New Research Reveals Barriers To Direct Deposit

New Research Reveals Barriers To Direct Deposit of Social Security Benefits

U.S. Department of the Treasury and the Federal Reserve prepare to launch grassroots pilot to promote direct deposit as safer, easier, faster way to receive federal benefits

September 14, 2004 -- Retirees and other individuals who receive their government payments, like Social Security, by direct deposit are significantly less likely to have a problem with their payment than those who get checks. Yet the growth rate of direct deposit is down sharply, and many Americans still receiving checks are elderly, disabled or low-income individuals who would benefit most from this safer, easier and faster payment alternative. Seeking to address this challenge before the first wave of baby boomer retirements, the U.S. Department of the Treasury (Treasury) commissioned a study that revealed check recipients' reluctance to adopt direct deposit.

As a result of the study, "Understanding the Dependence on Paper Checks," the Treasury, together with the Federal Reserve, is launching a six-month pilot marketing campaign to increase direct deposit use among Social Security and Supplemental Security Income (SSI) beneficiaries. The pilot campaign, called Go Direct, will focus on 10 markets: the counties surrounding Chicago and Springfield in Illinois; Knoxville, Memphis and Nashville in Tennessee; Austin, Dallas, Houston and San Antonio in Texas; and all of Puerto Rico. These 10 markets were selected because they represent large metro areas and capital cities within states having a high number of federal benefit check recipients.

"Without a doubt, electronic payments are superior to checks in terms of safety, speed and convenience," said Don Hammond, Treasury Fiscal Assistant Secretary. "Many of the people who still use checks would benefit the most from direct deposit. This research provides valuable insights on how we can reach out to these payment recipients so that they can fully understand and take advantage of the benefits of direct deposit."

Direct deposit use among federal beneficiaries grew rapidly in the late 1990s but has largely leveled in recent years. Despite ongoing educational efforts, the growth rate of direct deposit has slowed to less than 1 percent per year for Social Security payments. The Federal government issues more than 13 million benefit checks monthly, with Social Security and SSI representing the vast majority.

Direct deposit offers a significant cost savings to taxpayers. The Treasury mails about 160 million benefit checks a year, at an additional annual cost of $100 million in postage, printing and other costs. Unless more people choose direct deposit, the cost of printing and mailing checks will skyrocket in the next few years as America's 77 million baby boomers start hitting retirement age in 2008. Treasury has determined that for every check payment converted to direct deposit, the government saves 62 cents that can be invested in making payments to future generations.

Research Results -- Who Chooses Checks, and Why?

The Treasury study uncovered a number of reasons why benefit recipients are reluctant to switch to direct deposit.

Emotional ties. Many check recipients said they prefer a physical check because it provided a welcome ritual that reminded them to pay bills and balance their checkbooks. Check recipients feared that direct deposit would take away their sense of control, whereas getting a check in the mail felt like "cash in hand."

  • Inertia. Some of those interviewed said they were willing to switch, but simply hadn't done it yet, while others said they had no incentive to make a change.
  • Information gap. The research revealed a fundamental lack of understanding about electronic payments. While nearly all respondents said they were familiar with direct deposit, most were unable to explain accurately how it worked.
  • Mechanical gap. Check recipients were also significantly less likely than direct deposit users to have a bank account or trust the banking system. Of those surveyed, 27 percent of Social Security and 68 percent of SSI check recipients did not have bank accounts. Yet nearly half of Social Security recipients without bank accounts said they regularly cashed their benefit checks at a bank or credit union.

In general, check recipients varied widely across geography, race and economic status. The research shows that nearly a third (31 percent) were at least somewhat inclined to switch to direct deposit, while more than half (53 percent) were somewhat to very resistant. Those who were more receptive to switching tended to be more comfortable with technology and trusting of banks, were younger, more urban, and more likely to belong to a minority group than the neutral or resistant groups.

"Direct deposit is an important component of the modern economy," said Gary Stern, president of the Federal Reserve Bank of Minneapolis and chair of the Federal Reserve's Financial Services Policy Committee. "The Federal Reserve is supporting the Treasury in the Go Direct campaign because one of our core responsibilities is to foster an efficient and effective payments system. This campaign facilitates the elimination of costly check payments in our society." Treasury asked the Federal Reserve, acting as its fiscal agent, to conduct the research study and develop and implement an aggressive pilot campaign geared at converting a large number of checks to direct deposit.

Go Direct Pilot Campaign

The Go Direct campaign is expected to launch this fall, and will seek to increase the number of direct deposits in the pilot markets. The campaign will focus heavily on grassroots outreach to benefit recipients, largely through partnerships with community-based organizations and financial institutions.

Ken Fergeson, chairman of the American Bankers Association, one of many national organizations that are champions for the Go Direct campaign, said: "We know from Treasury's research that 80 percent of people getting Social Security checks come into the lobbies of financial institutions to cash their checks. Banks across this country are ready to do what we can to convince people that direct deposit is the way to go."

Go Direct has established a toll-free number for beneficiaries to call to sign up for direct deposit: 1-800-333-1795 (English) and 1-800-333-1792 (Spanish).

Research Summary

The Treasury's study was conducted by research and consulting firm WirthlinWorldwide.