of five banks and saying these are the banks that are physically closest to your residence and you can go and select whichever one of those you want for convenience purposes, but we have got you a deal that is the best deal we can get for the recipient.

    Mr. SMITH. Well, that is exactly the sort of halfway measure proposed here that in addition to saying you are going to be force-placed at this bank, here are some others that offer similar types of services.

    Mr. WATT. But the bid is going to leave that out, as I understand it.

    Mr. SMITH. We are suggesting that notification process be adapted. The one reason for the bid that I think the Treasury has is that the Treasury is spending the recipient's money in the sense that the revenues for the winning bidder are coming from the account holders or the eventual account holders so they are trying in a fiduciary capacity to try to minimize that. But you are absolutely right. The point you raised that the institution may not be the most convenient for all in the area.
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    Mr. WATT. All the more reason, it seems to me, that the customer ought to have some choices rather than being told, look, you are going to go to one bank. I mean, maybe I am missing something here. I do not have a fixed opinion about this. I hope nothing that I have said either in my questioning of Secretary Hawke or of this panel indicates that.

    I don't have a bias against big banks. I have got some of the biggest banks in America in my congressional district, including NationsBank and First Union and Wachovia, all of these based in my congressional district, so I cannot afford to have a bias against big banks for any kind of reasons, political or otherwise.

    But I kind of likened this to the argument we had in Charlotte about where to place the colosseum and where to place the football stadium. We put the colosseum way out because it was out on the superhighway and we found that there were massive traffic jams. We put the football stadium downtown because we had all of these streets coming to it already and we have got all of these banks out there and all of these options now that people have and here we go and put—it sounds like we are getting ready to put it at the end of a dead-end street and create a massive traffic jam.

    Mr. OGDEN. Mr. Watt, one of the things that struck me with the Treasury survey was the fact that 60 percent or so of the so-called unbanked recipients—and I hate to use that word, ''unbanked'' because in my town of Natchez, Mississippi, when the people come to our bank to cash their checks, they think of the Britton & Koontz bank as their bank and I am glad they do. But 60 percent of them are coming to the banks already, and another 20 or 30 percent are coming to the grocery stores to get their checks cashed.
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    I do not want to underestimate the voices of these citizens, and I think that banks all across the country are going to be a little bit under the gun on this. Our citizens are not going to necessarily want to opt for that Treasury account. They are going to want us to do something. And if we don't do something we are going to hear from them.

    I think there is a lot of built-in pressure over the coming year for the banking industry, especially community banks, to address the issue of what we do here.

    One other thing that has struck me about this whole process is that we really are talking about not only the elimination of paper, but the reduction of use of cash. I was thinking about this. If you get a $400 average check out there and you have 10 million people that don't have checking accounts at banks, there is a huge staging process that goes on every month. And I guess because I am in a community bank and I am around the vault and I am around the people, I see this. But 10 million times $400, I guess if my math is right, that is about $4 billion that the banks stage every month and distribute to people who come in and cash their checks.

    That means that elderly people are walking out on the street with money on their person that has got to last them the whole month. And I personally, like many bankers like myself, would like to see that change. This whole process of the card account is in tune with the increasing use of debit cards.

    The State of Mississippi, as other States are, is implementing EBT. So, we are moving in this direction of electronic transactions. And one aspect of this is not just to eliminate paper, but to reduce some of the cash that is just floating around out there. We offer a Deposit Too account and we have a debit card with the account. Everybody is waiting for the deadline. Our customers are waiting for the deadline. They do not believe that they are going to see the end of paper. And we have talked to them in the lobbies and they say, oh, I don't believe that is going to happen.
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    But if we can make this transfer to a card, we have got the opportunity to use that card to spend at point-of-sale terminals, to eliminate so much use of cash, and I really think that is in the public interest long range.

    Mr. WATT. I have no argument with that. I am not here to argue about that.

    Ms. WARE. I would just like to note that IBAA has not signed off on the competitive solicitation process. But before we move forward, we have to get more input from our members. And we will be doing that in the coming months so that we can follow with official comments.

    Mr. SMITH. And that goes for us, too. The regulations are very new. They only came out last week and so we are looking at them to see how they fit with the entire range of our membership. Not just the very large ones, but also the smaller ones.

    Mr. WATT. Mr. Chairman, I think I have overstayed my welcome.

    Chairman LEACH. Well, you have not, but I want to thank the witnesses. I think you have done a wonderful job and we appreciate your input. I do have the sense, however, that just as Treasury has not reached a number of judgments that one might have thought they would have reach by this point in time, neither has there been extensive focusing by a lot of parties on the outside. I think this is something that there is going to have to be an awful lot of thought on in advance that proceeds what we are doing here. I think that you have framed the issues, but I don't think we are at the point of Treasury being able to reach definitive judgments based on framing. I think this issue has some analogies, but not precisely to, a computer glitch that occurs at the turn of the century, and that involves a lot of mathematical formulations that simply have to be made.
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    This involves certain kinds of judgments that have to be made, and I think that the issues have been framed, but the judgments have not been. And I think that once you come close to making the judgments, then you have a new round of vetting that will probably have to occur. Anyway, thank you very much.

    For our third panel we will be hearing from organizations that represent many of the Federal beneficiaries most directly affected by the EFT '99 mandate. Ms. Margot Sanders is Managing Attorney for the National Consumer Law Center; Ms. Marcelyn Creque is a Midwest Regional Director and National Legislative Council member for the Association of Advancement of Retired Persons; and Mr. Richard Wannemacher is Associate National Legislative Director of the Disabled American Veterans.

    I appreciate all of you coming here today. And we will just begin in this order.

    Ms. Saunders is a long-time witness before this committee. You are welcomed back,

    Ms. Saunders.


    Ms. SAUNDERS. Thank you, Mr. Leach. We very much appreciate the opportunity to be here today. I offer my testimony not only on behalf of the low-income clients of the National Consumer Law Center, but also on behalf of the Consumer Federation of America, the National Community Reinvestment Coalition and the Organization for New Equality.
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    We have four serious concerns with the regulations that the Treasury has preliminarily issued. I will leave the most important for last so I can discuss it.

    One, the waiver policy which has been outlined is basically good, except that it leaves out three very important criteria. One, people with mental disabilities. Everyone with a mental disability doesn't necessarily need an authorized agent to receive their payments. There is a big difference between that degree of mental disability requiring someone to care for all your financial needs and a lesser mental disability such that one is not able to handle the technical attributes of an ATM machine.

    Second, a lot of people in this country are, unfortunately, illiterate. Twenty-four percent of the adult population is illiterate. That does not mean that they cannot function in this society with cash or with checks. They can count numbers, they can sign their name, but they cannot read the information on the ATM machine necessary to transact business. They should be able to obtain a waiver.

    Third, there are a lot of people in this country who cannot speak fluent English and they also need to be able to obtain a waiver.

    Second of all, as many have already noted, there are a lot of very crucial questions that have not been answered regarding the ETA account and the reasonable costs and the geographic coverage of the ETA account. Obviously, the way those answers are eventually addressed by Treasury is crucial.

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    Third, it is our experience as lawyers representing poor people around the country, that one of the most important reasons why low-income people don't have bank accounts is because they are afraid to have their Social Security income garnished or attached from their bank accounts. Although the law is absolutely clear and prohibits attachment, practice unfortunately makes it very much a threat. Very often, Social Security and SSI benefits have been attached in bank accounts. The only remedy an individual has is to file a lawsuit. In the meantime, they are without the funds.

    We have asked Treasury to address simply this by prohibiting garnishment and attachment or set off on any ETA account that receives Social Security or SSI or veterans benefits funds. Unfortunately, as you can see from the absence of this in the regulations, Treasury has not chosen to do so.

    But the most alarming aspect of these regulations is what they do not regulate. Treasury is saying they are going to embark on a massive public education campaign to push the 10 million unbanked recipients into voluntary accounts. At the same time saying, ''Treasury is not in any way going to regulate these voluntary accounts.'' We think this is an abuse of the law. The law says quite specifically, ''Regulations under this subsection shall ensure that individuals are required to have an account,'' and so forth.

    There is no distinction in the law between those individuals who voluntarily accept an account and those individuals to whom Treasury provides an account. The result of the failure to regulate the voluntary accounts is going to be terrible if the regulations continue as they are now.

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    Number one, we will see a good proportion of the 10 million be driven into the arms of fringe bankers: check cashers, finance companies and others who don't have any regulation, not even a reasonableness requirement on the fees that will be charged.

    Number two, there is no protection against garnishment and attachment of the Social Security money in the accounts if you do not pay your finance company bill. The result may be, well, rather than give you your entire Social Security amount, they just take out the amount of the loan payment.

    Number 4, note the waivers only allow the waiver for financial hardship if you are unbanked. Well, once you get a bank account, even if it is a bad bank account through a check casher or a finance company, you are no longer eligible for the waiver based on financial hardship.

    I see the yellow light is on. I have lots more to say, but I would be glad to answer any questions.

    Chairman LEACH. Well, thank you. And we will turn to Ms. Creque, but your observations are very important, and I don't want you to be constrained and certainly your full statement will be in the record.

    Ms. Creque.

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    Ms. CREQUE. On behalf of the American Association of Retired Persons, thank you for this opportunity to present our views regarding Treasury's proposed regulations to implement mandatory receipt of Federal payments via electronic funds transfer. My name is Marcelyn Creque and I am the Regional Volunteer Director for the AARP's Midwest region.

    Let me say at the outset that AARP is pleased that Treasury has proposed self-certifying waivers for physical disability, geographic barriers and financial hardship as well as a deferred EFT '99 implementation date for the unbanked until January 1, 2000. We also welcome comments by Under Secretary Hawke that signaled the department's growing recognition of the real life needs of Federal payment recipients and the enormity of the implementation task.

    However, AARP is concerned about the adequacy of arrangements to: a, assist Social Security and SSI beneficiaries who currently receive their benefits by check to sign up for direct deposit or obtain waivers; b, protect recipients from paying excessive fees and charges to obtain their benefits, especially in those cases where depository institutions might subcontract with nonfinancial institutions such as check-cashing outlets, to provide the new electronic funds transfer; and c, inform and educate the public regarding the requirements and workings of the new program. Currently 67 percent of Social Security recipients and 31 percent of supplemental security recipients use direct deposit. Direct deposit offers a delivery mechanism that is safe, convenient and reliable.

    Twenty million Social Security and SSI recipients do not participate in direct deposit, however, and will be directly affected by the conversion to mandatory EFT. Six and one-half million of these are individuals who currently have no bank account. A recent Treasury report indicates that most recipients who receive their benefits by check are aware of the advantages of direct deposit. Still for various reasons they prefer checks.
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    The major concerns of recipients about direct deposit involve uncertainty when payments will arrive, getting access to their money should the account be frozen, and the difficulty of a timely resolution of problem payments. Some simply feel they need to have direct contact with the payment. A key finding of the Treasury's study is that a plurality of all Federal benefit recipients object to the mandatory EFT. Forty-seven percent object, compared to 28 percent who support it. These negative views can hamper efforts to increase direct deposit participation among current check recipients.

    Given the particular vulnerability of the unbanked and banked consumers on limited and fixed incomes, AARP has urged that the implementing regulations be carefully crafted to include the recommendations on page 6 of our testimony.

    While AARP is pleased with the general tone of the Treasury's proposal, we remain concerned about a number of issues. First, Federal payment recipients have no protection against unrestrained hikes in banking service fees. Many seniors depend on these payments for most, if not all, of their income. The absence of protection increases the likelihood that the unbanked will opt not to open accounts and many bank recipients may close existing accounts and seek hardship.

    The structure of the ETAs will be critical in determining whether these accounts will increase participation in the banking system. The association does not believe that recipients who cannot afford existing accounts due to fees or balance requirements should be forced to use them or expensive check-cashing services. We are concerned about the ability of the Social Security Administration to handle the millions of requests for waivers that are likely.
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    Finally, there are no provisions in the proposed regulations for assisting recipients in understanding their options. A number of financial institutions now offer free or low-cost accounts that could prove costly alternatives to check-cashing outlets.

    In conclusion, although electronic funds transfer offers significant benefits for consumers, the Government and financial institutions must have consumer protection provisions placed well before the implementation date. AARP stands ready to work with you in this critical endeavor.

    Chairman LEACH. Thank you Mrs. Creque.

    Mr. Wannemacher.


    Mr. WANNEMACHER. Thank you, Mr. Chairman, Mrs. Carson, on behalf of more than one million Members of the Disabled American Veterans and its auxiliary, I am pleased to present our views on the impact of the implementation provisions of the Debt Collection Improvements Act of 1996.

    As an organization of more than 1 million service-connected disabled veterans, we are deeply concerned about how the implementation of these provisions will impact our members, many of whom are older, sicker, and severely disabled, more severely disabled than the average member of society.
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    A little bit of background on the DAV. The Disabled American Veterans provides many levels of services to our Nation's veterans, their families and survivors. Our national service offices across the country provide free assistance in filing and prosecuting claims before the Department of Veterans Affairs and other Federal departments and agencies. The DAV also provides free representation on appeals before the U.S. Court of Veterans Appeals and the U.S. Court for the Federal Circuit.

    The DAV is a leader in providing voluntary services at VA medical centers. During this past year, we have accumulated over 11,257 volunteers to provide more than 2.3 million hours of assistance at VA medical centers with a substantial savings to the Veterans Administration in FTE.

    In your invitation to appear, you asked us to address eight specific questions and I will attempt to do that. In question one, you said that in the year since the law required conversion of Federal benefits to electronic EFT was passed, what discussions have we had with the Treasury Department and other officials and how have our views been incorporated?

    Mr. Chairman, when we were made aware of this, the provisions requiring electronic funds transfer, the DAV was extremely concerned. We were grateful to appear before the Senate Committee on Banking Housing and Urban Affairs May 22nd, 1997, to express our views.

    In our testimony at the Senate Banking Committee, we expressed our concerns that some disabled veterans and homeless veterans could suffer additional financial hardship because of the requirement that they be banked in order to receive their earned benefits from the Government.
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    The Department of the Treasury's proposed rule published in 62 Federal Register 48–714, September 16, 1997, will require that all Federal payments be disbursed electronically after January 1, 1999, unless a waiver has been granted. We believe that this proposed rule responds to our concerns because it provides a waiver for any disabled veteran or any person who has a financial hardship. And we thank Treasury and we thank the Senate Veterans Affairs Committee and you for your concern in bringing this to our attention.

    Just after the testimony, we were made aware the VA general counsel had proposed an opinion of how they were going to discontinue VA benefits services to persons who were not accepted in the waiver. After further reading that, we found that they were only responding to the congressional mandate to implement the legislation.

    Under the proposed Section 2084(b), individuals who do not have a financial institution are permitted to receive a waiver if they have a physical disability or geographic barrier. And we believe that the Veterans Administration, through their outreach efforts, and Treasury as well as the Disabled American Veterans through our magazine, we are going to do everything we can to publicize, but we are also going to do everything we can to make sure that no wartime service-connected disabled veteran suffers any financial hardship.

    We want to assist the Agency and Congress in order to assure that all persons who are recipients of Federal entitlements do not pay additionally for the services that they paid through blood and sacrifice in the defense of a free America. Thank you very much and I submit the remainder of my testimony for your consideration.

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    Chairman LEACH. I thank you very much, Mr. Wannemacher, for those thoughtful observations about the veterans.

    Sometimes I think issues get wrapped up in elements of psychology as well as substance. And it strikes me this panel is 100 percent correct that one is going to have to put in place very clear policies of what I would consider to be civil protections.

    I think ''civil protections'' are a better term than ''consumer.'' These are not exactly consumer, these are civil protections for individuals. And if they are not in place, the Government is going to have a very difficult time educating the populous on why they might want to participate.

    One of the issues Ms. Saunders raised is a very troubling one that relates to attachments, and the Government is going to have to have that established well in advance that these funds cannot be attached.

    It may be, Ms. Saunders, that you have a point that one has to be concerned for people for whom English is not the first language. But here I want to get into psychology for a second. I am all for giving as much individual discretion on choice of whether people participate or not if there is a reasonable reason of almost any nature.

    On the other hand, I think that psychologically, if the right policies are put in place, and they are not yet, but if the right policies are put in place, I would think virtually every major consumer group or the DAV would want to be encouraging their members to participate. If they are not in place, obviously you will have a reason not to.
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    But I would envision a program in which a consumer advocate would be extraordinarily in favor of advocating for participation because the anecdotal record is fairly profound on what some of the alternatives to people are and how expensive check cashing can be, and so forth. But the reason that policies have been to be in place is that no one wants to be vulnerable to a financial institution, let's say charging a $5 fee to cash a check and so you need those policies in advance, and you need them precise. And they have to be part of the bidding process, one would assume, and well laid out.

    In any regard, I think the testimony of this panel is exceptional. Now, there was one issue that was somewhat hinted at by Mr. Watt that I would like some responses to. There seems to be an assumption that the only way to go is a bidding process. Does that strike you as the only way to go or are there other alternatives that you would like, Ms. Saunders?

    Ms. SAUNDERS. I think there are alternatives. The point that Mr. Watt made that I was most impressed with, frankly that none of us had thought about, was how important it is that whatever process we have, that it is renewed on a regular basis so that whatever is decided initially does not remain forever regardless of changed practices.

    When we first started thinking about this whole idea, we assumed that there would not be a default account. Rather, we thought that the Treasury would find some way to prime the pump, so to speak, and encourage the banks to develop as many Direct Deposit Too accounts and the Treasury would then get the word out.

    So, the bidding process is, as several Members have noted, somewhat of a misnomer since Treasury is doing the choosing, but not the paying and it is the individuals whose money is going to be transferred into the ETA account who will actually be funding it. If Treasury was going to be paying for the bill itself or for the accounts itself, it might make more sense for there to be a biting process.
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    Ms. CREQUE. Not being an expert in the banking industry, I think one of our primary concerns would be, regardless of the process used to select the bank, there also must be in place some way to evaluate how that particular bank is handling the ETA accountings. Some consumer protection if it is not going right, that the complaints not remain at the bank but come back and be analyzed by Treasury.

    Mr. WANNEMACHER. We would agree with what the two ladies said, but we would also say that you have to have freedom of choice, and if Treasury is going to determine that bank X is the best bank there, you are taking away the recipient's ability to pick and choose his or her own bank. And, you know, we feel that everyone should have a right to choose. And if it comes down to a point where a decision has to be made, then as Mr. Watt mentioned, if you have a list and you say, OK, there is five here. You choose one of the five and next month your money is going to be there, that would be the better solution, not the bidding solution.

    Chairman LEACH. Thank you, Mr. Wannemacher. The gentlewoman from Indiana.

    Ms. CARSON. Mr. Chairman, thank you very much. I have a philosophical question to which I guess I should know the answer. Does this regulation potentially apply to every human being in the country who gets a Federal check, like Members of Congress receive Federal payments? Do their checks go automatically on deposit under this?

    Chairman LEACH. Well, I think the benefit check is different than the Federal salary, but the vast majority of Federal salaries are in that process today.
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    Ms. CARSON. So it is a benefit and not a payroll check?

    Chairman LEACH. I think it will include payroll, but payroll is virtually all done that way anyway.

    Ms. CARSON. By choice of the recipient?

    Chairman LEACH. That is right.

    Ms. CARSON. And then second, the Treasury Department historically has done a good job of inserting a piece of paper in checks they send out telling people about the advantages of direct deposit. That has been going on for a long time. I am wondering if somebody knows why, then, there is a segment of the population, despite the information that continues to drop off in their mailbox on a monthly basis, that they are able to use direct deposit—why there is a segment of the population that has not taken advantage of that?

    Ms. CREQUE. Could I address that?

    Chairman LEACH. Of course, but before you say that, let me say that part of Secretary Hawke's testimony was addressed to that and the Treasury has done an extensive survey. Ms. Creque probably has more knowledge of this than anyone from her institution's perspective.

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    Ms. CREQUE. To answer your first question, it is our understanding that all Federal payments, except tax refunds, would be handled through EFT.

    Now, why don't people readily avail themselves of direct deposit? We have some seniors who came through some pretty rough years in the Depression and lost their savings in the banks. They have no trust in financial institutions. We also have seniors that the only way they transact business is via cash. They have to count the money out, they have to see that the bill is paid.

    Second, we have seniors that are not going to accept this just because it is a new system. You have to prove to them the merits of accepting this system. We also know that some of our seniors may be incapacitated and not able to go to an ATM machine. We also are concerned about location and safety of ATM machines.

    But what we have said all along in all of our appearances before all of the committees is that it will take education. You have to start now. It has to be education, you are talking about inserting notices in the check. OK? Not only notices in the checks, but they haves to be printed in other languages also. And as soon as we have approved policy direction, and regulatory guidelines from the Treasury, we have an army of volunteers that can go out and talk to people about EFT '99. Remember that for some folks it is going to be a total educational process about financial institutions because they just have not been involved with financial institutions.

    Ms. CARSON. I think, Mr. Chairman, if I may just add, we also are talking about a segment of the population that historically has been refused banking services, people who have gone into banks to get services and have been denied because of their income status and for a list of sundry other reasons. Suddenly, these same institutions that have been very negative in terms of responding to consumers are getting this major infusion of billions of dollars on the first of every month. The same people's money that they refused to serve historically.
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    Ms. SAUNDERS. May I respond to that? Assuming the money goes into the banks and goes out from the bank to the consumers, we have a lot less to fear, I think, than if the money goes into the banks and then goes out to alternative providers and then to the consumers, because there is no controls on these regulations over the fees that anybody will charge along that route if those accounts are voluntarily established.

    So, you could, for example, be somebody as you are describing who believes that they are not welcome at a bank, whether or not that is true. You go—and in your neighborhood there may not be a lot of bank outlets. And the place that you do your most financial business may be your local finance company where you have a small loan and there is a big sign up that says, ''You are required to have electronic deposit of your Social Security checks by a certain date. Get your deposit accounts here.'' You set up an account and the account you establish costs you $15 a month.

    Now, that is not going to be a net benefit to you in any way. It does not provide you new banking services and it is going to cost you money and you are not even going to be able to get out of the account under these regulations.

    Ms. CARSON. Go ahead. I am going to go vote.

    Chairman LEACH. I just want to know, did you want to ask a further question?

    Ms. CARSON. Well, I think that probably my statement was misunderstood. I am talking about people who probably had a bank account and needed to borrow $100 from their bank, you know. They had some money in the bank and some emergency came up. These are people who get $300- and $400-a-month checks that are in the bank, and they have something come up and need to borrow from the banks and the banks have turned them down.
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    I know in some areas the Community Reinvestment Act has addressed some of the issues of the consumers in that regard. But it has not responded sufficiently to it. I guess I have nightmares, too, because I know banks now have long lines of old people waiting to be served on the 3rd of the month whose money is already there. You know what I am saying? It is just a convenience, it is just a confidence if you trust in this whole mechanism, this forcing something on people that they don't want just because they happen to be recipients. That is all.

    I am going to go vote to rise.

    Chairman LEACH. Let me say that there are no more questions, except some we might submit to you in writing for this panel. Let me thank you all for appearing and we appreciate your contribution.

    Our next panel will be composed of Mr. Mark MacKenzie, Executive Director of Citibank EBT Services; Mr. Fred Julius, who is President of the Deere and Company Credit Union, Moline, Illinois, the residence of the Quad Cities—which as most reasonable people know, is the center of American culture; Mr. Stephen Wolf, who is Treasurer of the Pay-O-Matic Corporation in New York, who is testifying on behalf of the National Check Cashers Association; and Mr. Doug McNary, who is President of Western Union, North America, and a graduate of Iowa State University.

    It is the Chair's intent—what we have on the floor is a procedural vote, and I thought we would proceed with this panel through this vote.

    Mr. MacKenzie, would you like to begin?
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    Mr. MACKENZIE. Thank you. Good afternoon, Mr. Chairman, and Members of the committee. My name is Mark MacKenzie and I am Executive Director of Citibank EBT Services. Thank you for the opportunity to testify.

    Electronic funds transfer, or EFT, has changed the way individuals, families, businesses, institutions and even Governments conduct their financial affairs. January 1st, 1999, marks the time when EFT is recognized as a standard for the distribution of Federal payments. For millions of people and organizations that now receive Federal payments electronically, EFT '99 merely formalizes a practice that is second-in-nature. For others, this will be a change.

    Citibank is currently managing systems that distribute Federal payments to benefit recipients through the use of magnetic stripe, on-line debit cards and ATM point-of-sale devices. One of these, the DPC—this is an example of the card, distributes multiple types of Federal entitlement payments throughout the State of Texas. Another project in early implementation is the Southern Alliance of States or SAS Project, which uses the benefits security card to distribute Federal and State benefits in eight States in the Southeast.

    Citibank is also conducting EFT pilot distributions of Federal payments to U.S. Social Security annuity recipients who live outside the United States.

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    Citibank also provides EBT services to many State governments. These projects have established EFT can and should be applied to the distribution of Government payments. It is from our experience in these projects that we present to you to answer to the questions that you posed in your invitation to testify.

    You have also asked our opinion on the proposed EFT '99 rules issued by Treasury. However, since these were only issued last week, we would not have sufficient time to discuss them about all of our colleagues and to analyze them in detail.

    In response to question one, Citibank has continued to focus on the Federal projects that I mentioned. They have become an internal model for our approach to EFT '99. In addition, Citibank has dedicated substantial resources to developing new technologies to provide electronic banking services in a mass markets level. We do not believe that Treasury's new regulations will dramatically change the banking industry's current EFT or EBT practices.

    In response to question 2, EFT will not result in a windfall profit for banks. With respect to the unbanked, for example, any income from float will be negligible. For most banked individuals, EFT should simply be a change from receiving a Federal Government check to receiving a direct deposit, a service that is already available to these customers.

    In terms of what constitutes a reasonable cost, we need to review this issue as part of our overall review of Treasury's proposed regulations. In response to question 3, Citibank's experience with EBT and EFT at the State level is that our projects are operating as expected. Food stamp and other welfare benefit program recipients are adapting readily to EBT. This is a positive indication for the prospects of implementing EFT '99, particularly among the unbanked.
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    In response to question 4, our experience with local banks and other service providers in EBT project areas has been very positive. We attempt to directly involve local financial service providers by offering them an opportunity to make their services available to support the projects.

    We do not believe that Treasury's selection of financial institutions for Federal EBT is noncompetitive. As Treasury states in the proposed regulations, nonbanking corporations can work as processing subcontractors to the financial institutions that respond to EFT.

    In response to question 5, we have briefly reviewed the waiver categories in Treasury's proposed regulations. Our initial reaction is that they seem reasonable, but it is still under analysis. We will be reviewing these categories against our experience in EBT, but our hypothesis is that the actual number of EFT '99 waivers that unbanked individuals will require should be relatively small.

    In response to question 6, the Federal Financial Institutions Examination Council recently acknowledged EBT as a CRA-qualified activity. Based on this it appears that financial institutions participating in EFT '99 could potentially claim some CRA credit. This concludes the oral summary of my testimony. We previously provided you with a copy of our written testimony which includes more detailed answers, but I would be prepared to discuss those answers or any other questions that you may have.

    Thank you very much.
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    Chairman LEACH. Mr. Julius.


    Mr. JULIUS. Mr. Chairman, my name is Fred Julius and I am President and Treasurer of Deere & Company Credit Union. I am pleased to respond to your request to appear before the committee today to express my views on the issue of the Government's plan to convert Federal benefit checks to electronic funds transfers as required by the Debt Collection Improvement Act of 1996.

    By way of background, my credit union which was organized in 1935, has 19,000 members and served Deere and Company employees and their families nationwide.

    We have $116 million in assets and offer our members a full range of financial services, including direct deposit and receipt and origination of wire transfers through the automated clearinghouse. Our members have access to their funds through automated teller machines and point-of-sale terminals. The Department of the Treasury is challenged with developing the Government's plan to provide benefits electronically and has adopted the interim regulation to implement the delivery for the new recipients. Treasury also has a proposed rule to implement electronic delivery of all payments which was published September 16th and is the focus of these hearings.

    As President of Deere and Company Credit Union, I strongly support the migration from a paper-based payment system to an electronic payment system. Because of the enhanced security of such payments and the significant savings on the part of the Treasury and financial institutions in handling EFT contrasted to the cost of handling paper checks.
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    The effort of Treasury to implement nationwide EBT and national EFT of Federal payments is commendable, but we encourage Treasury to rely on the existing commercial EFT systems to achieve implementation of these new payments. This will provide maximum cost savings and will assure the continuing right for financial institutions of all sizes to participate in the new systems.

    Treasury's determination to limit implementation to insured depository financial institutions with respect to the maintenance of these accounts will maintain the integrity and safety and soundness of the systems being constructed.

    I would encourage Congress, though, to take an additional step and to involve the Federal Reserve in the mechanics of the nationwide EBT, a nationwide EFT for access to Federal payments deposits in accounts. Our country currently evidences a very fragmented access system at point-of-sale locations. Without universal access, payment recipients are discouraged from maximizing the convenience and safety involved in electronic disbursement of funds.

    The portability of a transaction account is extremely important to many senior citizens and Social Security beneficiaries due to their high degree of mobility on a seasonal basis. At the present time, the fragmented point-of-sale environment serves to impede open access to account funds through the use of a debit card issued by any financial institution.

    A senior citizen traveling between States on a seasonal basis is currently incented to maintain two or more accounts in varied geographic locations. This is an inconvenience which will be exacerbated by nationwide EFT unless universal access can be assured. This fragmentation creates a hardship on the recipient within the Treasury's standards to justify waivers for the implementation of EFT '99.
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    But if the Federal Reserve were to be charged with the authority and responsibility to serve as a nationwide clearing facility, then access to all point-of-sale terminals within this country can be guaranteed and voluntary participation in the new payment systems would be more likely.

    To the maximum extent possible, Treasury should allow participation of all financial institutions to perform EFT functionalities rather than selecting a few financial agents which will likely be large, superregional institutions. Credit unions have had a long-standing tradition of seeking out and serving individuals of modest means. We are in a unique position to deliver Government benefits to individuals who do not currently have an account.

    We have met several times with the Treasury Department officials to make sure that they know the credit union system wants to play an important role in delivering benefits to recipients who do not already have an account. The credit union system's national EFT network currently provides on-line ATM and point-of-sale services to millions of credit union cardholders. Thousands of credit unions offer electronic access through audio response, ATMs, shared branches, home banking and through the Internet and, for the most part, credit unions do not apply a surcharge when members withdraw funds at an ATM.

    This same network has direct connections to retailers throughout the country allowing credit unions to offer low-cost debit access at the point-of-sale. On-line debit cards are enabling millions of consumers to obtain cash back on the point-of-sale without incurring a surcharge. In addition, the credit union system is working to establish a shared branch environment which will enable credit union members to obtain service in any other credit union in the country.
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    If certainty of access of funds through use of an electronic card can be assured, community financial institutions are in a far better position to participate and compete with the larger institutions designated by Treasury. Open marketplace competition would serve to incent all financial institutions to establish special accounts for existing unbanked recipients and to establish account characteristics fees and attributes which will attract these account relationships. These market forces will result in reduced fees and enhanced service for the participating recipients of EFT.

    The hallmark credit union system is providing ongoing financial education to member credit unions and CUNA wants to work with Treasury as well as national and local groups to inform and educate recipients who do not have an account about how they can use a financial institution to improve the quality of their lives.

    Thank you.

    Chairman LEACH. Well, thank you Mr. Julius.

    Mr. Wolf.


    Mr. WOLF. Thank you. My name is Stephen Wolf. I am treasurer of Pay-O-Matic Corporation, a New York-based financial services company. I am testifying on behalf of the National Check Cashers Association, NCCA, the professional organization representing check cashers in 35 States. Our financial service centers are the location of choice for many Americans both with and without bank accounts who choose to pay for their financial activities on a transaction basis. Check cashers have always been able to adapt to meet the needs of our customers. And we are diligently working to respond to the Federal payments mandate of the Debt Collection Improvement Act of 1996.
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    NCCA has appointed a Federal payments task force, which is evaluating proposals to work with financial institutions to continue to serve our customers who receive Federal payments.

    We are working with some of the Nation's leading financial institutions to bring efficient, cost-effective service to our customers. Our association has participated extensively in the Treasury Department's rulemaking procedures through open meetings and written submissions.

    We will make further comments in detail on the proposed regulations after careful review and discussion among our members, but let me make some observations about the proposal released on September 16th.

    We believe that the regulations should provide for the widest range of choices for consumers in their delivery of payments. Some benefit recipients who do not have bank accounts may choose to obtain them, although that option has always been available to them. Others may opt to utilize Treasury's proposed Electronic Transfer Accounts. What we as check cashers want is the right to provide additional convenience or value-added services for these customers who choose to patronize our businesses.

    Our customers today utilize our services because we provide personal service, longer hours, convenient locations and more security than freestanding ATMs. We also provide a large number of ancillary services including utility payments, the sale of money orders and wire transferrings, auto registrations, transit fare sales. In order to receive these services, customers are willing to pay a reasonable transaction fee.
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    The proposed regulations leave open the question of whether our members would be permitted to participate in the ETA program. The department requests comments on that issue. It will not come as a surprise to you that we would like the option to be included as end points to deliver benefits to those who choose to come to us. Shouldn't they have the opportunity to decide for themselves whether they receive their funds at the bank or through a check casher?

    We are pleased that the proposed regulation does not anticipate restricting the right of check cashers and others to partner with banks to deliver services to those individuals with bank accounts who receive Federal payments. It is certainly good public policy to provide alternatives for recipients.

    In its letter of invitation, the Chairman asked us to respond to allegations that check cashers charge high fees. We vigorously deny that allegation. The typical fee for cashing a payroll or Government check is about 2 percent. Some check cashers will cash personal checks, but must charge a higher fee due to obvious risk.

    These are reasonable fees when one considers we provide personal service, must borrow our funds from banks, and pay for armored car service, rent, heat, insurance and, of course, payroll expenses. And unlike a bank, we do not have any of the customers' money on account.

    In 13 States our fees are regulated. In all States there is competition among check cashers and with other entities. Grocers, for instance, cash far more checks than we do. No check casher could charge above the market rate and stay in business. In some regulated States there is competition below the regulated fee cap.
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    In some of the criticism of our industry, I perceive an assumption that our customers are not astute enough of obtaining the value of obtaining financial services from the bank and need to be protected from their own bad decisions. I have more respect than that for our customers. It is not at all unreasonable for an individual who only has to make a few payments a month or can't wait for a check to clear or wants friendly personal service in his or her own language to come to a check casher. People are willing to pay a modest fee for service.

    The proposed regulations permit liberal waivers and would permit recipients of Federal payments to continue to receive paper checks if they certify that they would otherwise face physical, geographic and financial hardship. We believe this is a wise policy. We think most people will decide to open an account, but there will remain some for whom an electronic account would impose a hardship.

    Thank you.

    Chairman LEACH. Thank you, Mr. Wolf.

    Mr. McNary.


    Mr. MCNARY. Good afternoon, Mr. Chairman. I am Doug McNary. Based in Englewood, Colorado, I am President of Western Union Financial Services. I appreciate the opportunity to appear before the Banking Committee today to discuss EFT '99.
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    With a history that dates back to 1851, Western Union has been a leader in electronic commerce, offering consumer money transfers, money orders and other payment products through over 46,000 agent locations throughout the United States and over 14,000 locations in more than 140 countries worldwide today.

    We serve and understand the needs of what we call the cash-based society. We understand that the cash-based society doesn't necessarily want to be banked. We also understand that banking services often are not available or convenient to this market segment.

    Members of the cash-based society are typically hard-working people, many of whom earn in excess of $30,000 per year. They often live in rural areas and low- and moderate-income neighborhoods. They frequently lack conveniently-located financial institutions, including ATMs, near their homes or places of employment. Thus Western Union has developed an extensive agent network to provide convenient access to financial services near where our customers live and work.

    These agents include fixtures in the community such as over 11,000 supermarkets, 3,000 pharmacies, 3,600 check-cashing locations and private transportation providers such as Greyhound bus lines. Unlike most financial institutions, these Western Union agents are often open up to 24 hours a day, 7 days a week. And for many of our customers, English is the second language, one in which they lack proficiency. As a result, Western Union agencies are fluent in the language of their neighborhood. In fact, today over 40 percent of our business is conducted with customers whose first language is Spanish. In addition, unlike ATMs that only dispense $20 bills, Western Union customers can receive a cash payout in precise dollars and cents.
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    I wish to publicly commend the Treasury Department for their efforts in drafting the proposed regulations. However we believe that implementation of the regulations as currently drafted would inhibit Western Union's ability to offer an electronic delivery system in an expeditious and cost-effective manner.

    On more than one occasion, Western Union requested that the Treasury Department enable benefits recipients to designate Western Union and similar entities as their authorized agents. In turn, Western Union would establish an omnibus fiduciary account at an insured depository institution from which benefits payments could be made available through Western Union agent locations. Such an arrangement would be in full compliance with Regulation E and other consumer protection laws. This would be functionally equivalent to the broker-dealer exemption which permits Federal payments to be deposited in an investment account maintained in a broker-dealer's name. Unfortunately, the regulations as proposed do not permit this type of an arrangement.

    In publishing the regulations, the Treasury Department expressed concern about permitting the electronic transfer of Federal payments to an account controlled by a third party. They expressed concern about the potential failure of such third parties to honor their obligations. They also questioned the lack of Federal oversight of such fiduciary arrangements. We believe that the Treasury concerns are not well-founded in the case of Western Union.

    Western Union is subject to comprehensive regulation and licensing in 43 States, the District of Columbia, and Puerto Rico. As a result, we are required to hold all consumer funds as trust funds and to maintain a 100 percent reserve requirement on all money transfers and payment instruments in the form of cash or high quality investments.
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    By requiring that the majority of the Federal payments recipients receive EFT payments through traditional bank accounts, the proposed regulations will add additional costs that will ultimately have to be borne by the consumer. For example, instead of permitting Western Union to establish an omnibus account at a Federally insured depository institution similar to the types used by dealer-brokers, each payee must have a separate account. It is far more efficient and cost-effective to maintain one master account than a multitude of individual transaction accounts.

    We are asking the Congress and the Treasury to recognize the fact that a significant portion of the Federal payments recipients be allowed to continue to choose their financial services provider and to recognize, as Mr. Hawke said this morning, that the focus on lifeline banking needs to be refocused on electronic banking.

    Consumers should be accorded the opportunity to utilize and have access to efficient electronic delivery systems that are designed to meet the individual's needs. They should be allowed to choose Western Union.

    I sincerely appreciate the opportunity to appear before you today, and at this time I would be happy to answer any questions.

    Chairman LEACH. Well, thank you very much. I appreciate the range of participation here with Western Union, Mr. Wolf, credit unions, and Citicorp. Of particular relevance in a way is Citicorp's experience that you have currently with some of the benefits transfer programs, and my sense is the banking industry's presence is somewhat mixed, wanting to maintain an option to participate in ETA, but also thinking it may be a loser in terms of—a money loser. You have argued it is not a windfall. But is it likely to be a money-losing proposition for a bank?
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    Mr. MACKENZIE. Mr. Chairman, the answer to that is actually on several different levels. Our experience in EBT, especially with cash benefits on a State level, is that many financial institutions, as well as retail locations, are participating by having their terminals or their branches available and then receiving an interchange fee.

    For example, Shazam, not as a network, but as a provider, is going to participate for recipients in the State of Missouri who receive cash benefits and act as a processor for institutions that sign up to participate. The same is true for a number of other networks.

    Our experience in EBT is that a lot of financial institutions, grocery stores, check cashers, credit unions and other locations have an opportunity to be very active and to participate either by offering access to their point-of-sale terminals or their ATMs.

    Chairman LEACH. When you say grocery store, does that also apply to Western Union?

    Mr. MACKENZIE. We have a significant number of retail locations and major chains such as SuperValue, Winn-Dixie—large chain stores throughout the country who are actively participating in EBT on several fronts for food purchases as well as for point-of-sale cash access.

    For example, this particular card—direct payment card—this is the card that has been utilized in Texas. It is used throughout the Pulse network, which is a broad-based point-of-sale and ATM network with a multitude of financial institutions and retailers who participate. The recipients or beneficiaries receive direct deposit and they can shop and they can get cash back and they can go and withdraw all the cash in one transaction or they can have unlimited point-of-sale transactions with this.
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    It works. It has been in operation since 1992, and it works well. The notion is that the financial community, the retail community can participate at their choice and whether or not it was just terminal access they are providing.

    Chairman LEACH. In terms of if one isn't doing this for free, presuming in a market economy there is something that has to do with return on investment, is it the float you make money on? Is it the transaction that you charge for? Where are the intermediary cost recoveries?

    Mr. MACKENZIE. It is a card-based enabler. Float is not the area where we make money. As it was indicated this morning, it is less than 20 cents per account. We have over 20,000 active, nearly 30,000 who have subscribed, but the math is very quick at less than $4,000 a month at 20,000 accounts, float is not the market factor. And worth noting is this is a particular account where the recipient can do unlimited point-of-sale cash transactions in a mature point-of-sale marketplace in Texas.

    Chairman LEACH. So it is within——

    Mr. MACKENZIE. The fee income, it is based on the fees, the processing fees, the support fees, the database fees or transaction fees whether they are paid by a recipient or whether they are paid by the Government entity.

    Chairman LEACH. Do you visualize the Government paying you to do this?
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    Mr. MACKENZIE. Well, we have not seen what their account structure would look like. Our experience in EBT is, that in some EBT programs for cash benefit access, States will not subsidize the transaction because they are not subsidizing cash today so that it is zero-based. In other programs, they may subsidize one or two transactions. In other cases, they are subsidizing three and four transactions. It would really depend on what is the scope of services, the number of transactions that would be included, and that becomes the challenge for EBT.

    Chairman LEACH. If we come down to the individual, the recipient, there is X individual who receives $350 a month. This shows up in an account. Will he be charged for taking $350 out? Or is he charged as he buys a pair of shoes or both? And then what is that charge likely to be? Is it $1 to take all the cash out? Is it $3?

    Mr. MACKENZIE. Interchange rates around the country vary from network-to-network in terms of participation. In some networks, an interchange rate may be a fee equivalency of 40 cents and a 5-cent switch access fee. Others may be 50 cents. Others could have 35 cents. Across the country there is not a uniform rate.

    Chairman LEACH. Let's say the average is in the range of 50 cents, give or take a little bit. Does that mean that if I am the $350-a-month beneficiary recipient, that if I take all of my cash out, I am charged 50 cents for it? Or does that mean that if I do not choose to take it out, I am charged 50 cents for every time I use the card, or is it quite a variable in that?

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    Mr. MACKENZIE. There are several components. First and foremost for the recipient, if they have established a bank account, there is a monthly fee and for that fee they have the account protection, the ability to understand what their balances are, and depending on what the features are: whether or not they elected a monthly statement, which they may or may not want, if it is an all-electronic account, whether there is a savings feature added to the account structure or it is strictly a debit account. It depends on what are the services in the particular account.

    In this particular application—the direct payment card—which is not to say that that would be necessarily the ETA application, but in this particular application, it is all-electronic. There is a $3 monthly fee that the recipient has signed up to pay for, and for that we provide them with unlimited point-of-sale transaction access, which they do not pay for, so it is free. And we provide them with one free ATM transaction per month, and subsequent ATM transactions are charged at 95 cents. And with that, not only can they use this card within the State of Texas, the recipient can also utilize the Cirrus network, which is a national-international ATM network, and there is not an incremental charge for that based on the program. Therefore, the fees would depend on the service functions that the customer, as well as Treasury, would like to develop.

    Chairman LEACH. Mr. Julius, would you have a sense, just take the field of membership in your credit union of how many people would be unbanked that could otherwise be banked with you?

    Mr. JULIUS. That is really tough, because, number one, we have a potential membership base which would include all Deere employees, employees of John Deere factories or other subisdiaries, plus their family members. So we have a share of the number of employees and that participation is split with 5 other credit unions, so, again, we get into some really crazy numbers.
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    Chairman LEACH. I would suspect, frankly, you are a high end credit union, that you would probably not have a great unbanked constituency.

    Mr. JULIUS. Of course, anyone who belongs to the credit union is banked in that sense.

    Chairman LEACH. Sure.

    Mr. McNary, as you listen to Mr. MacKenzie, can you carve out a competitive role for your company?

    Mr. MCNARY. The opportunity for Western Union is very similar to the opportunity for Citibank. I think there are two very unique differences between our organizations. Obviously, Citibank is a financial institution today. Western Union is a financial services company, but we are not a bank. So, we are missing the bank component.

    What we do have that is unique is a distribution network where we have an existing relationship with the grocery stores, the pharmacies, the check cashers and a distribution service that exists today. So there is an infrastructure that is in place, including over 14,000 personal computers in those agent locations that we perform money transfer transactions with today.

    Chairman LEACH. Excuse me. Are you trying to get bought out here? No, I am sorry, go ahead.
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    Mr. MCNARY. Certainly, it is a challenge for Western Union under the proposed Regs. We would have to find a bank partner to work through under the
Regs as they stand today. The challenge is if you add the bank costs on top of Western Union's cost, it makes it prohibitive for the consumer.

    The unique thing is where Mr. MacKenzie was talking about distribution through point-of-sale devices and ATMs. We are doing distribution through the existing Western Union money transfer network both in the United States and outside the U.S., where there are a number of benefits recipients outside of the United States as well.

    Chairman LEACH. Thank you. At this point my sense is that, with the exception that you are concerned, Treasury has knocked you out of the box of being a primary recipient, that you are still positioned to be a secondary recipient, as I understand it?

    Mr. MCNARY. Yes.

    Chairman LEACH. And there is no great chagrin at the direction that Treasury is going; is that right? Is that true with you, Mr. Wolf?

    Mr. WOLF. Yes, as I said, we are hopeful that the final regulations will keep open as many options for the consumer as the consumer wants to avail themselves of. That is our primary concern. And I think the proposed Regs do that.

    Chairman LEACH. Now, I think Mr. Julius might have more concern because he wants Treasury to go to each individual institution; right? Without skipping the possibility of a regional superstructure.
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    Mr. JULIUS. Right now all financial institutions are regulated. We have the department of financial institutions, we have, I am sure everybody else has their auditors also, but basically we are regulated on the insurance end and on the regulatory end. And I think these are standards that have maintained the integrity of the system and maintained the trust. And I certainly am not casting any aspersions in this area, but that is a fact that we are doing that.

    Chairman LEACH. Would you like to buy Western Union?

    Mr. JULIUS. We couldn't afford it. So basically, I think that we should not go messing around with something that is working well as far as the structures that we have. We have a lot of the EFT structure that is going now and the only problem that I can see is that it is not universal enough that you can walk up to any customer or member and say, hey, if you have a point-of-sale card you can go anywhere in the United States and use that. That cannot be said.

    So, if you want to hand this to your mother or one of these older people who don't trust financial institutions or feel unable to do this, they are not going to have the confidence to walk up to some place and try this card. And if they are denied the first time, they will never go back to it again.

    I think that looking at the total payment structure, both from the standpoint of paying for something immediately at a counter or to pay a bill through bill payment systems and that, should have the barriers removed so that if I want to pay Jim Leach through my electronic transfer from my institution to your institution, I should be able to do that through a central system.
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    And in order to do that, we are going to have to involve the Federal Reserve. They are the ones that straightened out the check processing years and years ago. They are the ones that provided the ACH. They should be involved in handling these payment systems also.

    Chairman LEACH. Well, thank you. Does anyone else want to make any concluding remarks? If not, let me thank you all very much, and I am sorry for the disjointedness of the day. Sometimes we have long days and it is difficult to keep up with Members as well as the activities on the floor. But I think there are some comments here that the parties that are going to be dealing with this are going to have to review very carefully. And it is appreciated.

    Thank you very much.

    The hearing is adjourned.

    [Whereupon, at 4:00 p.m., the hearing was adjourned.]