Feds To Drop Paper Checks But U.S. Shift To Electronic Transfers Has Kink: Some Recipients Don’t Have Bank Accounts

A new law requires the federal government to eliminate paper checks by the end of 1998 and use electronic transfers to pay employees, contractors and benefit recipients.

That change is supposed to reduce mistakes and fraud, increase efficiency in government, give some large banks big contracts to handle the payments, and generally make things cheaper and easier for everybody.

Everybody, that is, except the estimated 10 million people who receive federal benefits but don’t have bank accounts.

Consumer groups are concerned that many people without bank accounts - often those on the lower rungs of the economic ladder - could be forced to pay bank fees to get their money, when now they may cash their checks free.

“Depending on how the government implements this mandate, it could be a change for the better or a change for the worse,” said Michelle Meier, government affairs counsel for Consumers Union.

The change to all-electronic paychecks already is under way. Beginning last July, new recipients of federal payments, including government employees, contractors and benefit recipients, were required to be paid electronically. But the law exempted those without bank accounts.

Treasury Department officials predict that all-electronic payments will save $500 million over the next five years in postage and check-production costs alone; nearly eliminate the 1.7 million annual inquiries from recipients whose checks have been lost, stolen, damaged or delayed during delivery; and prevent more than 100,000 cases a year of mail theft and check forgery.

Treasury’s Financial Management Service issues more than 840 million payments annually, totaling $1.2 trillion, for a number of federal agencies. Another 140 million payments are disbursed by the Defense Department and several small agencies.

Potential winners from the electronic payment mandate are financial institutions that could profit both from becoming vendors to the government and in a broader sense from the acceleration of electronic commerce.

Citicorp, in a venture with other financial institutions, is testing a program in which cards similar to those used in automated teller machines are distributed to federal and state benefit recipients. The recipients can withdraw money or draw down food stamp balances at ATMs or point-of-sale (POS) terminals, the card-reading machines often found at checkout counters.

Citicorp already has contracts with 27 states to deliver benefits electronically.

Treasury Department officials and financial institutions are exploring several options for getting electronic funds to those without accounts.

Some consumer advocates worry that businesses without federal deposit insurance could qualify as “authorized payment agencies,” as the law permits, and prey on low-income recipients.

“The idea that any institution other than an insured depository institution might be the intermediary between Treasury and the recipient concerns us,” said Margot Saunders, managing attorney at the National Consumer Law Center’s Washington office.

Treasury says it is aware of the issue and is exploring ways to deal with it.