Electronic Payments

One of the most obscure pieces of legislation in the last Congress–an amendment to the Federal Financial Management Act–is about to have a huge impact on the nation’s banking system and millions of unsuspecting consumers.

When the amendment takes effect on January 1, 1999, the federal government will shut down its check writing machines and all government payments–except tax refunds–will be transferred to recipients over electronic networks. This means that 340 million payments a year involving $240 billion that are currently made by checks will be transferred electronically.

The move to electronic money is being justified on claims of federal budget savings. Treasury has been touting an unsubstantiated savings figure of $100 million annually if everyone is forced into the program. But at what cost to the consumer?

For years, banks and government bureaucrats have been trying to cajole recipients of government payments into accepting electronic transfers, instead of paper checks. But, millions of citizens – including nearly 20 million social security recipients–have said “no” to electronic money and have insisted on checks and the right to cash or deposit their checks where and when they so desire. But, the freedom to choose will be wiped from the books for retirees and all other recipients come 1999.

Much more than the freedom to choose is involved. Complicating the issue is the fact that more than 10 million recipients of federal payments today do not have bank accounts. Under current plans these “unbanked” citizens overnight will be shoehorned into nation’s fee-ridden banking system.

This will bring a lot of new money into the banks. While much of the money will be drawn down immediately to pay basic living expenses, there will be funds (float) on which the banks will profit plus fees.

The law is laced with undefined phrases about the Treasury

Department ensuring access for recipients to accounts at “reasonable cost” and with “the same consumer protections” as exist for other account holders.

It will be interesting to see how the Treasury Department defines “reasonable costs” when it comes to fees on low balance accounts. Treasury and the federal bank regulators have run the other way when people like Representatives Maxine Waters and Bernie Sanders and Senator Alfonse D’Amato have talked about placing a lid on the banking industry’s rising fees.

Surveys by the U. S. Public Interest Research Group (PIRG) reveal that the average customer who patronizes a big bank is paying more than $218 annually in fees. Customers at smaller banks are faring somewhat better with annual fees totaling $190.

Does Treasury plan to declare the current fee structure “reasonable” and force the citizens being pushed involuntarily into the banking system to use $200 or more dollars annually of their social security or other payments to help boost bank profits?

There are a variety of reasons why there are so many unbanked people in the nation today ranging from costs, to concerns about privacy and the perception of banks’ attitude about low-income and minority citizens.

Low-income families, out of necessity, are resourceful and many have devised their own low-fee means of carrying out financial transactions. For example, many are able to cash their government checks free at grocery stores and other establishments where they shop and use money orders or cash to pay bills each month. Moving to a bank, under government edict, may be more costly for these recipients.

It is true that some of the check cashing firms, where there is no or limited regulation, charge substantial fees. And there are unscrupulous loan sharks and other elements of the underground economy that prey on the poor.

But, few banks reach out for the working poor or families that receive government assistance to survive. Aside from the rising tide of fees, many low-income and moderate income citizens and minorities are made to feel uncomfortable in institutions that are programmed to serve the affluent.

With this attitude, why are so many promoting the idea that the new electronic payments system must be controlled exclusively by the banking industry?

Credit unions on average charge less than half the fees imposed by big banks. Many have no fees for their members. Why not launch a program to establish networks of community and neighborhood credit unions, owned by consumer-members, which could be used as a conduit for the electronic fund transfers? After all, banks are closing branches by the thousands and leaving vast areas without anything but an ATM machine.

The Post Office Department used to run a large “Postal Savings” program. Perhaps something along the lines of this program could be revived to handle part of the new payments system.

The time frame established by Congress is too tight to set up a glitch-free program or to explore the means of avoiding a fee-dominated system controlled as a monopoly by banks.

Congress would be wise to repeal its ill-considered move to mandate electronic funds. This is an area where bank consumers should have a choice.