The New York Clearing House Association has dropped the last shoe in its "privatization," announcing the formation of a national clearing house for low-dollar payments.
Twelve of the largest U.S. banks have signed letters of intent to become owners of Small Value Payments Co., or SVPCo, a commercial enterprise that would be administered by New York Clearing House Association LLC.
The company will offer a national private-sector payments service, clearing and settling checks and automated clearing house transactions.
The New York Clearing House, which is remaking itself around three for- profit offshoots including SVPCo, will start the ball rolling by turning over its check and ACH operations to the new entity.
The owners will be Bankers Trust Co., BankAmerica Corp., Bank of New York Co., Chase Manhattan Corp., Citicorp, First Chicago NBD Corp., First Union Corp., Fleet Financial Group, Marine Midland Bank, NationsBank Corp., Norwest Corp., and Republic New York Corp.
Provisions have been made for up to 15 bank owners to capitalize the company at its legal formation, planned for late June or early July.
The company would have a 16-member board of directors, including one seat for the clearing house association. Its chairman-designate is Joseph G. Sponholz, vice chairman of Chase.
"We have a special opportunity to move the payment system forward and strengthen the private sector's position as the premier provider of low- dollar payment services," Mr. Sponholz said.
"Our vision to 'electronify' the check can be expanded by cooperatively leveraging already successful ECP (electronic check presentment) and ACH programs," he said in a prepared statement. "This will result in the continued growth and success of private-sector payment systems."
The clearing house had previously announced two other spinoffs: ChipCo LLC, encompassing the Chips large-value payments network, and ServiceCo LLC, a technology support arm.
Small Value Payments Co. will initially focus on electronic check presentment, or the electronic transmission of check information to paying banks, which foreshortens the physical processing of paper documents.
Banks use the information to post transactions to their demand deposit systems before the paper items are actually received.
New York Clearing House officials and other ECP advocates say the technique, if adopted nationally, would significantly reduce operating costs and fraud and improve funds availability.
"We have been trying to move the ball in terms of electronification; this is a significant step," said Jill Considine, president of the New York Clearing House. "With 66 billion checks written each year, there is a lot of opportunity out there."
The clearing house's existing small-value payment operations will be folded into the national venture, thus giving it immediate volume, said Henry C. Farrar, senior vice president of the New York Clearing House.
The organization's daily clearing and settlement of checks and ACH transactions amount to about $18.5 billion in the Second Federal Reserve District.
Banks that are already ECP-capable could begin adding payments to the system this summer. The new company hopes to "electronify" about 800 million checks by 2000, Mr. Farrar said. The ultimate goal is check truncation, with electronics obviating all physical transportation of checks after presentment.
The clearing house is throwing its weight into the long-term battle against check proliferation. Despite growth in direct deposit activity and other attempts to get away from checks, they are still increasing by an estimated 1% to 2% a year.
The Fed has played a role in promoting electronic check presentment services, said Paul Connolly, first vice president, Federal Reserve Bank of Boston. It has helped 2,000 institutions receive electronic check presentments from Fed banks, with roughly two billion items being processed this way each year.
But of some 65 billion checks written annually, only an estimated 3% are processed via ECP, according to the Fed.
Though many believe that check volume will eventually decline, "checks will still be around for a long time," said Mr. Connolly, director of the Fed's retail payments operations. He applauded the effort of the New York Clearing House.
"You have a system in which all banks large and small can participate," he said. "It makes a lot of sense to get some of the costs out of the system and reduce some of the risk."
The new company would establish regional operating nodes, which could include alliances with local or regional check and ACH processors that together would serve as a national payments infrastructure, Mr. Farrar said.
There will be an important difference between SVPCo and current ECP systems: As a multilateral exchange, the new system would be far simpler than the bilateral settlement arrangements that are now common.
"In order to make it work, it has to be multilateral, and it has to be open," Mr. Farrar said.
Hayden Watson, managing director of bank operations at Fleet and a member of SVPCo's advisory group, said the multilateral approach will accelerate ECP by doing away with complex structures and rules.
"The idea here was to get this effort going," Mr. Watson said. "It really does not duplicate anything. It simply creates a framework for doing things much faster."
Mr. Watson said the clearing house's plans are consistent with a recent report issued by BITS - the Banking Industry Technology Secretariat, a division of the Washington-based Bankers Roundtable - that called for renewed emphasis on check electronification and fraud reduction.
SVPCo, which some bankers are referring to as Payments Clearing House, will incorporate the rules of the Dallas-based Electronic Check Clearing House Organization, a rulemaking body for ECP exchanges.
Mr. Watson is a past president of Eccho and a current director of the Payment Solutions Network, or PSN, which is a bank-owned electronic network for ECP exchanges.
Efforts by people like him and John D. Carreker Jr., whose Dallas-based software and consulting firm manages both Eccho and PSN, reflect how banking industry officials are increasingly collaborating to achieve mutual benefits.
Mr. Carreker, who is head of Carreker-Antinori Inc., met regularly with New York Clearing House officials to help in the new entity's formation. He said he hoped owners of all the companies in this field - the new SVPCo or Payments Clearing House, PSN, Eccho, and Primary Payment Systems, which is a bank-controlled national check fraud data base - would look for ways "to make these things complement one another so that it is productive."
"I applaud their goals and what they are trying to do, as I understand them," Mr. Carreker said. "I think they and we intend to serve the banks by coming together as effectively as we can."
Mr. Farrar said Payments Clearing House is taking a "top-down approach" to get the largest participants in the check and ACH systems on board. Smaller banks that use outsourcing firms would also be welcome to join.
Outsourcing companies would have to be prequalified to put checks and ACH transactions into the Payments Clearing House.
Mr. Farrar said electronic check presentment vendors such as Sterling Commerce, Checkfree Corp., and Carreker-Antinori would have access to the system for qualification and testing.
Ms. Considine said the new payment system would not be an exclusive big- bank club.
"It's just big in terms of critical mass," she said. "It most certainly provides fair and open access to all participants."
