N.Y.'s Municipal CU Brings Check-Clearing In-House

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NEW YORK-Ongoing concerns over the corporates' ability to continue to provide check processing services has prompted one CU to bring check-clearing in-house.

The $1.6-billion Municipal CU has become an inclearing credit union and is now clearing members' checks directly through the Federal Reserve Bank. CEO Kam Wong emphasized the credit union's size permits the move and noted foresight helped it to pull the trigger on the new business process this past June.

"We started thinking about this in 2008," Wong told Credit Union Journal. "From a financial perspective, I saw some things at Members United (the corporate MCU used for check processing) that did not sit right with me. We thought about it and determined it was time for us to go out on our own. We said we cannot continue to count on someone else to help us with these processes, such as inclearing. We took over the depository items part of in-house, as well."

Before the corporate meltdown Wong was scrutinizing Members United's financial statement and the activity of the corporate, which is now in conservatorship. Wong saw a heavy concentration risk in the corporate's investment portfolio, and was also bothered by the fact Members United closed an office.

"The direction of the corporate and its financial well-being concerned me," Wong said. "I asked myself, 'What if they can no longer support us?' It indicated to me that we needed to take some action when Members United cut staff and moved an office where we would take over-the-counter deposit checks. I said something is not right."

The decision to begin moving toward self-sufficiency in 2008 has allowed MCU to not face the tough decision in front of many credit unions today-what to do with item processing once bridge corporates are dissolved.

Wong said it took two years to make the transition to inclearing. The biggest hurdles were the application process with the Fed and creating an account with the Fed. Establishing the electronic system so MCU's accounting and financial systems could go straight to the Fed, transfer funds, and review checks took a great deal of time, as well.

Technology Upgrades

The credit union purchased hardware-primarily a server and additional memory to store check images. Software is Jack Henry's ProfiStars, and MCU also brought check imaging technology in-house. Cost for the move, including human resource expenses, was less than $100,000, said Wong.

Inclearing is projected to save MCU 30% annually on share draft processing, according to Wong. But the CEO said cost to run the process was not the expense he really had his eyes on. "Cost reduction was key, but stoppage of service to members was a greater concern. I had this fear that what if there is a problem with the corporates and they cannot process our checks. What happens to our members' checks? That would cost us our reputation. This is reputation risk we are managing and you can't put a price on that."

Although the Members United Bridge Corporate is servicing CUs, Wong is wary of that option. "They have cut a lot of staff. I don't care who tells me that the service levels are still the same-I don't buy that."

There have been no issues with MCU's new process, according to Wong. Since moving in-house, check processing is faster and more efficient, and members receive credit for deposits sooner, generally the next day. MCU clears 2- to 2.5-million checks daily for the 260,000 members with checking accounts. Wong said lead time is necessary to convert to inclearing, especially to allow for lengthy testing. "We did a lot of tests because this process cannot go wrong. When you go live there is no room for mistakes. So we tested the system for six months."

Wong said it is possible within two years that MCU could support smaller CUs check processing needs. "But we are not there yet. I want to make sure we perfect everything."

Finding a solution for item processing is an issue facing the CU industry, acknowledged Wong, who reiterated that his credit union is fortunate to have made its decision two years ago. "I am not sure what will happen with the corporate system. In my opinion, based on the letter from NCUA that tells us we have options, the corporate system may disappear."

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