Chemical Banking Corp. has become the second institution to originate automated clearing house transactions through a fledgling network that allows banks to bypass the Federal Reserve System.

The payments network, called the Private Sector Automated Clearing House Exchange, or Pax, went live last April. Citicorp was the first bank to send ACH transactions via Pax, which is the first privately owned automated clearing house exchange that operates nationwide.

Chemical added 18,700 ACH transactions to Pax on its first day of operations. The expected volume will boost monthly transactions using Pax to over 350,000, up from December's volume of 93,000.

Pax is owned and operated by the Arizona Clearing House Association, the New York Automated Clearing House Association, and Visanet ACH, a Visa U.S.A. subsidiary that process ACH transactions for a number of banks and regional associations.

Pax was developed so that member banks could take advantage of lower processing fees and gain efficiencies in interregional ACH money transfers.

Chemical, the nation's fourth-largest bank holding company, processes over six million ACH transactions monthly. The bank will add as many ACH transactions as possible to the Pax network, officials said.

"We decided to use Pax for strategic and competitive reasons," said Anne Friedman, a vice president of Chemical Bank. "The real reason is to reduce settlement, risk because you reduce the number of times that the ACH transaction is processed."

Robert Powell, senior vice president with Visa, said there will be "exponential" benefits for all banks.

"By Chemical coming on, it really benefits all the other banks that exchange items with Chemical Bank because now those items are going through at a later deadline, there is less risk, and there is earlier finality," Mr. Powell said.

"What they've done is essentially cut out the middleman and streamline the process," said Deborah L. Williams, an analyst with the Tower Group, a bank technology consulting firm located in Wellesley, Mass.

ACH processing can cost as little as half a cent per transaction. But depending on the operator, the cost shoots up to around 1.2 to 1.4 cents when Fed is involved, bankers say.

But more important than cost reduction, Ms. Friedman said, the new system also benefits users because it is settled twice a day while the Fed settles only once a day.

Another benefit from speeding up the settlement time was the reduction of settlement risk, since payment finality can be provided up to 18 hours earlier.

"Because I'm cutting out one piece of that process, I'm offering my clients more competitive deadlines," Ms. Friedman said. "You can get it out quicker, which means you can send that payment out later in the day."

Chase Manhattan Corp., the largest originator of ACH transactions with 163.4 million items sent in 1993, has already established a direct link with Visa.

ACH volume has been growing steadily at a compound annual growth rate of 12% since 1990. In 1993 the total transaction volume was 2.2 billion, with a value of $8.8 trillion.

Private-sector competition has reduced Fed market share of ACH volume to around 80% in 1993, down from 90% five years ago.

The Tower Group's Ms. Williams said in five years the Fed should be left with about 65% market share, "but that's nominal, given the fast growth of total ACH volume."

Bankers agree the current system is ripe for an overhaul because of the current inefficiencies, but that's something the Fed is striving to improve. In an effort to streamline management of its financial services, the Fed formed two committees recently to improve its payment services.

"Competition can engender efficiency," said Paul Connolly, first vice president with the Federal Reserve Bank of Boston. "I can assure you the Fed is at work to make our ACH more attractive."

He noted that the Fed was developing a central processing site that will eliminate redundant processing and will introduce "flow processing," which will have four deadlines in a 24-hour period.

"We'll get payments delivered anywhere in America within four hours," said Mr. Connolly. "I expect this to be an ongoing process of improving the ACH."

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