Clearing house group hones strategic plan.

The National Automated Clearing House Association of Herndon, Va., holding its annual conference this week in Orlando, is celebrating its 20th anniversary. To look back and look ahead, American Banker writers Jeffrey Kutler and Barton Crockett recently interviewed Elliott C. McEntee, president and chief executive of the association, and Sam S. Cerverizzo, the group's board chairman and senior vice president of Chemical Bank, New York.

Mr. McEntee began to conversation with a current assessment of the ACH network, and Mr. Cerverizzo discussed the association's strategic plan. Excerpts follow.

MCENTEE: An evolution is taking place in the automated clearing house that has gone largely unnoticed, because many people in banking tend to stay ver focused on their own niches.

According to the First Manhattan Consulting Group study last year for the Bank Administration Institute on retail delivery systems, more than 50% of all transactions take place outside the branch. The ATM and the telephone are bigger delivers of financial services than the traditional branch. The ACH network is part of that evolution. It has contributed substantially to the fact that fewer consumers are going to their branches. This has resulted in a lot of positive things, including convenience to the customer and cost savings for banks.

The original, basic reason for establishing the ACH network and the National Automated Clearing House Association ws to give the banking industry an electronic alternative to the processing of paper transactions among companies, consumers, and financial institutions.

A secondary objective was to create a nationwide network, so companies, consumers, and financial institutions could participate under a single set of rules and formats.

Both of those objectives have been met over the 20 years since NACHA was formed. We have 20,000 financial institutions participating in the network. They represent over 99% of all assets in the United States. We have over 300,000 corporations originating ACH transactions on a regular basis.

Based on 1993 numbers, more than 50% of all households receive at least one income payment a month via direct deposit; over 40% of households pay at least one bill through the ACH network each month. On the corporate side, 90% of all cash management drawdowns go through the network.

Most people don't realize we are now the largest ACH network in the world. In 1993, 2.2 billion payments were processed, and over 2.6 billion if we include on-us volume. The dollar amount is close to $9 trillion.

Q.: How does that volume break down, commercial versus government?

MCENTEE: There were 803 million commercial debits, 859 million commercial credits, and 554 million government transactions in 1993. Commercial volume grew 16%, and growth has been running between 16% and 20% the last five years. We will also be paying more attention to counting on-us transactions, which are becoming a more important part of the business because of mergers anbd consolidations.

Let me go into the benefits available to everyone through the ACH, starting with direct deposit. We have done two studies on cost savings, and we found that a bank saves 70 cents every time a paper payroll check is converted into an ACH item.

McKinsey & Co. just completed a study aboput the banking industry's cost reductions over the last 10 years. Bank employment is down 20%, the ratio of assets to bank employees has doubled, and we think the ACH was a contributing factor: you don't need as many tellers and branches because of direct deposit and people's access to their money via ATMs and telephone banking.

Another benefit is that a customer who signs up for dirtect deposit maintains higher balances and uses ATMs more frequently. Another of our studies showed that banks' best customers are those on direct deposit -- they use more credit and noncredit services.

Q.: You have commissioned PSI and other outside firms to perform these studies. Does that reflect a need for missionary work, perhaps because NACHA and the ACH system may not be widely understood?

MCENTEE: That is an important objective. The other is to measure how successful we've been. We spend money on marketing these particular products and we want to see the results.

Q.: Do you feel the message aboyut the ACH and its impact on productivity may not be getting out?

MCENTEE: At the senior levels of a lot of banks, I don't think this is well understood. I don't know if Sam would agree or not.

CERVERIZZO: It depends on the size of the bank. In smaller banks it's well understood by very senior management, and in larger banks where senior management has more diverse responsibilities, it's probably not as understood. A bank like Chemical, or Citibank, or Chase that is heavily reliant on consumers does understand the issues, the tradeoffs, and why they need to attract conversions from checks to ach.

MCENTEE: It has been a slow process with a lot of banks. One on the West Coast just decided to emphasize customer retention. If you can get a customer to sign up for a series of direct deposit and direct payment ACH products, receiving the automatic payroll and making some bill payments and charitable contributions this way, you are more likely to keep that customer longer than if he did not sign up for these programs.

CERVERIZZO: We know that customers on direct deposit utilize a variety of other consumer-type services, in contrast to viewing the banking relationship as just a checking account or a place to get cash.

MCENTEE: There are also a lot of benefits to banks' business or wholesale sides, Ernst & Young's annual cash management studies the last three years showed revenues are growing faster in ACH services than any other category.

We just completed a survey of utility companies around the country on preauthorized bill payment programs. On every paper payment converted to anb ACH debit they save eight to 46 cents, depending on the existing system they use.

A company that converts a paper transaction with a trading partner to electronic data interchange, the fastest growing ACH product, saves $5, according ti a study by EDI Ltd.

We are starting to see significant participation rates in a lot of these applications. A lot of companies now have 75% to 90% of employees on direct payrollk deposit.

Several major utility companies have 15% to 20% of customers using direct payument. A utility company today that starts to offer direct payment can expect 3% to 5% participation the first year -- up from five years ago, when 1% was considered a success. The reason in that utilities and banks market the service more aggressively, and there is a greater understanding among the public about the benefits of direct payment.

One of the biggest ACH beneficiaries of all is the government. The social Security Administration has told us that it could not pay its current numberof beneficiaries if all were receiving benefits by check. The agency doesn't have the staff to issue checks to everybody. Over 55% of Social Security recipients are on direct deposit.

Q.: How much of federal government ACH volume is Social Security?

MCENTEE: More than half. We have all the government agencies on direct payroll deposit, most with 85% to 90% employee participation rates. Financial EDI is widespread, with the Department of Defense one of the last agencies to sign on. Two big programs are coming on, federal tax deposits and electronic benefits transfer. The ACH will be the vehicle for delivering funds to the operating companies that have EBT contracts with the government, sot the ACH will be playing significant role in those systems along with ATM and point of sales networks.

The government has definitely discovered this vehicle. Vice President Gore's task force report on reinvesting government contained page after page of references to the ACH and electronic payments.

I also wanted to note that the system is all electronic now. A bank can move an ACH payment to any other bank in the country within four hours, whereas in the past that took a day or longer. The Social Security Administration likes to brag that it never lost a transaction in the ACH network. Something like one in 4,000 checks get lost or stolen in the postal service.

An American Bankers Association study estimated check fraud is increasing 20% a year. We don't have that kind of problem. This is not to say the ACH doesn't have some close calls, and losses on some occasions, but our problems are nothing like the checking system's. As I learned at the Financial EDI Conference in San Antonio, which drew 680 people, fraud is the driving force for corporations' moving away from the paper check.

CERVERIZZO: Elliot has just described what NACHA's strategy has been up to this point -- managing and reducing risk, improving quality and expanding services, promoting the system's use, and helping with education and training programs. Where do we go from here? What is the future of NACHA and the ACH itself?

The NACHA board and executive committee undertook a concerted effort to design a strategic plan for the next five to seven years. A lot of input went into that -- demographics, economics, regulatory concerns, general banking and corporate trends, and globalization.

Looking at all these drivers, we asked, what is that the ACH really? So we divided our world into three categories: business-to-business payments, business-to-consumer payments, and consumer-to-business payments.

Going forward, whatever we do within NACHA will be concentrating on those three segments and supporting them through association programs. We are looking at the NACHA staff, how it is organized, and the skills levels it will need to support future growth. We are looking at marketing and promition, and what more we must do, if anything to support the three legs of our chair.

We are expanding our number of councils. We have one on electronic data interchange, we started one on bill payments, we have a cross-border council for international EDI, we are looking at a council to determine NACHA's role in electronic check collection.

Q.: How long has this planning process been under way?

CERVERIZZO: It started with the executive committee that was put in place in June 1993. But all the NACHA board members play a role in developing, designing, and giving inout into the program, and putting in place action plans that will make the strategy become reality. Several board meetiungs have been held where the only subject discussed was NACHA's strategic direction. Everyone on the board sees this process as critical to the future success of NACHA.

Certainly, everyone will benefit from a strengthened network. As bankers rely less on interest income and more on fee income, they look to the ACH as a source of fee income. They also look at ACH as another opportunity to reengineer their work flows, or reduce checks and other paper. Efficient as check processing is, it is a very expensive process, moving from the teller window eventually to another bank via clearing houses and the Fed.

Corporate treasurers see the ACH as a significant expense reduction opportunity, especially in the area of postage and paper processing and fraud control.

We believe there are about 20 billion transactions in the board category of bill paying -- mortgages, utility bills, charitable contributions, mutual fund payment -- that can go from check to electronic. Even a 25% or 50% conversion rate would provide major growth in electronic payments. Interstate banking will give banks a chanve to have even more efficient payment systems. A bank with subsidiaries in multiple states can unify their account processing systems, gaining economies of scale and back-office efficiencies.

We see local ACH associations expanding in the future. The association may also become responsible for check clearing to ATM exchanges, and look to NACHA for support. This raises the question, is NACHA goint to concentrate only on the ACH portion, or widen its umbrella to encompass checks, wire transfer systems, debit cards?

We are looking for more corporate participation in NACHA. We don't see them sitting on our board in the near future, but we do want to better understand their requirements.

Q.: What is the corporate participation today?

CERVERIZZO: Their primary input is via the affiliates program, a group that meets periodically to discuss ACH-related concerns that are communicated to NACHA for action. They also are welcome on our various councils, as are federal and state government agencies.

Q.: Where does the strategic planning process go from here?

CERVERIZZO: The formal plan will be presented for approval at the full board meeting in June.

Q.: How are you addressing private sector's relations with the government on payment issues?

MCENTEE: We want to make certain that we ensure competition between the public and private sectors. The tax deposit program is one in which competition would be diminished if the Fed were allowed to perform processing functions that are currently the domain of the private sector.

But looking to the future, perhaps the most interest opportunities are international and cross-broder. We already have a cross-border council, and a significant number of transactions between Canada and the United States, and we easily see an "ACH for the Americas" resulting from the NAFTA treaty. With other groups of trading partners in Europe and the Pacific Rim, there will have to be efficient multinational payment systems that match what some countries have domestically.

NACHA has been asked to help a lot of these countries develop programs within and across international borders. And our international conference, which runs concurrently with our annual conference, is getting a fiar amount of practicipation from foreign companies and countries.

Q.: Are you satisfied with the transaction growth you've been reporting?

CERVERIZZO: No. Any successful enterprise must continue to grow. As pleased as we are with results over the past few years, we want to see more growth, and I think we will.

MCENTEE: As long as you have a company with a computer system that is printing a piece of paper and using the U.S. Postal Service to move it to another company with a computer system that has to open the envelope and put the check into its system, then I'm not satisfied. As long as I see long lines in bank branches on paydays, then I'm not satisfied.

Q.: Does the growth of on-us transactions, which do not go into the interbank ACH network, raise questions about the ACH infrastructure, its adequacy, or even the need for coordinating bodies like the local ACH associations?

MCENTEE: As far as NACHA is concerned, there is still a tremendous need for a set of rules to bind the bank and corporations together. The rules and formats are necessary regardless of where the transactions take place. Even Canada, which has an incredibly concentrated banking syste, compared to ours, has a set of rules and formats and a payments association to coordinate them. But they don't have an ACH network per se; they exchange transactions among themselves because there are so few players. Maybe in 20 years, if we have a lot of consolidation, the network may be very different from what it is today. But we still need someone to set the rules and formats.

As for the local associations, there are a larger nimber of smaller banks getting into thje ACH originations business, credit unions are becoming a lot more active. So the mission of some local associations is beginning to change, away from education and marketing services to larger institutions, and helping them not just with ACH but with education programs in check collections and wire transfers.

When I took this job five years ago, people siad that NACHA's membership would drop by half within five years. Well, we lost two single-bank members [Manufacturers Hanover Corp., which merged with Chemical Banking Corp.; and Continential Bank Corp.] and there was no change in the number of regional multi-institution associations. [There are currently 29 regional associations and 11 banking companies in NACHA.]

Q.: You mentioned that more is being demand of regional ACH associations, and their services are diversifying. Doesn't that confuse the payment-system picture? Who is providing leadership and coordination?

CERVERIZZO: NACHA ios a starting point for this coordination. The 29 for local associations look to the national association for leadership in development of training programs and all kinds of support materials for education and marketing. Broadening this to payment systems is general, beyond the ACH, payment systems are fragmented -- you have NACHA, the bank card associations, electronic check processing associations, Fed Wire -- there is no single point of leadership.

MCENTEE: There has been a slight change in NACHA's focus over the last few years. A National Organization of Clearing Houses was formed, with 15 check clearing houses as members plus the two major national clearing houses that are competing with the Fed. NACHA provides the administrative support to that organization. We do the same for the National Association for Check

Safekeeping. It was formed within the American Bankers Association 12 years ago to promote nonreturn of canceled checks, and we have made it more proactive, exploring more tie-ins between the check and ACH systems.

The subject of leadership came up when we formed our bill payment council. Was it going to be strictly an ACH project, or would it accommodate similar programs at MasterCard, Visa, or regional ATM networks. We felt our role was to help the banking industry and billers by bringing all the players together to create common rules and procedures and formats, rather than five or six methods at cross-purposes.

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