As the Federal Reserve banks accelerate their planned reduction of check processing services, several companies are stepping up their own operations in an effort to capture banks' remaining check volume.
The Fed has been gradually mothballing check processing sites around the country for several years. Though the program is, in part, a response to the inexorable decline in the use of checks, the Fed is also helping to push banks along by shuttering sites that still receive substantial numbers of checks.
Mary Ann Jordan, a senior vice president at Eastern Bank Corp. and the director of its financial institutions unit, said this is creating a window of opportunity. Eastern, a Boston bank, and the Avon, Conn., banking technology vendor COCC, announced plans this week to start an "on-we" image-exchange network, aimed at serving banks in the region that will soon be unable to send their checks to a nearby Fed site.
"We'll still take their paper," Ms. Jordan said.
So-called on-we networks can clear checks when both the depositing and paying banks are involved.
The Fed already has closed its check-processing operation in Boston and said in March that it would move up, to the third quarter, a shifting of check-processing work from Windsor Locks, Conn., to Philadelphia, an event that previously had been scheduled for 2009.
By 2010, the Fed expects to have only four full-service check processing centers — in Atlanta, Cleveland, Dallas, and Philadelphia — to serve the nation. These changes, part of an intentional effort by the central bank to promote the migration to image clearing, both tighten banks' processing deadlines and increase their transportation costs.
The COCC Exchange network is the latest in a series of regional image-exchange networks that has grown up in recent years to reduce clearing costs in local areas. COCC, a cooperatively owned core processing outsourcer that primarily serves community banks and credit unions in New England, said it expects most of its nightly image-processing volume will move to Eastern Bank in the next 12 months.
Joseph D. Lockwood, COCC's chief technology officer, said its network will offer participants a flat price for clearing items regardless of the time they are deposited or the site of the paying institution, in contrast to rivals that offer tiered pricing structures with higher fees for images presented later in the day. COCC, which was once known as Connecticut On-Line Computer Center Inc., said Eastern Bank will provide 100% next-day availability for all deposited items without withholding a percentage of the institution's deposit — a practice known as deferral.
Mr. Lockwood said clients will receive more investment options for funds in Eastern Bank accounts than the Fed offers, and lower costs because Eastern has direct image-presentment arrangements with several large banks, a further advantage over the Fed.
The Fed's "clearing process still favors the really large institutions, which is just wrong," he said. "It should favor the most progressive institutions."
COCC, a service bureau that has long provided paper item processing, has 110 item-processing clients and is rapidly converting to image, Mr. Lockwood said. "By yearend 2008 we will only have one left doing paper processing through us."
Lloyd Hamm, the chief administrative officer at Eastern Bank, said the arrangement with COCC could potentially double the number of institutions that clear checks through the $6.8 billion-asset commercial bank.
Chuck Doherty, a vice president at the financial technology company Fiserv Inc. and a business manager in its financial institutions group, said the Brookfield, Wis., company this week stepped up an effort to promote its existing check processing services to core processing clients that are likely to be affected by the changes in the Fed's Payor Bank Services.
As the Fed pulls back, "what we're saying to" banks "is that we can help you bridge the gap," Mr. Doherty said.
As of July 31, the Fed has said, it will discontinue services such as manipulation of the magnetic ink character recognition line and account-number sorting of checks. By Dec. 31, the Fed will have discontinued MICR presentment and FedImage CD-ROM delivery, among other services, and additional payor services are to end in 2009.
Fiserv operates 43 item-processing centers nationwide and has long had a strategy of consolidating check volume in a declining market.
Mr. Doherty would not discuss Fiserv's own plans for closings of those centers, saying only, "We're looking all the time at our footprint and seeing what makes the most sense."
Bert Ely, an Alexandria, Va., independent banking consultant, said that both the Fed and private processors like Fiserv will come under greater cost pressure as more imaging moves earlier in the clearing process, to branch capture and remote capture in the offices of business customers.
"The key is how imaging is moving back to the point where the check is first handled," Mr. Ely said. Geography ceases to be an issue in electronic clearing, he added. "Whether you're in the middle of Montana or the middle of Manhattan, it really doesn't make any difference."
David Vandeven, the president of Midwest Independent Bancshares Inc., a Jefferson City, Mo., bankers bank, said that the Fed's pullback has been a factor prompting community banks to shift their check volume to his company's on-we clearing service, Midwest Image Exchange Network, which is marketed as Mie.Net.
He said that 200 of its 300 community-institution clients use the service, which was introduced last year.
The Fed's retrenchment means that many Midwest customers will have to send their checks to Dallas instead of the Kansas City, Mo., center that is to close this month, he said. "That has real and perceived impacts, both of which we have to deal with."
