As part of the Debt Collection Improvement Act of 1996 (1996 Act), Congress decided to take advantage of the benefits that could result from the greater use of EFT payments and required that EFT be used to make all federal payments, except tax refund payments. EFT was defined as any transfer of funds, other than transactions originated by cash or checks that authorized a financial institution to debit or credit an account. EFT payments include payments made through the Automated Clearing House(ACH) network for the direct deposit of payroll or Social Security benefits. The 1996 Act also instructed Treasury to ensure that individuals have access to an account at a federally insured financial institution, that such an account have the same consumer protections provided to other account holders, and that it be provided at a reasonable cost. But the 1996 Act permitted Treasury to waive the EFT requirement under certain conditions, for example, when compliance would pose a hardship to a federal check recipient, for certain types of checks, or in other circumstances. The 1996 Act mandated that Treasury implement the EFT requirement in phases. During the first phase, recipients who became eligible to receive federal payments on or after July 26, 1996, would receive their payments by EFT unless they certified in writing that they did not have an account with a financial institution or an authorized payment agent. Treasury implemented an interim rule on July 26, 1996, for these requirements. The interim regulation remained in effect until January 1, 1999, at which time all federal payments were to be made by EFT unless Treasury granted a waiver. Treasury’s final regulation (issued on September 25, 1998) was intended to bring Americans who did not use the financial system to receive funds or make payments into the financial mainstream. In July 1999, Treasury issued a notice that established the required features of the ETA, a low-cost account Treasury designed for unbanked federal beneficiaries. Prior to implementing these final regulations, Treasury sponsored research and obtained the viewpoints of interested parties, including financial institutions, consumer groups, and others, during field hearings and as part of the regulatory comment process. The positions these groups held on the implementation and final design of the ETA were sometimes very different. For example, from the beginning consumer groups were concerned that some benefit recipients would be negatively affected if the 1996 Act’s waiver policy was strictly enforced. Treasury responded by establishing a flexible waiver policy that permitted individuals to determine for themselves whether direct deposit would cause them a hardship. However, establishment of this policy caused some representatives of financial institutions to anticipate that few unbanked beneficiaries would voluntarily enroll for ETAs. These officials asked Treasury for the flexibility to set their own monthly account fees, a request opposed by consumer groups wanting to ensure that the accounts would remain low cost. In designing the ETA, Treasury also commissioned studies to determine why people chose not to use direct deposit (including why they remained unbanked) and to identify an electronic account that could be offered to the unbanked at a reasonable cost. On July 16, 1999, Treasury published a notice in the Federal Register that established the required features of the ETA, such as the amount of the maximum monthly fee ($3.00) that an ETA provider could charge a customer and the minimum number of free withdrawals the account was required to include. The notice also set the amount of money Treasury would reimburse each ETA provider ($12.60) for opening an ETA. Treasury makes payments on behalf of several agencies; the largest percentage (90 percent) of benefit payments is for SSA. The majority of SSA’s payments fall under the Old-Age and Survivors Insurance (OASI) and the Disability Insurance (DI) programs. These programs combined are commonly referred to as Social Security, or the Old-Age, Survivors, and Disability Insurance (OASDI) program. In addition, SSA administers the Supplemental Security Income (SSI) program. Descriptions of these programs follow. OASI provides payments to retired workers or the survivors of workers who have paid into the Social Security trust fund. The trust fund is financed through payroll taxes paid by workers, their employers, and the self-employed. To qualify for OASI benefits, workers must have paid Social Security taxes for at least 10 years or an equivalent. DI provides payments to disabled workers who have paid a minimum amount into the Social Security trust fund. To qualify for DI, workers must have a medically determinable physical or mental impairment that prevents them from engaging in substantial gainful activity. These benefits provide an income base for eligible workers who have qualifying disabilities and for eligible members of their families. SSI is a means-tested program that provides qualified recipients with monthly cash payments sufficient to raise their income to a predetermined level guaranteed by the federal SSI program. The program is financed from general tax revenues and provides aid to aged, blind, and disabled children and adults who have limited income and resources. SSI benefit recipients may also qualify for other benefits, such as food stamps and social services. Besides administering payments for SSA, Treasury makes retirement and compensation payments on behalf of the Department of Labor (DOL) for victims of black lung disease, the Office of Personnel Management (OPM) for retirement benefits for federal employees, the Railroad Retirement Board (RRB) for retired railroad workers, and the Department of Veterans Affairs (VA) for benefits paid to veterans or their survivors. Table 1 identifies the number of payments by type (EFT or check) Treasury made for each federal agency in 2001. When determining the number of check recipients likely to enroll for an ETA, an important question to consider is how many of them do not have a bank account. One of the best sources for this estimate is the Bureau of the Census’ national SIPP. The SIPP provides information on the demographic and economic situation of individuals and households in the United States. This survey includes specific questions that ask whether individuals receive income from government programs and if they have checking or other types of accounts. Other well-known surveys, such as the Survey of Consumer Finances (SCF), sponsored by the Federal Reserve, can be used to produce estimates of the unbanked population but not estimates of individual unbanked federal benefit recipients. In 2001, most federal beneficiaries who received payments directly from Treasury received their payments electronically. Use of electronic transfers increased steadily throughout the 1990s, especially between 1996 and 2001. This increase can be attributed to a combination of efforts undertaken by the public and private sector to promote direct deposit. In particular, Treasury and SSA initiated and continue activities to advise check recipients of the safety and convenience of receiving their benefits by electronic transfer and to facilitate switching check recipients to direct deposit. We found that direct deposit participation varies widely among recipients in each SSA program. Today, the OASI program has the highest EFT participation rate at 82 percent. Information on the characteristics of benefit recipients who use direct deposit is limited, but our analysis of studies and SSA data suggest that EFT users tend to be older and that participation rates are generally lower in the southeastern states. Over the past decade, EFT usage has increased significantly. As shown in figure 1, in 2001, Treasury made 578 million (76 percent) of all federal benefit payments to beneficiaries through EFT compared to 315 million (47 percent) of the benefit payments it made in 1990. In 2001, Treasury made about 186 million check payments to about 14 million benefit recipients. This increase in EFT use was markedly greater after enactment of the 1996 Debt Collection Improvement Act. Specifically, between 1991 and 1996, EFT usage by federal benefit recipients increased by 8 percentage points (from 48 percent to 56 percent) and, between 1996 and 2001, by 20 percentage points (from 56 percent to 76 percent). Also, after declining steadily since 1990, the reduction in payments Treasury made by check mostly leveled off since 1999 and, since then Treasury continued to pay, on average, over 180 million check payments per year to federal recipients. To promote direct deposit, Treasury and SSA have jointly developed marketing campaigns and distributed promotional materials to financial institutions, SSA field offices, and nonprofit organizations. These materials include public service announcements for radio, television, and printed publications; posters for distribution to financial institutions and SSA field offices; and check inserts to accompany benefit checks. These promotions emphasize that direct deposit is “safe, quick, and convenient,” and materials are often available in both English and Spanish. Treasury considers these check inserts, such as those shown in figure 2, to be one of its most important methods of promoting direct deposit, because these inserts reach beneficiaries directly. SSA also undertakes its own activities, some of which were initiated before the Debt Collection Improvement Act was signed into law. For instance, in the early 1990s, SSA streamlined the direct deposit enrollment process by introducing a toll-free enrollment number for benefit recipients and establishing a program to allow benefit recipients to enroll in direct deposit at a financial institution more easily. As a result of the 1996 Act, SSA further strengthened its direct deposit enrollment procedures by instructing staff to use a line of questioning that presumed a recipient would use direct deposit. During 1997 and 1998, before Treasury established a flexible waiver policy, SSA also told individuals with bank accounts that they were required to sign up for direct deposit. Other organizations and financial institutions have also promoted direct deposit, providing additional publicity to encourage federal beneficiaries to use it. Nonprofits such as the American Association of Retired Persons (AARP) and the National Community Reinvestment Coalition (NCRC) promote the use of direct deposit as part of their financial literacy programs because of the benefits (such as safety and convenience) it could yield to their constituencies. For example, AARP officials told us that they conducted a three-year educational campaign starting in about 1997 that involved cooperating with banks and community groups to promote direct deposit and using mass mailings to reach their constituency. In addition, these organizations have cooperated with federal agencies such as Treasury, banking associations, and other consumer groups to compile a training guide that provides financial education to people with minimal knowledge of the banking system. This guide includes fact sheets on the advantages of direct deposit and a description of how individuals can receive benefits electronically (for example, with an ETA). Financial institutions complement these efforts by sponsoring direct deposit campaigns, and some banks provide free checking accounts in exchange for using direct deposit. Banks are highly motivated to promote direct deposit because checks are more costly to process than electronic transfers. For example, major banks we spoke with reported that it cost them about .05 cents to process an ACH transaction and more than a dollar (one major bank reported $1.19) when a customer comes to a teller window to cash a check. Despite these ongoing efforts by Treasury and others, the annual increase in EFT usage by benefit recipients has slowed down over the last few years. For example, between 1999 and 2000, EFT use increased by only two percentage points, from 73 percent to 75 percent, and between 2000 and 2001, EFT use increased by only one percentage point, from 75 percent to 76 percent. In contrast, between 1996 and 1999, EFT use had been increasing by about six percentage points annually. Although SSA has limited data on the characteristics of direct deposit users, we used available SSA data to identify program participation rates, the age of direct deposit benefit recipients, and participation in direct deposit by state. OASI recipients were more likely to use direct deposit than were DI or SSI recipients. These benefit recipients had the highest participation rate—82 percent. In contrast, 68 percent of DI recipients and 51 percent of SSI recipients used direct deposit. However, because the OASI program has a larger number of participants, it also has a higher number of check recipients than the other two programs. (Figure 3 provides additional information on direct deposit usage for each program.) SSA officials said that they do not tailor their marketing by program type and could not identify factors contributing to the lower use of direct deposit among DI and SSI recipients. They noted that SSA was in the process of conducting a survey of beneficiaries to better understand why people are not using direct deposit. However, the officials said that the survey results were unlikely to distinguish reasons for nonparticipation among benefit recipients. As shown in figure 4, SSA data suggest that age is not an obstacle to direct deposit. Benefit recipients 65 and older have high direct deposit participation rates. For example, among OASI recipients, 83 percent of those 65 and older used direct deposit compared with 79 percent of those 18–64 and 65 percent of those under 18. However, most OASI check recipients (5.6 of 7 million total check recipients) are 65 and older. Since other factors, such as a disability or use of a representative payee by those under age 18, might contribute to lower electronic transfer use by younger recipients, any comparison of usage by age should be done with caution. While higher direct deposit use is not associated with any one region of the United States, direct deposit use is generally lowest in the southeastern states, including Alabama, Kentucky, Louisiana, North Carolina, and West Virginia. These states have OASI direct deposit participation rates of 68 to 77 percent, compared with states such as Arizona, Oregon, and Washington, where participation rates range from 90 to 91 percent. We asked Treasury and SSA officials if they could identify any factors that could explain why direct deposit use was lower in the southeastern states, but they could not. As indicated in table 2, of the three programs SSI shows the widest variance in direct deposit participation rates across states from a high of 67 percent in California to a low of 31 percent in West Virginia. Appendix III identifies direct participation usage by state for each SSA program. We found that the major obstacle to using direct deposit was being unbanked—that is, not having a bank account. Importantly, we also found that the number of unbanked federal beneficiaries may be higher than earlier estimates suggest. Our analysis of the Census Bureau’s SIPP showed, for example, that the number of unbanked beneficiaries may be twice as high as Treasury’s estimate. Our analyses also indicated that unbanked federal beneficiaries are more likely to have lower income and educational levels than banked beneficiaries and are more likely to be unmarried. We used studies of both unbanked federal beneficiaries and the unbanked population at large to determine why some federal check recipients remain unbanked and to identify obstacles to bringing them into the banking system. Our analysis of relevant studies conducted by federal agencies and other researchers showed that unbanked federal beneficiaries and unbanked individuals at large have practical reasons— including cost and convenience—for not opening a bank account. But lack of a bank account is not the only reason beneficiaries choose not to use EFT. Some federal beneficiaries who have bank accounts do not use direct deposit, in part because of the availability of the opt-out provision and in part because of concerns about receiving payments, accessing money, and resolving problems, among other things. Determining the exact number of unbanked federal beneficiaries is difficult because federal agencies do not document whether or not their recipients have bank accounts. However, determining the correct percentage of federal check recipients who are unbanked is an important ingredient in developing a strategy on how best to attract federal check recipients to EFT. An underestimate of the percentage of federal check recipients who are unbanked could have profound implications on the success of any program to attract federal check recipients because it is much more difficult to persuade beneficiaries without bank accounts than those who already have a bank account to use EFT. In 1997, to prepare for the ETA program, Treasury sponsored its own research that estimated that about 5.2 to 6.5 million federal beneficiaries— approximately 24 percent of check recipients—were unbanked. Treasury still uses this percentage in determining the number of unbanked check recipients and, in early 2002, placed that figure at 3.3 million. However, we analyzed data from the Census Bureau’s SIPP from 1998 to determine the number of adult federal recipients without bank accounts and found that for 1997 Treasury may have underestimated the number of the unbanked who received federal benefit checks. Specifically, we estimated that about 11 million federal beneficiaries, or over half of all federal check recipients in 1998, did not have a bank account (see appendix I for details of our analysis). Of this number, almost all received benefits from SSA or a combination of benefits from SSA and other agencies. In addition, our analysis of more recent SIPP data indicated that, in 1999, the number of unbanked federal beneficiaries was closer to about 11.5 million, including about 8.7 million OASDI recipients and from 3.0 to 3.9 million SSI recipients. This same analysis indicated that about 37 percent of unbanked SSI recipients also received OASDI. While no estimates of the unbanked are available for 2001, our analyses of the SIPP data raise significant concerns about Treasury’s most recent estimate of 3.3 million. Our analysis of the SIPP data indicates that Treasury officials may be planning their EFT marketing based on an estimate of the unbanked that is too low. When we discussed our estimates with Treasury officials, they told us that they were unaware of the availability and benefits of using the SIPP data to estimate the size of the unbanked population. They acknowledged that if the unbanked recipient population was significantly larger than their estimate, the goal of enabling this group to receive funds electronically would be more challenging than had originally been thought and therefore might call for developing new strategies to attract the unbanked. While the SIPP does not contain information on why individuals have decided to be unbanked, our analysis of the SIPP data allowed us to identify certain characteristics of unbanked federal benefit recipients. Identifying such characteristics could contribute to developing strategies to increase ETA and EFT use. Using survey data from the 1999 SIPP, we were able to identify the following characteristics: Low-income recipients were less likely to have a bank account than high- income recipients. For example, 35 percent of OASDI recipients with family incomes of less than $15,000 were unbanked, compared with 16 percent of those with incomes of $30,000–$45,000. About three-quarters of unbanked OASDI and SSI recipients had family incomes of $30,000 or less. Recipients with less schooling were less likely to be banked. For example, 36 percent of OASDI recipients who did not complete high school were unbanked, compared with 20 percent who had at least a high school diploma and 16 percent with at least some college experience. Most unbanked OASDI and SSI recipients had no more than a high school diploma. Ethnic minorities, including African Americans and Hispanics, were more likely to be unbanked than white recipients. For example, 52 percent of African-American OASDI recipients were unbanked compared with 18 percent of white recipients. However, because most OASDI recipients are white, they accounted for 66 percent of all unbanked OASDI recipients. Single OASDI and SSI beneficiaries were more likely to be unbanked than married recipients. For example, 30 percent of unmarried OASDI recipients were unbanked compared with 16 percent of married recipients. For both programs, the majority of all unbanked beneficiaries were unmarried. Eighty percent of unbanked SSI recipients and 62 percent of unbanked OASDI recipients were unmarried. For both OASDI and SSI, younger benefit recipients were less likely to be banked than older ones. For example, 63 percent of OASDI recipients 18– 35 were unbanked compared with 19 percent between the ages of 65 and older. However, because most OASDI recipients are 65 and older, they still represented the majority (66 percent) of unbanked OASDI recipients. Federal beneficiaries in the southeastern and southwestern states were more likely to be unbanked than those in other parts of the country. Around 35 percent of recipients in the southeast and 36 percent in the southwest did not have a bank account, compared with 22–25 percent in other parts of the country. Appendix IV provides figures showing more detailed information about the characteristics of unbanked OASDI and SSI recipients. While additional research could provide other insights into why some federal recipients are unbanked, this type of information is still useful because the more Treasury and other program officials know about unbanked benefit recipients, the more equipped they will be to develop a workable strategy for increasing the use of EFT. Appendix IV provides figures showing the same detailed information about the characteristics of the unbanked population at large to provide a broader context within which to understand the characteristics of unbanked federal benefit recipients. To identify some of the obstacles to bringing unbanked federal beneficiaries into the financial mainstream, we relied largely on existing studies of the unbanked population. While research on the unbanked is fairly limited and often restricted to a specific geographic location, these studies still provide useful insights. Collectively they indicate that the unbanked have a number of practical reasons for preferring their current check-cashing and payment arrangements. For example, because these recipients frequently have low incomes, the minimum balances required by banks and the potential for incurring overdraft fees may deter the unbanked from opening bank accounts. Treasury-sponsored research completed in 1997 indicated that federal check recipients were unbanked largely because they believed that they did not have enough money to establish an account, felt that they did not need an account, and believed that bank fees were too high. The researchers noted that fees were a problem because low-income recipients could have trouble maintaining a minimum balance and thus could incur service or overdraft charges. More than half of unbanked recipients reported that they cashed their checks at financial institutions or grocery stores. Responses to the 1998 Federal Reserve Board’s SCF, which queried a sample of the population at large, also indicated that the unbanked have practical reasons for not having checking accounts. The respondents said that they would not write enough checks, did not have enough money to establish an account, and thought that service charges and minimum balance requirements were excessive. Other studies evaluating the unbanked population at large indicate that the unbanked make decisions that take into consideration their limited income and the cost of financial services. These researchers evaluated both the costs of maintaining a bank account and the cost of paying bills. For example, based on a survey sponsored by the Office of the Comptroller of the Currency (OCC), a researcher estimated that the unbanked used both check-cashing outlets (71 percent) and banks (23 percent) to cash checks, and noted that those using a bank were able to do so at little or no cost. However, to make payments (for example, by purchasing money orders) almost all the unbanked surveyed preferred using places other than financial institutions, such as check-cashing outlets and post offices, to arrange for payments. The researcher noted that many unbanked might operate outside the banking system in order to save money, but the survey results indicated that minimum balances required to open an account may pose a significant problem for many of the unbanked. Another researcher, using research sponsored by the Federal Reserve, also noted that a checking account could be expensive for low-income individuals, because they would be likely to maintain a very low balance and could therefore incur overdraft fees. This same study forecasted that ETAs would not be widely adopted because the unbanked—except in urban areas where check-cashing outlets are costly—would prefer their current arrangements, which allow them to cash their checks and pay bills at the same time. Another researcher concluded as well that unbanked households may favor financial service providers such as check-cashing outlets because the unbanked cannot meet the high minimum balances required to open a deposit account and are averse to paying the monthly maintenance fees generally imposed on accounts with small balances. In addition, this researcher also noted that check-cashing outlets selling money orders and cashing checks for the general public may be more effectively tailoring their services to the needs of the unbanked. While researchers recognize that the unbanked may have practical reasons for not having a bank account, they also recognize the important connection between owning a bank account and saving money. For example, researchers have identified a variety of benefits attributable to savings, including the ability to save money over the short term for emergencies and over the long term for home ownership and to avoid the sometimes high cost of using check-cashing outlets. However, in discussions with us, officials from nonprofit organizations and community banks indicated that the unbanked population needs financial education and “hand-holding” in order to understand the benefits of owning a bank account and to learn how to manage one without incurring fees. Some studies have also suggested that what may be required is changing the way financial institutions have traditionally provided services to low-income families. One author noted that these customers may value the ability to cash checks, purchase money orders and stamps, and pay utility bills at one location. While check-cashing outlets offer these services, banks do not. Although many individuals do not have traditional bank accounts, some federal beneficiaries have been receiving payments through debit cards. In January 2002, GAO reported that Electronic Benefit Transfer (EBT) cards were used to deliver food stamp benefits to 80 percent of recipients, or about 14 million individuals. The EBT is a plastic card resembling a bank- issued debit card that recipients use to pay for their food at authorized retail stores. An increasing number of states have also decided to use this card to provide cash welfare benefits. The money for these cash welfare benefit transactions is held in a pooled bank account by a state agency, and individuals are authorized to withdraw a certain benefit amount. These cash benefits can be withdrawn at an automated teller machine (ATM) or spent at a retail outlet with a point-of-sale terminal. Many private sector initiatives are also under way that involve using debit cards to transfer wages to unbanked workers. Financial institutions we interviewed indicated that firms with high numbers of unbanked workers, such as fast food and home improvement chains, were likely to consider this option. Treasury research and our interviews with organizations familiar with the check recipient population identified several factors that kept some recipients with bank accounts from using direct deposit. The concerns most frequently cited in Treasury’s 1997 survey research included uncertainty about when the payment would arrive, fear of being unable to access disputed money (for instance, during a divorce), and resolving problems. However, this study concluded that lack of awareness of or perceived difficulty in signing up for direct deposit were not major obstacles. An SSA survey of check recipients in 1993 reported that some people simply preferred to receive checks. Representatives from AARP commented that some level of distrust would always exist about electronic payments, especially among low-income recipients. SSA data also indicated that another obstacle to increasing direct deposit use may have been permitting recipients with bank accounts to opt out of using direct deposit. As shown in figure 5, these data show that sign-up rates for direct deposit among new applicants for benefits peaked between 1997 and 1998 but decreased thereafter. For example, enrollment rates for new OASI recipients peaked at 86 percent in 1997 but decreased to 76 percent in 2001. SSA officials said that the 1997 increase was most likely the result of strengthened enrollment procedures in anticipation of a mandatory direct deposit requirement and noted that some field office staff advised new benefit applicants that participation was mandatory. However, once Treasury regulations specified that enrollment was optional, it became easier for new applicants to opt out of signing up for EFT. SSA data also indicated that benefit recipients with representative payees—both individuals and institutions such as nursing homes—were less likely to use direct deposit than those without (see fig. 6). We asked SSA officials why representative payees would be less likely to use direct deposit, but the officials could offer no explanation. Treasury officials, however, suggested one possible explanation. They told us that the way in which SSA makes electronic payments to institutional representative payees could make it difficult for those organizations to identify an individual payment. Financial institutions are not required to pass along to the organization information contained in a separate record that accompanies these types of electronic payments. Thus, for instance, if the name of the intended recipient is truncated on the payment record, the institutional representative payee may not be able to identify the person for whom the payment is intended. The institutions, therefore, find it easier to receive a check for each individual for whom they are the representative payee. Despite Treasury’s efforts to market the ETA program, since the program was initiated in July 1999, about 36,000, or fewer than 1 percent, of unbanked federal beneficiaries had opened ETAs by June 2002. Most financial institutions do not offer them. Because some of the nation’s biggest banks, which typically have the greatest number of branches, have enrolled in the ETA program, opportunities to reach ETA prospects have increased. But these banks often market the ETA only on a limited basis, as they do not see the account as profitable. Smaller banks that focus on specific community or ethnic groups often do make special efforts to market the ETA but open fewer accounts. Further, potential ETA users may choose not to participate in the program because they prefer other means of cashing their checks or feel that the ETA does not offer enough features—for example, a payment mechanism. Given the current number of ETA holders, it is unclear whether the ETA can generate savings sufficient to offset the costs of maintaining and promoting the program. Treasury considers the ETA important because it is the preferred method of fulfilling the 1996 Debt Collection Improvement Act’s intention that unbanked benefit recipients use EFT to receive their payments. However, providing low-cost electronic services that are attractive to both the unbanked recipient population and financial institutions presented Treasury with a major challenge, especially when EFT became optional. In response to congressional concerns and concerns expressed by consumer and community-based organizations, federal agencies, and recipients, Treasury established a broad waiver policy emphasizing consumer choice, essentially allowing beneficiaries to decide for themselves whether they wanted to open an ETA. The ETA is not a checking product and therefore has fewer features than a traditional checking account (see figure 7 for a listing of ETA features). For example, while an ETA has a maximum monthly fee of $3.00 and requires no minimum balance, it does not provide a bill-payment mechanism, such as check writing. Treasury made a deliberate decision not to include check writing, in part, because of concerns raised by both financial industry and consumer advocacy groups about the potential for account misuse, including overdrafts. As ETA providers, financial institutions are required to offer the account as described by federal regulation and to make it available to anyone receiving federal benefits, even applicants with a history of check misuse or fraud. To help defray the costs of opening an ETA, Treasury reimburses financial institutions $12.60 for each account opened. Since the notice establishing the required ETA features was published in July 1999, Treasury has undertaken a number of promotional activities. Treasury’s first step was to enroll or certify financial institutions to offer the account. According to Treasury officials, recruitment efforts included making personal contacts with major banks, attending conferences to generate interest in offering ETAs, and advertising the ETA in trade publications. However, both Treasury and bank officials told us that banks were slow to offer the ETA for several reasons, including having to prepare their computer systems for the year 2000 problem before developing a new product and wanting to “field test” the account before offering it nationwide. Some banks delayed enrolling because they were merging with other banks. After some financial institutions began offering ETAs, Treasury began a nationwide marketing campaign to educate check recipients about the benefits of the ETA. This campaign, which is still under way, includes promotional inserts that are included with benefit checks (see app. II). In addition, Treasury developed materials, such as an educator’s guide and video that could be used by community based organizations to educate check recipients about the ETA. Treasury’s other efforts include developing ETA promotional materials such as brochures, posters, and pens with the ETA logo for distribution to financial institutions and community organizations promoting the ETA, as well as public service advertising for newspapers, radio, and television. In addition, Treasury sponsors what it calls “Strategic Alliance Meetings” about a dozen times a year at different locations around the country. At these meetings, Treasury educates representatives of community-based organizations, ETA providers, financial institutions, local federal program offices (for example, SSA and VA), and local government officials about the benefits of the ETA and promotes collaborative efforts locally. In addition, Treasury contracted with the Federal Reserve Bank of Dallas (FRB Dallas) to maintain a database of ETA providers that ETA prospects can access on the Web. FRB Dallas also maintains a toll-free telephone number that provides the names of local ETA providers to ETA prospects and in some instances transfers callers directly to the financial institutions that offer telephone enrollment. FRB Dallas and Treasury have reported that they are seeking to simplify enrollment because estimates show that only a small number of those who inquire about the ETA actually sign up for it. FRB Dallas reported that, in between June 2001 and May 2002, it has received approximately 148,000 inquiries, but only 19,400 beneficiaries had actually enrolled for ETAs. We could not determine whether these promotional activities were effective in reaching the unbanked recipient population because such an assessment would have required us to interview large numbers of ETA prospects. However, Treasury provided us with information showing that mass mailings of promotional brochures, along with checks, coincided with an increased number of ETA inquiries on the toll-free number, suggesting that this method is an effective tool for reaching potential ETA users. As of July 2002, Treasury had entered into agreements with approximately 597 financial institutions with 17,977 branch locations to offer ETAs.Although this number includes 6 of the country’s 10 largest banks, it represents only about 3 percent of all financial institutions and 23 percent of all bank branches in the country. In addition, some states have fewer providers, especially states such as Mississippi and Alabama, which have an exceptionally low number of ETA providers. Treasury officials indicated that the number of banks enrolling in the ETA program has leveled off, and they believe that not many more banks are likely to enroll. Figure 8 shows the number of financial institution branch locations available in each state as of June 7, 2002. In addition, data compiled by the Federal Reserve Bank of Dallas show that the number of ETA providers varies in the 100 counties with the highest number of check recipients (as measured by checks authorized by SSA). Looking at coverage in areas such as counties or cities is more useful than looking at coverage by state because the measurements for smaller units are more specific. We found that in Dallas, Texas, and Maricopa County, Arizona, for instance, the proportion of bank branches offering ETAs was 55 percent and 76 percent, respectively. In contrast, only 5 percent of bank branches in Philadelphia, Pennsylvania, and 13 percent of those in Dade County, Florida, offered ETAs. While many financial institutions told us that the ETA was a good product for the targeted market—unbanked individuals, often with a poor credit history—they added that they were initially reluctant to offer the account because they did not see the product as profitable, given its limited market volume and account restrictions (for example, the $3 maximum monthly fee). Several banks pointed out that the ETA was not providing them with any interest earnings because ETA holders tended to withdraw their money quickly and thus had low balances. Bank officials we spoke with reported average balances ranging from $50 to $500. Some banks also indicated that ETAs did not provide them with cross-selling opportunities, because customers using these accounts tended to have limited incomes. Other banks said that they were hesitant to offer the ETA because of concerns about account misuse and fraud, although most banks reported that relatively little of this activity materialized, if only because of the account’s design and their preventive efforts. Most large financial institutions we interviewed reported that the $12.60 fee that Treasury reimbursed did not cover their costs for opening an ETA, although some smaller institutions reported that the fee was definitely an incentive and was enough to maintain the account. Large financial institutions we interviewed that chose to offer the ETA despite its perceived lack of profitability were more likely to cite their intention to serve the low-income community or to receive Community Reinvestment Act (CRA) credit as a factor in their decision. Financial institutions can receive CRA credit for offering the ETA, but institutions that did not offer the ETA were satisfied that they served the community by other means and were meeting their CRA obligation. One major trade group indicated to us that many banks lost interest in the program once Treasury decided that participation would be optional, because banks had thought they would make profits based on volume. Banks also cited other concerns about offering the ETA, including the cost of reconfiguring their computer systems, in part to prevent account misuse. In fact, many of the large financial institutions we interviewed considered this reconfiguration as a sizeable investment, given that they were unlikely to earn profits on this account. Most large financial institutions we interviewed limited their marketing of the ETA for the same reasons they were reluctant to offer the ETA in the first place. Institutions said that they lacked financial incentives to justify extensive marketing because the accounts were not profitable, given their limited market potential and account restrictions. Banks said they viewed the ETA as a product intended primarily for those with poor credit histories, adding that the ETA’s $3.00 maximum monthly fee was too low and that they did not see the potential to earn profits in overdraft and transaction fees. Some banks noted that other products they offered— such as free checking and other low-cost accounts—were potentially more profitable and would be offered to qualified ETA prospects. One bank said that it did not make sense to promote a product that had such a narrow focus—federal beneficiaries—and added that demand for ETAs had not met original projections. As a result, many large financial institutions limited their marketing efforts to special ETA brochures, which they considered important because they wanted the ETA to fit in with their brand image and be associated with their bank logo. Other marketing efforts included promoting ETAs to those who meet the ETA “profile” and offering financial incentives to tellers. Some large banks reported that they sought to increase ETA enrollment by helping applicants complete the ETA application or enrolling them for direct deposit at the same time they opened an ETA. In addition, a few large banks had established telephone enrollment systems that allowed FRB Dallas’s ETA call center to route the call directly to the bank’s enrollment line. In some cases, customers still had to go to the bank branch to present identification and complete the paperwork. Despite their limited marketing efforts, large financial institutions have been able to open more ETAs than smaller financial institutions, partly because they have more extensive nationwide branch coverage. Over 75 percent of all ETAs have been opened by 9 large financial institutions that are ranked among the top 50 in the country in terms of asset size. Like the large financial institutions, smaller financial institutions such as credit unions or savings institutions limited their marketing of the ETA primarily because they believed they had better products that were more marketable to ETA prospects. However, many smaller institutions, some located in low-income neighborhoods with little branch coverage, tended to market the ETA in a more personal way. These small financial institutions emphasized the need to “hand-hold” and the importance of providing financial education to ETA prospects. For example, one small community development credit union in Pennsylvania told us that the president of the credit union went door to door handing out flyers that described the ETA’s benefits. Another small bank in Louisiana said that the bank held an “ETA week” during which the bank distributed ETA promotional materials at the branch office and offered refreshments to better facilitate communications with customers. These small institutions were also more likely to report that they opened ETAs through community outreach programs that involved visiting churches or senior centers. In addition, some financial institutions—including a few large ones— reported offering financial incentives to ETA prospects to open an ETA. These incentives included waiving the $3.00 monthly service fee for several months or allowing unlimited ATM withdrawals or teller access at no additional cost. Small institutions had more ETAs per branch than large banks but fewer ETAs overall, because small banks have fewer branches. While financial institutions generally indicated that they limited their efforts to market the ETA, they nevertheless used a broad range of methods to attract ETA prospects. Among the ETA providers we interviewed, banks primarily targeting the Hispanic community often did the most extensive outreach, perhaps helping to explain why one-third of all ETAs have been opened in Puerto Rico. Both large and small financial institutions have undertaken other marketing efforts, such as the following: One large bank that targets the Hispanic community and has locations in both Puerto Rico and the United States emphasized that it marketed the ETA and other products specifically for Hispanics. For example, in Puerto Rico it sent mobile banks to reach less-populated communities. In a major metropolitan area like New York, it concentrated on providing a comfortable environment that included bilingual services for prospective clients. Smaller banks that serve the Hispanic community in the United States likewise said that they tried to build relationships with the local community by participating in local parades, health fairs, and community gatherings at venues such as churches. Several small financial institutions reported that they coordinated with local Social Security offices to meet ETA prospects in person. These banks indicated that they went to local SSA offices equipped with ETA brochures and, in some cases, were able to open accounts on the spot. Two large banks said that such collaboration could help promote the ETA, because a one-step enrollment process would make it easier for ETA customers to open an account. One large bank emphasized the importance of personal contact to persuade people to open accounts. This bank was one of the few that we interviewed that cashed government checks for free. Further, this bank trained its tellers to promote the ETA and had at one point used coordinators to direct and encourage those standing in line to cash checks to open the ETA (staff reductions have eliminated this position). Bank officials told us that they found this strategy to be highly effective and reported opening a large number of ETAs during the months when “coordinators” were in use. As of June 2002, about 36,000 ETAs had been opened, a figure representing fewer than 1 percent of unbanked federal beneficiaries. We found this figure to hold true regardless of which estimate we used for the number of unbanked beneficiaries. Treasury officials indicated to us that it was too soon to evaluate the success of the ETA because the program was less than 3 years old. But the low enrollment we found is consistent with feedback we received from some banks, including community-oriented banks, that told us the ETA had limited appeal. Treasury’s own market research indicated that only 276,000 to 818,000 federal beneficiaries would voluntarily enroll in an ETA, given the account’s current attributes.Current ETA enrollment thus represents only 4–12 percent of Treasury’s original demand projection for the 3 years the ETA has been in operation. Because information about the characteristics of ETA holders—as well as of non-ETA holders—is limited, it is difficult to describe all the factors that affect individual decisions to open an ETA and to determine which of Treasury’s promotional activities have proved effective in persuading people to open an ETA. However, using information from research studies, financial institutions, and consumer groups, we identified the following factors that may influence the decision to open an ETA: Personal preference: As previously noted, many unbanked people decide not to open a bank account because they prefer the way they are already cashing their checks. A 1999 Treasury study found that most unbanked federal beneficiaries either did not pay to cash their checks or were satisfied with the way they cashed their checks. Lack of a payment mechanism: Both financial institutions and consumer groups suggested that ETA’s lack of a check-writing feature could affect the decision to open an ETA because beneficiaries would still have to go elsewhere to obtain a money order or pay bills. Limited availability of banks offering ETAs: As previously noted, Treasury’s ETA promotional efforts have resulted in relatively few financial institutions choosing to offer ETAs. In addition, the number of bank branches offering ETA varies widely by state. For example, in states with relatively few bank branches, the number of ETAs is low. Lack of consumer awareness: Although Treasury and Social Security offices have been mailing check inserts and letters about the ETA to beneficiaries, some consumer groups suggested that many recipients still lacked information about the ETA. Lack of a convenient enrollment procedure: Currently, ETA applicants must complete several steps to open an ETA. First, they must locate an ETA provider in their neighborhood, most likely with assistance from the ETA call center operated by FRB Dallas. Second, many banks require that applicants complete at least some of the paperwork in person. And finally, while some banks will enroll the person for direct deposit, others require that ETA holders contact SSA themselves. As previously noted, FRB Dallas and Treasury officials told us that they were seeking to simplify enrollment because such cumbersome enrollment procedures may be contributing to the low sign-up rate. One of the objectives of the 1996 Act was to save the government money through increased EFT use. However, it is uncertain whether the ETA program—Treasury’s preferred method of linking the unbanked to EFT— will generate savings sufficient to offset the cost of maintaining and promoting the program. Further, some of the costs of transitioning benefit recipients to EFT, whether to ETAs or other accounts, have been shifted to the banks and the benefit recipients themselves. According to Treasury’s 1997 estimate, each EFT saves the government $0.41 per payment. Thus, the current enrollment of approximately 36,000 could save Treasury roughly $177,120 annually, assuming that each beneficiary receives 12 EFT payments each year. In comparison, based on information Treasury provided to us, the cost of promoting the ETA program is roughly between $1 and $2 million a year, including $722,000 paid to FRB Dallas for managing financial institutions’ enrollment and maintaining the ETA database and call center. In addition, Treasury reimburses financial institutions $12.60 for opening each ETA account. Assuming that 12,000 accounts are opened each year, reimbursement costs would be about $151,000. Treasury officials indicated that the value of the ETA program should not be based simply on the number of ETAs opened. Some benefits are difficult to quantify, such as the long-term benefits of bringing an unbanked person into the financial mainstream and reductions in costs associated with lost checks or fraud associated with checks. Other government agencies, bank officials, and consumer groups have also acknowledged that the ETA could provide such long-term benefits. According to Treasury, the number of ETAs opened also may not represent the total number of new account holders using direct deposit because some unbanked recipients may have elected to open other bank account products. Treasury officials also asserted that, since Treasury’s overall goal is to increase electronic payments, it did not matter whether the recipients opened ETAs or other bank products, so long as they were using direct deposit or other forms of transferring funds electronically. Based on our discussions with representatives from the federal government, financial institutions, and consumer groups, we identified approaches that the Treasury could consider to further promote the use of EFT, especially by unbanked benefit recipients. These approaches, described below, include increasing cooperation between banks and local SSA offices to enroll beneficiaries for ETAs; exploring other electronic payment options besides the ETA to deliver benefits; partnering with banks to provide information on the general availability of low-cost banking products; and conducting further research to determine why certain states have unusually low direct deposit participation rates. Each approach has potential strengths and weaknesses that vary based on the perspectives of different stakeholders, such as government agencies and banks. Therefore, reaching a consensus on the merits of each approach would require careful consideration. Financial institutions frequently cited cooperation with local SSA offices as the most productive way to promote ETAs. Some bank officials told us that, at some SSA offices, banks were able to distribute information about their products or enroll people on the spot. This arrangement worked because it provided a way for financial institutions to market the ETA directly to unbanked benefit recipients who otherwise might not visit a financial institution. For the beneficiaries, it provided the opportunity to enroll for both an ETA and direct deposit at one location. However, SSA and Treasury officials were concerned about this option because they believed that the presence of a bank in an SSA office could be misconstrued as an endorsement of that particular institution. One bank suggested that SSA could invite banks to market the ETA on a rotating basis one day a month to avoid any appearance of favoritism. Requires banks to provide staff Would not reach current recipients or new enrollees who do not have to visit SSA offices (most recipients) SSA officials said that Treasury should consider sponsoring other electronic payment options, such as a debit card. Financial institutions we interviewed offered such cards and said that anticipated user volumes and fees could provide the necessary financial incentives to deliver this service, which they already provide to unbanked employees in the private sector. Modeled on the EBT card used by some states to deliver “food stamps” or other cash benefits, the card could be programmed to work on most ATM networks and would allow withdrawals and point-of-sale transactions but not deposits or check writing. While the cost to beneficiaries could be higher than the cost of the ETA, Treasury’s own research shows that some ETA prospects, although sensitive to increases in price, may be willing to pay a higher monthly fee for a product with more features. Costs to the benefit recipients or to Treasury could be higher or lower than the ETA, depending on the number of free ATM withdrawals allowed per month before recipients and/or Treasury incurs additional charges. Such arrangements would depend on Treasury’s contract with the electronic payment service provider. Treasury officials objected to this option, noting that it was similar to the Benefit Security Card that has been used to provide federal and state payments on the same card and that was piloted in some southern states. Treasury officials terminated the pilot, even though the vendor did not charge them to distribute the card, because they did not think it was successful in all states, and it could be difficult to administer in the future due to renegotiating and monitoring contracts. In addition, this product would compete with the ETA without providing bank accounts. However, SSA officials thought that a product similar to the Benefit Security Card would be worth reconsidering because it would not require that individuals open their own bank account and beneficiaries could obtain the debit card when they first enroll. For example, in states where use of the Benefit Security Card was highest, beneficiaries could enroll and receive a card at the same visit. SSA officials added that they had also considered making the Benefit Security Card available through a toll-free number, making enrollment easier for those already receiving benefits. As indicated by financial institutions and a recent study by the U.S. Public Interest Research Group (PIRG), more banks are offering free checking and no-frill checking products. Although institutions could charge inexperienced customers excessive overdraft and other fees on these products, PIRG and other nonprofit organizations said that such products could be more attractive to an unbanked person than the ETA. Further, these free or low-cost products could be available in areas where ETAs are not. While Treasury cannot endorse particular bank products, it could cooperate with financial institutions to promote low-cost products in general in much the same way that it promotes direct deposit without mentioning specific banks. One bank suggested that Treasury broaden the language in the ETA promotional check inserts to include a general statement about the availability of free checking accounts and the features customers should look for when considering these accounts. Data clearly indicate that fewer recipients use EFT in many of the southeastern states and that the percentage of unbanked beneficiaries in this region is also high. Thus, additional research focused on these states could help generate information that could assist in developing strategies to increase the use of EFT in these states. Treasury agreed that it might be worthwhile to have a study done specific to the southeastern geographic area to determine why EFT participation was so low. Consumer groups and academicians noted that the reasons for being unbanked might differ widely throughout these states. While opportunities exist to increase EFT use, each identified approach has potential strengths and weaknesses. Reaching consensus among the stakeholders is unlikely to be easy because they make decisions based on their sometimes complementary and sometimes contradictory objectives. On the one hand, Treasury and the financial institutions promote electronic payments not only to save money, but also to speed up transactions and reduce fraud. On the other hand, financial institutions (other than credit unions) are in business to earn profits and thus want to offer products other than the ETA that allow them to collect more fee income through higher monthly fees and overdraft charges. Finally, check recipients consider their own interests when deciding whether to open an ETA or other bank account. These stakeholders, who do not benefit from the savings realized by Treasury and financial institutions, may not want an ETA or a bank account and may seek alternative methods of cashing checks and making payments. The major government stakeholders in the effort to promote EFT, Treasury and SSA, offered differing views on how best to attract check recipients to EFT. Treasury officials told us they continued to believe that the ETA was the best vehicle to offer the unbanked check recipients. They had explored other options through pilot programs such as electronic payment cards and said that they determined these options would be more difficult to administer. They did, however, acknowledge that they may need to reconsider their strategy based solely on the ETA if the numbers of unbanked check recipients is higher than they have estimated, as we suggest. SSA officials stated that a variety of vehicles for receiving benefits electronically should be available and not just the ETA. Some type of electronic transfer of benefits provides the consumer and SSA advantages not attainable when checks are mailed. These include the safety, security, and the efficiencies gained by avoiding lost or stolen checks. Given these differing viewpoints, achieving agreement on the merits of alternative approaches would likely require careful consideration. The number of recipients of federal benefits using EFT climbed steadily throughout the 1990s, rising from around one-half to more than three- quarters of all beneficiaries. Correspondingly, during this period the number of payments made by paper check has also substantially declined. However, since 1999 the drop in the number of federal check payments has generally subsided and during this three-year period Treasury continued to make, on average, over 180 million check payments per year. In 2001, these checks went to about 14 million federal beneficiaries. This stabilization in the number of check recipients may signal that the remaining population of federal check recipients may be harder to convert to EFT. The biggest obstacle to Treasury’s goal of increasing direct deposit is that a high number of beneficiaries are without bank accounts. Our analysis of 1998–1999 data from the Bureau of Census’ Survey of Income and Program Participation suggests that over 11 million federal beneficiaries, substantially more than Treasury originally estimated, were unbanked. This difference in estimates could have profound implications, as it is much more difficult to attract unbanked federal benefit recipients to EFT than it is to attract recipients who already have a bank account. Using the same Census data, we were able to identify a number of characteristics common to unbanked federal beneficiaries that could be useful in developing appropriate strategies to increase EFT use. Because the ETA has not been widely accepted by banks or unbanked beneficiaries, it is unlikely to prove successful as the only means to persuade unbanked federal check recipients to use EFT. Treasury cautioned that it may be too soon to evaluate the success of the ETA because the program is less than 3 years old. However, using information from a variety of sources we identified a number of factors (such as lack of a payment mechanism) that contribute to the limited appeal of the ETA and are important to consider when evaluating the usefulness of the ETA in attracting the unbanked. Further, because research indicates that other factors affect an individual’s decision, or ability, to open a bank account, reaching this market may be difficult without knowing more about them. The alternative approaches outlined in this study have potential strengths and weaknesses but warrant further exploration for two reasons. First, experience to date has shown that it is unlikely that Treasury’s current strategies will convince a majority of federal check recipients to switch to electronic transfers. Second, given the limited appeal of the ETA, we question whether the program will generate savings sufficient to offset Treasury’s cost of maintaining and promoting the program. The alternative approaches for further promoting EFT involve a variety of steps that could be taken ranging from ideas to improving the efficiency of the ETA’s enrollment process to understanding why certain sectors of the country have lower direct deposit use. Further, we recognize that the private sector has an important role to play in developing alternative products to attract check recipients to electronic transfers. To assist Treasury in pursuing its goal of convincing unbanked beneficiaries to use EFT, we make the following recommendations to the Secretary of the Treasury: Revisit the estimate of the number of unbanked federal check recipients. In doing so, we further recommend that Treasury explore use of Census SIPP data as a means to both obtain a better estimate of the extent of federal check beneficiaries who are unbanked and to better understand the characteristics of the unbanked population. Use the information on the extent and characteristics of unbanked federal check recipients to consider alternative approaches, including those discussed in this report, to develop a strategy that offers a greater likelihood of attracting that portion of the unbanked population that chooses not to open an ETA. We requested comments on a draft of this report from the heads, or their designees, of Treasury and SSA. We obtained written comments on a draft of this report from Richard L. Gregg, Commissioner of Treasury's Financial Management Service, that are presented in appendix VI. SSA did not provide comments. Treasury generally agreed with our recommendations, outlined how it would respond to each of them, and made three clarifying points. First, Treasury requested that we emphasize the role of the Congress in developing the EFT waiver policy and how Treasury would have needed congressional support in order to set a more stringent waiver policy. Second, Treasury requested that in describing how it developed the ETA, we note that Treasury made a deliberate decision not to include a checking feature because of concerns raised by the financial industry and consumer advocacy groups about potential account misuse. We added clarifying remarks in the report that addressed these points. Third, Treasury committed to reviewing the data from the SIPP as it relates to the number of unbanked federal recipients to better understand the characteristics of that population. However, Treasury expressed concerns about over reliance on the SIPP data and stated that it would pursue a strategy that would use SIPP data and other credible data sources in conjunction with its own empirical data collection efforts to better understand why check recipients are unbanked. We agree with the actions suggested by Treasury and believe that such actions are consistent with our recommendation that Treasury consider alternative approaches offering a greater likelihood of attracting the portion of the unbanked population that chooses not to open an ETA. Treasury also provided technical comments on the draft report that we incorporated as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the Chairman and Ranking Minority Member of the Senate Committee on Banking Housing and Urban Affairs, the Chairman and Ranking Minority Member of the House Committee on Financial Services, and other congressional committees. We will also send copies to the Secretary of the Treasury, the Commissioner of the Social Security Administration, and also will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions regarding this report, please contact me at (202) 512-8678, hillmanr@gao.gov, or M. Kay Harris at (202) 512-8415, harrism@gao.gov. Key contributors to this report include Sonja Bensen, Emily Chalmers, Kyong H. Lee, Grant Mallie, Mark Ramage, and Carl Ramirez. An overall objective of this report is to describe how Treasury complied with the 1996 Debt Collection Improvement Act’s mandate to promote the use of electronic funds transfer (EFT) payments to federal beneficiaries and to identify obstacles to increasing the use of direct deposit. To meet this objective we (1) provided information on the extent of EFT usage and the steps federal agencies and others have taken to promote it; (2) identified obstacles to greater use of the EFT program and identified characteristics of recipients who do not have bank accounts; (3) provided information on the current status of the electronic transfer account (ETA) program, including steps the government has taken to promote it; and (4) identified options for Treasury to consider to further promote electronic transfers. To determine the extent of EFT usage and describe factors contributing to the increase in direct deposits, we obtained statistical data from Treasury and the Social Security Administration (SSA) showing the number of payments made by EFT and check since 1990. In addition, we discussed the agencies’ promotional efforts and obtained documentation of their activities. To identify the characteristics of direct deposit users, we reviewed studies and obtained the most recent statistical data from SSA. To describe how nongovernmental entities such as financial institutions and nonprofit organizations promoted direct deposit, we interviewed banks of all sizes and several nonprofit groups, including the Association for the Advancement of Retired Persons (AARP), the National Community Reinvestment Coalition, and U.S. Public Interest Research Group (PIRG). To determine the number of unbanked beneficiaries, we analyzed data from the Census Bureau’s Survey of Income and Program Participation (SIPP). The survey population for SIPP consists of individuals (age 15 and older) residing in the United States but does not include those in the military and living in institutions such as nursing homes. By design, SIPP allows estimates to be made at the household, family, or individual level. The SIPP has a number of strengths that make it a good choice for this analysis. This survey is intended by the Census Bureau to be a major source of primary information on income and benefit program participation. It was specifically designed to assist in formulating and evaluating initiatives related to federal programs (such as improvements to entitlement programs such as Social Security) and to produce reliable, national-level estimates of selected characteristics of all individuals and families in the United States. In addition, the SIPP oversamples low- income households, and while the contribution of these respondents to overall estimates are weighted (statistically adjusted) to be representative of the entire population, the oversampling has the advantage of improving the reliability of estimates of characteristics of lower-income people, such as being unbanked. Finally, the SIPP is the only national survey that we identified, with the exception of Treasury’s 1997 research, that allows us to identify the characteristics of individual Treasury benefit recipients. SIPP is a panel survey, which means that the same sampled households are reinterviewed to track changes in their characteristics over time. SIPP panels last about 4 years, and participating households are interviewed 12 times (once every 4 months). Each interview, conducted by telephone and in-person (once a year), is referred to as a “wave.” The information collected in SIPP falls into two categories: core and topical. The core content includes questions on subjects related to demographic characteristics, labor force participation and program participation. Core questions are asked during every wave. Other questions collect in-depth information on specific subjects (such as detailed asset ownership) and are asked less frequently. Those topical questions are often found in topical modules that occur in specific waves. The focus of our analysis was on identifying whether individuals receiving benefits had bank accounts. Therefore, we selected the ninth wave (conducted between December 1998 and March 1999) of the 1996 panel and the twelfth wave (conducted between December 1999 and March 2000) because they were the most recently available data sets that contained the “asset, liabilities, and eligibility” topical module that was needed to establish bank account ownership. In particular, the ninth and twelfth waves contained the most recently available information on the number of respondents with noninterest-bearing checking accounts as well as other types of accounts (for example, savings accounts). We used these survey responses to produce estimates of the unbanked and their characteristics (e.g., family income, education level, etc.) as of November 1998 for wave 9 and as of November 1999 for wave 12. Estimates were produced for both the U.S. population at large and for federal benefit recipients. For wave 9, the SIPP included about 28,900 households, or 54,500 individuals, in its sample. Of these, the unweighted number of households receiving federal benefits in our dataset was 9,677 and the number of unweighted individuals was 12,824. For wave 12, the SIPP included about 28,100 households, or 53,300 individuals, in its sample. Of these, the unweighted number of households receiving federal benefits in our dataset was 9,565 and the number of unweighted individuals was 12,652. Because the SIPP is based on a probability sample, the specific sample selected is only one of a large number of possible samples that might have been drawn. Each of those possible samples could produce slightly different estimates. The confidence in estimates from a sample is expressed as a 95 percent confidence interval. This is the interval that would contain the actual population value for 95 percent of the samples we could have drawn. Unless otherwise noted, all percentage estimates in this report have confidence intervals of +/- 3 percentage points or less. All numerical estimates other than percentages have confidence intervals of +/- 6 percent or less of the value of those numerical estimates, unless otherwise noted. We also performed tests of association between variables for which we produced cross-tabulations. As a result we only report on relationships that were found to be significant at the .05 level or better. We recognize that our estimate of the unbanked population at large may be compared to the results of the Federal Reserve Board’s Survey of Consumer Finances (SCF). For 1998, using data from the SCF, analysts determined that about 9.5 percent of households did not have any type of transaction account. However, these estimates are not directly comparable because the SIPP collects information, such as whether a person has a bank account, from each member of a household but the SCF does not. The SCF collects information from the household’s “primary economic unit,” the person considered to be the economically dominant single individual or couple in the sampled dwelling. This survey does not collect data for individuals who are financially independent of the primary economic unit in the sampled dwelling. Thus, this survey could exclude subpopulations that would be included in the SIPP sample, such as roommates, grown children, and grandparents with their own retirement income. To the extent that these differences do not account for varying estimates of the unbanked, certain characteristics of the SIPP make it a more reliable source of such estimates. For instance, the ninth wave of the 1996 SIPP included 28,900 households, whereas the 1998 SCF included only 4,300 selected “households.” Because the SIPP survey data did not include questions asking why recipients chose to remain unbanked, we analyzed the findings of studies that had surveyed segments of the unbanked population. These studies included Treasury research that focused on unbanked federal check recipients, as well as research on broader cross-sections of the unbanked population. While the research methodologies varied and the analyses were limited to specific geographic areas, these studies provided valuable insights into the characteristics of this population, which is unusually difficult to survey. To supplement these analyses, we interviewed a broad range of people with expertise on the unbanked, including researchers at the Federal Reserve and Office of the Comptroller of the Currency, academicians (for example, at Swarthmore College and the University of North Carolina), and consumer groups. To describe the status of the ETA program and government efforts to promote it, we interviewed officials from Treasury and SSA and obtained documentation that described how these agencies have promoted the ETA program. We also observed a promotional event in Atlanta, Georgia, sponsored by Treasury. In addition, we analyzed data provided by Treasury and the Federal Reserve Bank of Dallas on the number of banks and participants enrolled in the ETA program. In addition, we interviewed a cross-section of 21 financial institutions that included 16 ETA providers and 5 nonproviders. In selecting financial institutions, we considered factors such as the type and size of institution, geographic diversity, and any special projects that institution had undertaken to promote either the ETA or direct deposit in general. We asked each institution why it did or did not offer the ETA, what low-cost products it offered and, if applicable, how it marketed the ETA. We also obtained the views of several bank trade associations, including the American Bankers Association and the Community Bankers Association, on the reasons banks did or did not agree to offer the ETA. In addition, we interviewed consumer groups such as the AARP, U.S. PIRG, and Consumers Union to obtain their perspective on how the ETA benefits consumers. We also analyzed various studies that Treasury conducted when developing the ETA. To identify options for Treasury to consider to further promote EFT, we identified those most frequently mentioned by financial institutions based on their experiences with promoting the ETA. We also interviewed directors of the Electronic Benefit Transfer program who had experience with implementing the Benefit Security Card in Florida, Georgia, and Missouri and spoke with vendors—Citicorp Electronic Financial Services and EFunds—that supported distribution of that card. To identify the pros and cons associated with each option, we obtained comments from Treasury, SSA, the Federal Reserve Board, the Office of the Comptroller of the Currency, and several nonprofit organizations. We conducted our interviews of banks in various locations in the Midwest and the Northeast and did field work in Atlanta, Georgia. We conducted our work between August 2001 and July 2002 in accordance with generally accepted government auditing standards. We used the Census Bureau’s Survey of Income and Program Participation (SIPP) to estimate the number of unbanked federal beneficiaries and determine some of their characteristics (for example, income and educational level). Because most unbanked beneficiaries receive a benefit from the Social Security Administration, we provide these estimates specifically for individuals receiving Old-Age, Survivors, and Disability Insurance (OASDI) and Supplemental Security Income (SSI) program benefits. In addition, we analyzed the SIPP to obtain similar estimates for the unbanked population at large, which includes OASDI and SSI recipients, and the portion of the U.S. population that does not receive OASDI benefits. The figures in this appendix show estimates for all of these groups. The source for all of these estimates is from the twelfth wave of the 1996 SIPP panel, representative of November 1999. Unless otherwise noted, the 95 percent confidence intervals for all the estimates presented are +/- 3 percent or less.

Summary: In 2001, the Department of the Treasury made 764 million payments valued at $549 billion to beneficiaries of federal programs, primarily programs administered by the Social Security Administration. Of these payments, 76 percent were made using electronic funds transfers (EFTs), potentially saving the government millions of dollars in costs associated with disbursing paper checks. In 1996, Congress passed legislation which required that federal payments except tax refunds be made electronically as of January 1999. The act also required that each person affected by this mandate have access to an account at a financial institution at a reasonable cost and with certain consumer protections. To meet this requirement, Treasury developed the Electronic Transfer Account (ETA). Most recipients of federal benefits have their payments deposited electronically. The number of recipients using EFT climbed steadily throughout the 1990s, rising from around half to more than three-quarters of all beneficiaries. Treasury and the Social Security Administration (SSA) have undertaken activities to increase the use of direct deposit, including developing marketing material and directly notifying check recipients of the advantages of using EFT, particularly safety and convenience. Although information describing the characteristics of these EFT users is limited, GAO determined that participation rates are highest for those 65 and older. The primary obstacle to using EFT was that many federal check recipients did not have a bank account. GAO's analysis of the Survey of Income and Program Participation's 1998 data indicated that 11 million benefit recipients, over half of all federal benefit check recipients in 1998, were unbanked. The ETA has not been widely accepted by banks or unbanked beneficiaries despite Treasury's efforts to promote it. Since initiation of the program in 1999, 36,000 ETAs have been opened, representing fewer than 1 percent of unbanked beneficiaries. Based on discussions with representatives from Treasury, SSA, financial institutions, and consumer groups, GAO identified several approaches that Treasury could consider to increase the use of electronic transfers. These approaches include increasing cooperation between banks and local SSA offices to more effectively enroll beneficiaries for ETAs; exploring other electronic payment options besides the ETA to deliver benefits; partnering with banks to provide information on the general availability of low cost banking products, especially in areas with low ETA coverage; and conducting further research to determine why certain states have low direct deposit participation rates.