Banking Relationships of Lower-Income Families and the Governmental Trend toward Electronic Payment - includes related articles - Statistical Data Included

Federal Reserve Bulletin, July, 1999 by Jeanne M. Hogarth, Kevin H. O'Donnell

For recipients, the EBT program can provide greater convenience and security than the paper-based system because funds can be obtained or used more quickly, only as needed, and with greater privacy; EBT can also lower the recipient's costs of obtaining benefits by eliminating check cashing and the associated fees.(29) Despite the evidence that lower-income consumers who use the alternative financial services sector prefer high person-to-person involvement with financial transactions, recipients' experiences with EBT suggest that they may find a smooth transition to electronic financial services (see box "Methods of Doing Business with Depository Institutions").(30)

During the early development of the EBT program, a major policy issue involved the level of consumer protections afforded to welfare recipients. State agencies expressed concern about the compliance costs associated with the Electronic Fund Transfer Act (EFTA) and its implementing rules (Regulation E), particularly in the areas of liability for unauthorized transfers and error resolution.

The Federal Reserve Board supported state and federal efforts to provide benefits electronically and sought to accommodate agency concerns while maintaining consumer protections. In 1995 the Board adopted a final rule for Regulation E that made some exceptions to facilitate compliance by state and federal agencies. At the same time, the Board determined that all consumers using electronic funds transfer services--including welfare recipients--were entitled to the same protections under the EFTA and Regulation E. The Board set a three-year period for voluntary compliance, after which the rules were to become mandatory. In response to states' concerns, however, the Congress exempted state-administered, federally assisted benefits from coverage under the EFTA in the Personal Responsibility and Work Opportunity Reconciliation Act of 1996.

Electronic Transfer of Recurring Federal Benefits

The Congress took electronic delivery of federal payments beyond the realm of welfare when it enacted the Debt Collection Improvement Act of 1996. A portion of the bill that became known as "EFT '99" declared that by January 2, 1999, the Department of the Treasury would have to use direct deposit for all recurring federal benefits, such as payments for social security, Supplemental Security Income, veterans benefits, and retirement. The primary motivation for this new law was to save tax dollars: A check costs the government $0.43 to prepare and have delivered, while an electronic funds transfer costs only $0.02.

Treasury's final rules for implementing EFT '99, issued in September 1998, stop short of mandating direct deposit.(31) Instead, consumers have the choice of receiving their benefits through direct deposit; receiving a check; or using a special new account, the Electronic Transfer Account (ETA), which is scheduled to become available in late 1999. Between the July 1996 enactment of EFT '99 and April 1999, the proportion of recurring federal benefit payments delivered electronically grew from 58 percent of unit volume to 73 percent.