Banks Keep the Reins By Merging ClearXchange, Early Warning

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The bank owners of the clearXchange payments network and the Early Warning risk management service hope that by combining the two programs, they can remain in control of technologies that will become core to mobile commerce.

"It keeps banks as the center of providing financial services for consumers when doing financial transactions," said Mike Kennedy, the CEO of clearXchange, who has made it a priority for the consortium to build bank scale and expand its use cases beyond P2P.

Under an agreement announced Oct. 26, Early Warning, a risk management collaboration owned by Bank of America, BB&T, Capital One, JPMorgan Chase and Wells Fargo, will acquire ClearXchange, the P2P network operated by Bank of America, Capital One, JPMorgan Chase, U.S. Bank and Wells Fargo. The acquisition is expected to close by the end of the year, and the combined company will offer integrated services in early 2016. ClearXchange has users across 7,500 financial institutions (including nonmembers) while Early Warning serves about 1,100.

As part of the agreement, U.S. Bank and PNC are expected to join B of A, Capital One, JPMorgan Chase and Wells Fargo as owners of the combined company. The enhanced platform will be available to all banks and credit unions and will create a transaction network in line with the Federal Reserve's plan for faster payments and the Consumer Financial Protection Bureau's vision for consumer protections governing such a system.

As mobile payment technologies develop, large categories of businesses are battling for control. These include mobile network operators, mobile phone manufacturers, retailers, banks and card networks, each of which wants to retain ownership of their customers' data. The combination of clearXchange and Early Warning tips the scales in the favor of banks and away from the card networks.

"Visa and MasterCard are trying to enroll consumers directly for MasterPass and Visa Checkout," said Richard Crone, a payments consultant. "By combining the forces of fraud detection, [the banks] are in an excellent position to take clearXchange right to the point of sale."

The banks behind both clearXchange have made "huge" investments in mobile technology, and the combination of existing services will ease the links between vital tasks, Kennedy said. The organization's three founders — B of A, JPMorgan Chase and Wells Fargo — account for over  half of the U.S. online and mobile banking population.

"Not only do we increase the size of the network, but we are able to combine authentication and risk with digital payments," Kennedy said.

Since starting as a P2P service for consumers, clearXchange has broadened its uses to include functions such as government payments, and the direct link to the banks' core banking systems can benefit bank-led mobile wallets and other mobile commerce plays.

One of the combined company's early products will be a real-time bill payment system, said Lou Anne Alexander, the chief market development officer of payments for Early Warning.

"The banks can integrate these capabilities directly into their product suite as opposed to being something the banks have to do in addition to connecting to the network," Alexander said, adding Early Warning's products include a range of authentication tools with direct access to mobile carrier networks along with anti-fraud tools such as behavioral analysis.

Early Warning doesn't have a huge brand recognition, but it's well regarded in the financial services industry as a security tool, Crone said.

"ClearXchange and Early Warning can be the 'silent giants' of payments that we may never know about, but allow us to do mobile payments directly with banks," he said.

Consumers have not adopted mobile payments in a big way in the U.S. but the advancement of real time processing initiatives suggest improvements that may draw more consumers. ClearXchange has explicitly stated that one of its goals is to be an enabler of faster payments in the U.S.

As clearXchange and Early Warning's owners plot their integration, The Clearing House has entered an agreement with U.K.-based international payment systems provider VocaLink to help develop the technology for a new real-time payment system in the U.S.

The Clearing House is the only private-sector commercial-bank-owned Automated Clearing House operator in the country, handling approximately 50% of all commercial ACH volume in the U.S. VocaLink developed the U.K.'s Faster Payments Service, which launched in 2008 it has processed more than four billion payments and provided the foundation for services such as Zapp, a unit of VocaLink that handles mobile payments.

Any advancement The Clearing House makes with a faster payments system will coincide with the overall U.S. effort being pushed through the Federal Reserve, said Steve Ledford, Clearing House's senior vice president of product and strategy who is heading up the real-time payments initiative.

"The Federal Reserve all along has said it is looking to the private sector to actually deliver a real-time payments system for the U.S.," Ledford said. "We are private sector, and that's what we are intending to do."

The Clearing House has been working with VocaLink for more than a year in developing the underlying infrastructure in order to build a real-time payment system, while also leveraging how the technology is delivered in other countries, Ledford said.

The Clearing House also works closely with Nacha, the rule-making body for the ACH that also provides the forum for same-day ACH and other advancements, Ledford said.

The Clearing House announcement comes about six weeks after Gregory Baer became president of The Clearing House Association, the nonpartisan advocacy organization of which The Clearing House Payments Co. operates as a regulated affiliate providing payments technology and infrastructure for financial institutions. Previously, Baer was the head of regulatory policy for JPMorgan Chase.

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