Five years ago, the Bankers Roundtable (now the Financial Services Roundtable) issued a clarion call to bankers to defend against assaults of nonbanks on the industry's payments-system stronghold. That call to arms was as timely as it was urgent.
At the time, the Internet was becoming part of the mainstream vernacular, along with concepts like electronic bill payment and on-line financial services, and nonbanks were eager to help satisfy the emerging demand. A landmark report on the future of the payments system made it clear that bankers needed to lead the transition to electronics if they wanted to retain control of the payments system.
To help marshal industry forces, the Roundtable created the Banking Industry Technology Secretariat. The BITS board, consisting of the chairmen and chief executive officers of 14 of the largest bank holding companies, has made a strong commitment to foster electronic banking and e-commerce options that benefit financial institutions and their customers.
Over the past two years BITS has set key priorities that demonstrate this leadership, including broad-based adoption of electronic check presentment, or ECP. This was the important first step in a transition from paper to electronics -- one that ensures the continued anchor of bank-customer relationships through the demand deposit account.
The DDA relationship cannot be underestimated. Even in electronic banking, it is the glue that binds customers to banks. The DDA and the universal acceptance of checks remain a strategic advantage banks have over nonbanks. If Americans continue writing checks -- and every indication is that there are more checks written now than in years past -- then we need better ways of moving checks among banks. ECP offers a new check archetype that binds customers to banks through efficiency and revenue-producing product innovations.
With ECP, the critical information needed to clear check payments between banks is separated from the paper and exchanged electronically in advance of the physical presentment of the items. Because ECP results in more useful information arriving at paying banks earlier in the clearing process, it creates a strategic advantage in the battle against check fraud. It also creates new fee opportunities through product innovations that enhance customer service.
Ten years ago ECP was considered a technology "luxury," a form of astute float management that could be enjoyed only by the largest of check-collecting banks. Today, partnerships are being forged that extend the benefits of ECP to banks of all sizes and roles -- big and small, collecting banks, and paying banks.
Fostering these partnerships is the potential for improved earnings that rival even the most promising of emerging payment alternatives: as much as $3 billion a year in short-term savings industrywide and more than $5 billion a year once all banks are exchanging ECP files. Even more substantial long-term strategic value will accrue through the integration of ECP with imaging, truncation, and related initiatives.
The BITS board has identified ECP as a top priority in the transition to electronic payments. Its ECP goal is for large banks to process 50% of incoming checks electronically by 2001.
The benefits are based on numbers of banks committed to ECP. A critical mass of electronic check payments must be attained. The largest banks in the country are responsible for 26% of check transactions; these banks have the critical mass to accelerate ECP adoption. All are fully committed to the BITS initiative. Full electronic conversion, coupled with truncation and imaging, within 10 years will give the industry $4 billion to $6 billion of annual benefit.
One step BITS has taken toward this goal is to endorse the Electronic Check Clearing House Organization (Eccho) as the private sector's national ECP rules group. BITS also is working toward ensuring a uniform set of state laws governing ECP exchanges and the parties to these transactions, laws comparable to those that govern paper checks and electronic funds transfers.
BITS also has endorsed SVPCo, the small-value payments company created by the New York Clearing House and owned by 21 of the nation's largest banks. SVPCo, which has licensed Eccho rules to support its national ECP framework, was endorsed as the coordination point for multilateral ECP for the banking industry.
SVPCo is an important catalyst for a nationwide system of ECP exchanges owned and operated by banks. The New York Clearing House, which provides the technological and settlement infrastructure for SVPCo, is one of a select few organizations authorized by the Federal Reserve to provide interdistrict net settlement services for checks. The clearing house, the oldest in the country, has a long-established and respected reputation for providing technology and net settlement services in support of Chips, the large-dollar interbank wire transfer system, as well as for automated clearing house transactions.
Meanwhile, Eccho has changed its membership requirements to encourage more participation by independent community banks -- a move that will create exponential growth in private-sector ECP. Though the Federal Reserve offers several varieties of ECP to community banks and other financial institutions, there has been no cost-effective, private-sector ECP alternative for the smallest institutions. Now for an investment of as little as $100 a year, a community bank can gain Eccho rules coverage through a special arrangement with organizations like the Independent Community Bankers of America.
This recognition of the value of ECP, and the necessity of an established ECP rules structure, by the Roundtable's members and the BITS board, has set in motion events that will make ECP the preferred interbank check clearing alternative for the start of the millennium. The astute bank executive already is preparing for this change.
With a national network of ECP exchanges, a national ECP rules structure, and the support and guidance of the Federal Reserve, any bank anywhere in the United States can exchange electronic check files and capitalize on the strategic advantages that stem from widespread industry adoption of ECP.
Industry relationships are coalescing to make broad-based ECP a reality. The Federal Reserve has committed itself to promote electronic check collection as part of the national transition to electronic payments. The constituencies of BITS, Eccho, SVPCo, and the ICBA, combined with the Fed's national check collection program, represent the preponderance of interbank check collection in the United States. Leading providers of check software have products on the shelf and in place at banks that support ECP exchanges today.
Few, if any, industry initiatives carry the magnitude of financial opportunity and shareholder value of ECP. But for this value to be realized, each and every bank must make a commitment to the internal technology resources needed to carry out ECP.
With billions of dollars in benefits at stake for customers, individual banks, and the industry at large, we cannot afford to let this opportunity slip away. Now is the time for senior executives at all banks to resolve to dedicate the resources needed at their institutions to make broad-based implementation of ECP a reality.
