Big Getting Bigger as Small Are Squeezed Out

The iron rules of banking competition and consolidation are taking hold in the automated clearing house business.

Prominent money-center and superregional banks are increasingly using their size and scale advantages to build market share at the expense of smaller institutions unable to make the necessary system commitments or beat efficient competitors' prices.

The result, evident in American Banker's annual surveys of ACH activity, is the emergence of an elite 20 to 25 institutions that are making it more and more difficult for midsize banks to gain significant ground in this electronic payment activity.

In 1994 the trend became even more pronounced, and the elite more entrenched. The top 10 originating banks - see the table on page 23 - were responsible for 36.4% of the private-sector debit and credit payments that clear mainly through the Federal Reserve System or Visa U.S.A.

Those banks' share of a growing pie - commercial ACH transactions are up by double-digit percentages - has climbed steadily from 35.75% in 1993 and 35.1% in 1992.

According to the ranking of holding companies on this page, the top five in consolidated volume generated 33% of all private-sector ACH entries.

This is not to say there is no room for smaller fry. Virtually all banks, thrifts, and credit unions participate in the automated clearing house, at the least to receive the direct deposits of payrolls and Social Security payments that are still at the system's core.

And when it comes to originating automatic payments to or from corporate and business customers, a few smaller institutions have created niches. For example, Benchmark Bank in Quinlan, Tex., Boone County National Bank of Columbia, Mo., and Kansas Blue Cross/Blue Shield Credit Union in Topeka each managed to initiate more than a million ACH payments last year.

But those volumes are barely a blip on the National Automated Clearing House Association's 1994 estimate of 1.95 billion interbank private-sector transactions, or 2.43 billion when intrabank or on-us transactions are added in, or 3.0 billion when also including government payments like Social Security and federal payrolls.

Growth in overall activity, while disappointing to people who had wanted to see a greater displacement of paper checks by electronic entries, is still faster than in most U.S. businesses: 13.8% in not-on-us commercial activity and 14.7% for the entire system, according to the national association.

Most of the growth is going to top dogs like Chase Manhattan Corp., Norwest Corp., BankAmerica Corp., Wachovia Corp., Chemical Banking Corp., and a few others. What they have in common, aside from economies of scale, are leadership positions in corporate banking and cash management that provide a springboard for payment services like ACH.

"The top ones have made the investments, and they are seeing the results," said Anne Shuttleworth, a vice president at First National Bank of Chicago, the 11th-biggest bank originator. "It takes more people to run an ACH shop than other areas of corporate services with higher margins." The required commitment makes it "very difficult to do this business halfway."

The list of the 100 largest originators - it consists of 98 banks, one thrift, and one credit union - holds further clues about the struggles that the lower tiers face.

For one, the volume of the 100th-largest originator was about the same as in 1993. For the first time, this threshold did not grow from year to year, indicating that transaction growth is concentrated toward the top of the list.

While the advent of personal computers and specialized software makes it easy for even the smallest banks to originate payments, their volume does not compare with the largest.

Leader Chase Manhattan - consolidating the volume of an upstate operation with that of its New York bank - increased originations by more than 23 million items last year, as did No. 2 Norwest.

The top five holding companies' net aggregate increase of 75 million - factoring out the old business of Continental Bank in Chicago that BankAmerica inherited by acquisition - equaled 26% of the year's growth in commercial credits and debits.

Norwest's lead bank in Minneapolis, also second to Chase on the bank list, became only the second individual originator to pass the 100 million mark. And BankAmerica, including what is now Bank of America Illinois, became the fourth holding company to achieve that status.

Holding at No. 3 among the banks was Bank One in Springfield, Ill., which is Chase's closest rival in the origination of direct debits for insurance company premiums and other billings. Bank One built that business as a niche player, Marine Bank of Springfield, which had just $1.2 billion of assets when the Ohio-based holding company bought it in 1992.

The passing of Marine Bank left only one community bank with a disproportionately large ACH business - the $300 million-asset Western Bank of Sioux Falls, S.D., at 8.7 million items.

Western's era ends this year with its acquisition by First Bank System Inc. Already in the single-bank top 20 through First Bank in Minneapolis, the parent company's pro forma annual volume of 29.7 million would put it 16th on the consolidated table.

First Bank would not necessarily knock No. 20 Shawmut National Corp. off that list. Completion of the latter's merger into Fleet Financial Group would put them at 37.7 million, behind No. 12 Mellon Bank Corp.

Despite Bank One Springfield's 11% growth in 1993, which on the bank list kept it about a million ahead of Bank of America's 67.8 million, Banc One Corp. got stung by the loss of an ACH originations contract from Checkfree Corp., which processes bill payments via personal computers. Banc One was the only one of the top 20 holding companies not to grow in consolidated originations.

Checkfree assigned that business to Society National Bank of Cleveland, making it and its new parent, Keycorp, an immediate contender for elite status.

With electronic data interchange, tax payments, and other corporate opportunities poised for rapid growth, the biggest wholesale banks are only likely to get bigger in the ACH.

"We are involved in an aggressive program to educate existing customers on the benefits of electronic payments," said Larry Hoskins, senior vice president of product management at Wachovia Corp., which is fifth on the holding company list.

While encouraging more usage by current customers, Wachovia also tries to be "creative in soliciting new markets" and, as is common among its peers, selectively bids to win business away from competitors, Mr. Hoskins said.

Wachovia's success is measured in consistent growth: its three ACH- originating banks together registered a 25% increase in 1994 after 27% in 1993 - a growth range Mr. Hoskins expects to stay in. The lead bank in Atlanta was up 32% in 1994 and ranked fifth among individual banks.

"A lot of companies are simplifying their bank structures and will be less likely to want to use multiple disbursement banks," Mr. Hoskins said. To fulfill its nationwide corporate ambitions, Wachovia has packaged ACH services with others aimed at concentrating those banking relationships.

"The ACH, like other electronic payment businesses, is very much a scale business," said Susan Scheerer, senior vice president and manager of the treasury management division at First Bank in Minneapolis. "The bigger you are, the smaller the incremental expense, and that gets you a pricing advantage."

The need for scale explains why First Bank is consolidating Western Bank's ACH operation, which is heavily skewed toward debits for insurance premiums. That will create more of a balance, as First Bank historically has handled many more credits than debits.

Some bankers are wary of the risks that come from imbalances. Some have pointed to the exposure of a $50 million institution like AAL (Aid Association for Lutherans) Member Credit Union originating enough insurance debits to rank among the top 100.

Giant Wachovia, in fact, strives for a balance between "making and collecting payments" for its corporate customers, Mr. Hoskins said. Ms. Scheerer said the large scale of an operation brings a risk management advantage regardless of transaction mix, as well as a platform for national expansion.

"We are competing nationally against those other members of the elite," she said. "As we grow, the debit-credit balance is less a concern than meeting the business needs of our clients. "Client and relationship management is our focus."

"One of the attractive aspects of the ACH business is (there are no) geographical limitations," Ms. Scheerer added. "This also means that anyone with the commitment and necessary scale can attempt to be a national player. You need to have technology and size."

"We hear that some banks with standard (ACH software) packages are considering outsourcing," said Keith Theisen, ACH services manager at Norwest. That wouldn't do for Norwest and its key rivals. ACH is "one of our key strategic products," Mr. Theisen said, and Norwest focuses on "processing advantages and economies of scale."

All the big players seem to be expecting a banner year in 1995. Growth factors include corporations' desire for a more secure alternative to checks, heightened demand for electronic data interchange, and the impact of regional or national promotions (see article on page 21).

Typical of the leaders, Norwest has been adding business from multiple sources including traditional insurance and payroll applications. An existing customer, U S West, doubled its volume in 1994, Mr. Theisen said, adding, "we want our customers to use the ACH as a preferred payment mechanism."

Chase, which has recently seen only average growth rates, should reach 25% in 1995, said division executive Leonard Heckwolf. "We have revised our ACH strategy to go very aggressively on the corporate side and on the West Coast," he said.

Chase also expects to build volume in partnerships with Microsoft's Money and Intuit's Quicken software programs, and through an international system that he says is farther along than the National ACH Association's cross-border payments project.

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