Volume 9; No. 4; Fall 1997
"Unbanked" Citizens Draw Government Attention
By William Sessums, Project Manager, Financial Management Service,
Department of Treasury
The Debt Collection Improvement Act of 1996 (Act), requires the government
to deliver all payments except federal tax refunds using electronic funds
transfer (EFT) by January 1, 1999. The expanded use of EFT means that millions
of individuals who receive federal benefits will be brought into the banking
system for the first time. The Treasury Department's Financial Management
Service (FMS) would prefer that these federal recipients become "banked,"
through the establishment of accounts at financial institutions. This makes
direct deposit of federal benefits a viable payment option. But if recipients
remain "unbanked," the government will pursue other options which
can accommodate EFT payments. Without such options, unbanked individuals
cannot meet the EFT payment requirement, and millions of people may continue
to conduct their financial affairs in ways that compromise their financial
safety. The Treasury Department is currently seeking industry ideas for
how these EFT options will operate and how they will be offered at a reasonable
cost through a proposed rule (31 CFR Part 208) which was published on September
|Illustration by Frank Serr
After the public comment period, which ends on December 16, 1997, the
rule and compliance measures will be finalized. Until 1998, one can only
speculate how the government will make electronic payment options available
to federal recipients who lack bank accounts. However, Treasury currently
sponsors two programs designed to provide EFT account services. One is
the Direct Payment Card pilot in Texas; the other is the Benefit
® program that is available
in eight southeastern states. Different from these government-sponsored
approaches (but designed to indirectly expand direct deposit participation
among unbanked recipients) is Treasury's promotion of its Direct Deposit
| The government is moving boldly to convert federal benefits
such as Social Security to EFT. A major challenge: the estimated 10%
of check recipients that lack bank accounts. Treasury is encouraging
all financial institutions to expand the use of direct deposit by
offering accounts that are more "unbanked friendly." Still,
a national strategy to provide banking services for recipients that
remain unserved is being defined. It's unclear what the final plan
will look like, but Treasury's FMS has been offering basic banking
services to a limited target audience since 1992.
Banking Services Through the Private Sector
Direct Deposit Too (DD Too)
Direct deposit is the most popular form of payment by EFT and is currently
the method used for approximately
55% of federal benefit payments. Converting the remaining payments to EFT
could save taxpayers roughly $500 million over the next five years, while
enhancing safety, reliability, and convenience to consumers. However, if
federal benefit recipients lack bank accounts, direct deposit does not work.
There are many reasons why individuals lack basic bank accounts, but DD
Too responds to many of the problems commonly linked to checking accounts.
Specifically, improper account reconciliation, bounced checks, and penalty
fees may create feelings of uncertainty and anxiety plus added cost to some
bank customers. This increased cost often surpasses the price of cashing
checks and purchasing money orders at non-depository institutions.
| Government research indicates that 60% of federal benefit recipients
cash their monthly benefit checks at financial institutions. FMS is
asking financial institutions to serve recipients by adopting the
Direct Deposit Too model.
| Eighty-eight percent of all Treasury-disbursed benefit payments
(EFT and checks) involve programs administered by the Social Security
DD Too is a bank account model that any financial institution
may adopt. DD Too is NOT a government product where account features
and fees are regulated. However, if the DD Too model is widely
adopted, it increases direct deposit potential for any payor including
the federal government. FMS markets the DD Too model to all financial
institutions in an effort to increase the availability of "risk free"
and "penalty free" accounts for unbanked federal benefit recipients.
This expands consumer choice, and brings more benefit recipients into
mainstream banking. Some financial institutions are adopting the DD
Too concept by permitting direct deposit of recurring payments plus
an over-the-counter deposit feature for infrequent payments. These same
financial institutions often supplement on-line debit with over-the-counter
access features. Treasury applauds such efforts and is pleased that the
four banking regulatory agencies consider accounts based on the DD
Too model eligible for credit under the Community Reinvestment Act
DD Too's Suggested Standards
Payments: Direct deposit of federal benefits into
a consumer-owned and consumer-established bank account offered by
private sector financial institutions.
Access: No checks, no potential to overdraw, no minimum
balance requirements, and reasonably priced services. Card/PIN access
to accounts by on-line debit is generally suggested.
Government-Sponsored Bank Accounts
Direct Payment Card
FMS's Direct Payment Card pilot in Texas is a banking service
where account features and fees are uniform since they are defined by
government. In 1992, Citibank was competitively selected to provide account
services as the Treasury Department's agent. These accounts are recipient-owned
and are "prefunded" because federal benefit payments are delivered
through the Automated Clearing House (ACH) network on the appropriate
payment date. No other deposits are permitted into the account. Recipients
access their federal payments at existing ATMs and at retail point-of-sale
(POS) terminals using a standard Citibank issued on-line debit card and
a personal identification number (PIN).
Payment access is fully compatible with private sector requirements since
transactions are routed through regional and national financial networks.
Recipients pay a reasonable fee for services, but unlike most basic accounts
that are available through the private sector, the Direct Payment Card
account cannot be overdrawn, has no minimum balance requirements and there
are no "penalty fees" due to the risk-free nature of the account.
FMS markets Direct Payment Card services directly to check recipients
in Texas, targeting recipients who lack bank accounts. Citibank enrolls
recipients, issues cards/PINS, trains recipients, and handles customer service
inquiries via a toll-free phone line. Recipient participation in the Direct
Payment Card pilot is voluntary and FMS pays Citibank an additional
subsidy since the pilot nature of the program limits payment volume and
| The Comptroller of the Currency and the three other federal
regulatory agencies conclude that DD Too would receive favorable consideration
as either a community development service-low cost account that improves
access to low-moderate income persons, or as an alternative delivery
system, for delivering retail banking services.
Benefit Security Card
The Benefit Security Card
is an EFT application that is rolling-out across eight southeastern states,
known as the Southern Alliance of States (SAS). This effort is a partnership
between the federal government and SAS, and marks the only instance where
state-administered welfare benefits and federal benefits are either mutually
or singularly available using a single debit card. Among SAS states, this
EFT service is referred to as Electronic Benefits Transfer (EBT). Although
EBT services appear identical to benefit recipients, the federal approach
for servicing these accounts is fundamentally different from the states'
Within the SAS, both federal and state recipients access their benefits
using the Benefit Security Card
at ATMs and retail point-of-sale outlets. However, unlike state benefits,
all federal benefits via EFT must be deposited into a consumer-owned account.
Unlike federal benefits, SAS recipients who receive only state administered
benefits do not receive Regulation E protection and the banked or non-banked
status of the SAS state recipient is not generally relevant. Most states
have, or will soon have, EBT systems in place, but many do not contract
with financial institutions to provide EBT services. In the SAS, however,
a financial institution must be the primary service provider because federal
payments are a part of the Benefit Security Card
program. All other aspects of the federal approach in the Benefit
® program, including voluntary
participation by federal recipients, are similar to the Direct Payment
Card program except there is no federal subsidy to the financial
The Search for Broad-based Solutions
| EBT represents state initiatives where paper payments such
as checks and food coupons are permanently replaced by Electronic
Funds Transfer. FMS has piggybacked on states' efforts, but unlike
EBT, the federal program is offered to unbanked recipients on a voluntary
basis. In addition, the federal recipient receives deposit insurance
and Regulation E protection since, unlike EBT, payments to a federal
recipient must be deposited into an account at a financial institution.
The government continues to be concerned that roughly 10 million federal
benefit recipients conduct their financial affairs in ways that compromise
safe and sound practice. Mr. John D. Hawke Jr., Under Secretary of the
Treasury for Domestic Finance, echoed this concern in his American
| The Debt Collection Improvement Act will significantly impact
federal EFT activity. Treasury encourages financial institution officials
to assertively market direct deposit to existing customers, and to
actively offer the DD Too model to potential consumers that are currently
"...At a time when the complexity of our economy makes
it unthinkable for most people to conduct their daily affairs without
a bank account, it has been estimated that as many as 20% of American
families including almost one-third of minority group families
have no such accounts. Many of these families...rely on check cashers,
pawnbrokers, money transfer agents or local merchants to cash their payroll
or benefit checks, frequently at a high cost."
The Treasury Department continues to build momentum for financial institutions
to offer reasonably priced accounts based on the DD Too model.
This is because everyone gains when "unbanked" recipients are
presented with competitive account choices that are easy-to-use, reasonably
priced, and available through neighborhood financial institutions. However,
if there are voids in private sector availability, and given Treasury's
mandate to expand EFT participation by January 1999, Treasury will seek-out
additional EFT options and target services to Federal benefit recipients
who lack bank accounts. How closely such account services will be modeled
on FMS's Direct Payment Card and Benefit Security Card®
programs is speculative at best. But stay tuned...early in 1998, Treasury
will begin to lay a framework for a national strategy to deliver federal
benefits to a constituency that remains unbanked.
| FMS's proposed rule, 31 CFR Part 208, is available for public
comment through December 16, 1997. Before any final decisions are
made as to the attributes of a federally-sponsored, consumer-owned
card/PIN account, Treasury is asking stakeholders to comment. Immediate
access to the proposed rule is available on the Internet: http://www.fms.treas.gov/eft.
1For a copy of the full
written opinion regarding DD Too's applicability to the CRA, contact the
Federal Reserve Bank of San Francisco's Community Affairs Department, or
contact FMS at (202) 874-6540.
2 "New Law Means
Millions of New Customers," American Banker, November
William Sessums is responsible for managing the U. S. Department of
Treasury's Direct Deposit Too Project in the Product Promotion Division
of the Financial Management Service (FMS). He created Treasury's Direct
Deposit Too model and is the primary coordinator of FMS's Direct Payment
Card program. Prior to joining FMS, Mr. Sessums held positions with the
State of Maryland, Department of Human Resources.