Improving Financial Management

Build a Strong Financial Management Infrastructure

FM04: Increase the Use of Technology to Streamline Financial Services


The use of information technology to streamline financial services is a key element of the infrastructure that the federal government must have to deliver fiscally sound financial management. Historically, financial processes were among the first administrative processes to be automated, and these systems continue today to be fundamental in the delivery of good financial management. Over the years, the greatest challenge before financial managers has been to continue to improve upon these systems and take advantage of the technological enhancements that have evolved in information management. Financial systems generally provide two major products--the delivery of financial information and the automation of financial processes. Both can benefit from the improvements that exist in information technology today.

Federal financial management systems and applications have not fully used the ever-changing enhancements technology has made available. The systems lag in standards and compatibility and are, for the most part, out of date. Manual processes that require paper documentation and multiple data entry to various subsystems even within an agency financial system are highly prevalent throughout the federal government. These situations result in inefficiencies and introduce problems of reconciling erroneous and omitted data. Additionally, they require a tremendous resource commitment of people and time to process financial transactions.

The federal government promotes the use of electronic funds transfer (EFT), which includes transfers through the Automated Clearing House and transfers made by wire. Using EFT rather than paper checks for payments (popularly called direct deposit) reduces costs and allows greater control over the timing of payments. Currently, the cost to send checks is nearly six times the amount to send the payments electronically to banks. Additionally, vendors, individuals, or states gain greater security, reliability, and convenience if paid electronically by the government.

Electronic benefits transfer (EBT) is a more recent advance. EBT uses plastic cards to deliver federal benefits to individuals who do not have bank accounts or regular relationships with banks. EBT replaces food stamp coupons and checks delivered through the mail. It uses proven technology and the existing commercial infrastructure, including automated teller machines, point-of-sale terminals, and on- line data transmission networks. The goals of the EBT program are to provide an electronic disbursement alternative to all beneficiaries without bank accounts and to coordinate these efforts with federal, state, and local programs.

Electronic data interchange (EDI) has been piloted in several agencies and is currently used very successfully in the Department of Defense and the General Services Administration to exchange common business documents and financial transaction data between and among agencies and the public sector for invoicing, purchase orders, receiving reports, etc. The federal payments process within EDI is called Vendor Express and transfers both dollar value and related information electronically into bank accounts.

Within the federal government payments for services between agencies can be handled electronically through the On-line Payment and Collection (OPAC) system. However, not all agencies use OPAC in their business transactions within the government, and, where it is used, the processing of transactions is not always timely. The application of EDI standards throughout the agencies using OPAC would promote even more efficient transfer of financial data among the agencies.

Tremendous resource savings and greater reliability can be achieved when electronic technology is applied to business practices between or within government agencies, or between businesses and government agencies.

NEED FOR CHANGE The federal government has led the financial industry in certain technologically progressive applications, but they are not used to their maximum effectiveness. In 1992, the federal government's cash flow was $2.5 trillion. Less than 10 percent of collections were received electronically and only 42 percent of payments were made electronically.[Endnote 1] Even though EFT has been available to pay federal employees for 15 years, the government still provides checks to employees, if they desire. Currently, about 84 percent of federal employees receive their salary payment electronically.[Endnote 2] Some agencies have pursued requiring EFT as a condition of employment and have run into union objections. Others, such as the military, have been successful in fully implementing EFT to pay their military and civilian employees. This tool has only recently begun to be used by a small number of agencies to reimburse employees for travel expenses. The GSA began reimbursing its federal travelers in February 1993 through EFT and provides an 800 number for employees to call to check on payment status. The Department of Energy also reimburses its federal travelers through EFT.

Federal salaries are only a small proportion of the 800 million payments made annually by the federal government. The largest number of federal payments are for social security (over 550 million). In 1992, only 49 percent of those payments were made through EFT. That percentage has increased recently and is expected to be around 55 percent in 1993. The increase is due, in large part, to the efforts of the Department of the Treasury and the Social Security Administration offering direct deposit of funds at the initial point of contact with a new beneficiary. Federal pension and veterans benefit payments and tax refunds constitute the other significant volumes of federal payments. Of those, 66 percent of federal pensions, 43 percent of veterans benefits, and 10 percent of tax refunds were paid electronically in 1992.

Converting all unbanked recipients to EBT would save millions of dollars annually over paper-based processing costs, claims costs, and availability of funds. Eight states currently are operating and testing EBT while another 26 are in various stages of planning. Major issues remaining to be resolved include the unknown cost/benefit impact; who bears the costs of the program; and the treatment of liability for lost, stolen, and sold cards under proposed Federal Reserve Board regulations.

The National Performance Review (NPR) is proposing a nationwide EBT that would use a standard commercial debit card. As envisioned, this nationwide EBT would be a standard configuration, based on existing industry standards, that would be offered competitively by vendors as a base or enhanced service, locally and regionally, just as in the commercial environment. This project will require a dedicated group of individuals with senior government support and leadership. Just as critical to any eventual system is the settlement, reconciliation, and reporting service to support large-scale EBT use that needs to be in place. The Department of the Treasury, the Federal Reserve, and the Food and Nutrition Service are currently working on this service.

Numerous administrative processes in government, whether they are for travel, procurement, budget execution, timekeeping, property management, personnel/payroll accounting, or other processes requiring financial transactions, continue to be labor and paper- intensive, requiring multiple levels of approval and remaining vulnerable to poor internal controls. Most could be streamlined and automated to save time, increase data accuracy, and improve internal controls. Modern software applications designed for both personal computer (PC) and PC-based local area networks are available for most of these processes. However, agencies continue to use existing manual-based processes, or more often continue to design and build customized systems to support these processes without eliminating manual-based processes.

Current approaches to systems development, such as information engineering, recommend that managers develop an information architecture as a first step in the redesign of systems and processes. This approach systematically guides managers through an examination of their current systems and processes and identifies key information flows and products. The benefit of this approach is that it generally results in recommendations to simplify processes, automate others, and more often than not, eliminate many. If this approach is followed, agencies generally avoid simply automating poor manual processes. This is particularly important in the replacement of older financial systems. This approach has been used by the Environmental Protection Agency in the design of its Contracts Management Information System. It is also the approach now being used in the redesign of financial systems in the Departments of State and Housing and Urban Development.

Electronic signature allows for electronic approval of funding documents. Not only does this tool reduce the paperwork burden associated with the administration of these documents, it also automates internal controls that often add to the paperwork process and just as often are ignored. Although many applications are on the market that provide for electronic signature, the standards for secure transfer of data vary between them, creating internal control concerns and raising data management issues. Although much progress has been made in developing standards for electronic signature, final standards and protocols from the National Institute of Standards and Technology (NIST) are still not available. NIST has issued a bulletin that provides initial information to federal agencies on security issues in the use of EDI. However, the lack of published electronic signature standards and protocols deters many financial managers from implementing these systems and prevents efficient and secure transfer of data between systems.


1. Issue all federal employee pay and expense reimbursement through EFT. (1)

The Secretary of the Treasury should issue requirements to implement this recommendation in full by September 1994.

2. Handle all interagency payments through the On-line Payment and Collection (OPAC) system. (1)

The Secretary of the Treasury should issue requirements to implement this recommendation in full by September 1994.

3. Handle all payments to state or local governments through EFT. (1)

The Secretary of the Treasury should issue requirements to implement this recommendation in full by September 1994.

4. Include the EFT payment clause from the Federal Acquisition Regulations in all contracts. (1)

The Director of the Office of Management and Budget (OMB) should set the policy and the Secretary of the Treasury should issue requirements for all agencies to implement this by October 1994. All businesses with federal contracts would be paid through EFT after that point. All contracts should include the electronic funds transfer payment methods clause in the Federal Acquisition Regulations beginning October 1994.[Endnote 3]

5. Issue all payments to individuals through EFT or EBT. (1)

The Secretary of the Treasury should issue requirements to implement the EFT portion of this recommendation by September 1994. For programs involving direct benefits to individuals, EFT should be the presumed method for paying new beneficiaries. Agencies should continue to aggressively promote conversion to EFT for check recipients. Special emphasis to convert promptly should be directed at federal pension and veterans benefits. The Internal Revenue Service should expedite implementation of electronic payments for tax refunds. As EBT becomes more widely available, checks issued to unbanked individuals should be phased out.

6. Simplify, redirect, and reengineer agency financial processes to make them fully electronic and reduce the paperwork burden. (1)

Agency heads should review their financial processes toward this end. Their review, reinforced in revised OMB Circular A-127, should be included in the agency 5-year plans submitted to OMB by September 1994.

Cross-references to Other NPR Accompanying Reports

Reengineering Through Information Technology, IT02: Implement Nationwide, Integrated Electronic Benefit Transfer.

Department of Agriculture, USDA07: Deliver Food Stamp Benefits Via Electronic Benefits Transfer to Improve Service to Customers While Remaining Cost Effective.

ENDNOTES 1. U.S. Office of Management and Budget, Federal Financial Management Status Report and 5-Year Plan (Washington, D.C., August 1993), p. 49.

2. Ibid.

3. "Electronic funds transfer payment methods," Federal Acquisition Regulations, 52.232-28 (April 1989).

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