Uncle Sam wants you! To stop writing those checks - government promotes electronic payments - includes related article on Lockheed Martin IMS' child-support electronic payment software - Government Activity

Software Magazine, Oct, 1997 by Julekha Dash

The government is undertaking a massive campaign to persuade businesses to send and receive payments electronically. But the private sector is dragging its feet.

You would think that in light of the recent UPS strike the federal government would be launching a promotional campaign to bring the U.S. Postal Service more business. On the contrary, Uncle Sam has announced a couple of mandates that may actually do away with excess mail by replacing paper checks with electronic payments. Within the next six to 18 months, large numbers of employers will have to begin filing their federal taxes and receiving federal payments electronically. While these initiatives may idle a few postal workers, the government hopes they will also produce big gains, preventing fraud and lowering the cost of cutting and clearing checks.

Historically the private sector has been quick to complain about government inefficient but this time the finger is pointed in the other direction. IT executives working the public sector, as well as some analysis, say that many private companies have actually resisted the move to electronic payments. Some blame the lack of response on the banking industry, as many banks lack the technology required to handle such payments.

Whatever the cause of the foot-dragging, as of July 1, 1998, companies with employment tax deposits exceeding $50,000 will be required by the IRS to pay their federal taxes electronically. This includes not only payroll taxes, but federal excise taxes, unemployment taxes, and corporate income taxes. If they do not comply, they will be forced to pay 10% of the taxes they owe as penalty. By January 1, 1999, companies with tax deposits in excess of $20,000 will be required to comply with the new IRS regulation, known as the Electronic Federal Tax Payment System (EFTPS). Currently only very large companies -- those with more than $47 million in employment taxes -- must file their taxes electronically.

The second mandate dictates that by January 1, 1999, all companies must receive payment from the federal government electronically. These payments include wage, salary, benefits, retirement, vendor, and expense reimbursements, but do not include federal tax refunds. This legislation affects more than 300,000 companies that perform contractual work for the government.

Banks on the Hook

Gary Craft, vice president and senior research analyst at Robertson Stephens & Company, an investment banking firm in San Francisco, says the first mandate poses less of a problem than the second because companies can always use a third-party payroll processor such as ADP to file their taxes. "It's an extension of the existing service that these [payroll companies] already have."

The second mandate, which places the burden of receiving electronic payments on private companies, is more daunting, says Craft. Why? Because electronic payments are typically accompanied with remittance data, which is equivalent to the information one finds on an invoice -- who's paying the bill, the date of payment, and what services were rendered. The problem, says Craft, is that most banks don't have the capability to transmit that information, which requires financial EDI (electronic data interchange) software to exchange data between business partners. Unfortunately, roughly 80% of North American banks do not have financial EDI capability, according to industry estimates.

"If money is coming into your account, you'd better know by whom and when," says Craft. "This throws a major curve ball into banks. If a small business is trying to figure out the deposit activity and their bank can't provide the answer readily, they will look for a new bank."

Robertson Stephens expects The Automated Clearing House (ACH), a national network that handles financial EDI payments, to be the most significant electronic payments network over the next several years. The National Automated Clearinghouse Association (NACHA), based in Herndon, Va., oversees all ACH transactions. According to a 1995 NACHA study that surveyed more than 200 companies regarding their attitudes towards financial EDI, 64% of the companies said they would increase their financial EDI participation if every commercial bank in the U.S. were EDI-capable.

Nonetheless, says Craft, banks are somewhat cautious about entering the world of electronic payments. As more corporate cash managers rely on electronic payment methods, the share of revenue that banks receive from indirect payments -- which have traditionally generated a significant revenue stream -- will decline. These indirect payments include revenue derived from what's known as `float' -- the timing difference between when a check is made and when it is deposited -- as well as non-interest-bearing customer deposits, such as a corporate checking account. As payments go electronic, disbursements are made more or less instantaneously, meaning there is less time for cash to sit idle until a physical check clears. In addition, as funds clear more quickly, corporate cash managers have an easier time predicting how much money they will need at any given time, making it unnecessary to keep large reserves in their accounts.