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.