Anticipating a surge in "native electronic payments," The Clearing House Payments Co. LLC is pursuing a sweeping reorganization and finally shutting the door for good on its original business — processing paper checks.
The New York company expects to close its last paper exchange site by yearend. The move is part of an effort to retool its organizational structure and its processes for clearing and settling wire transfers, automated clearing house transactions and checks.
Rossana Salaris, The Clearing House's senior vice president of payment products, said the transformation will enable the last stages of the industry's inevitable shift to electronic payments.
"Our goal is to make sure the infrastructure is there. Whatever kind of bank or credit union they are, we are going to help them," she said in an interview this week. "But unless we do what we need to do as the infrastructure provider, none of it is going to happen."
Though the majority of payments are now made digitally, billions still originate as paper checks and are later converted to some kind of e-transaction. Salaris said The Clearing House and other companies are promoting native electronic payments, which never involve paper.
The effort began in the first quarter, and some of the changes are continuing, but this is the first time the company has discussed them.
A key part of The Clearing House's work is aimed at addressing changes that will make wire transfers more useful for business-to-business payments. Today about 70% of B-to-B payments are made with paper checks, mainly because corporate customers need to attach invoice data telling recipients the purpose of the payment.
By the end of next year The Clearing House and the Federal Reserve banks will have completed their joint overhaul of the wire transfer network, enabling banks' corporate clients to incorporate remittance information in wires.
Corporate customers can already include this data in ACH transactions as "addenda records."
She predicted that the change would lead to a surge in wire payments by businesses. "Once it catches on, it's better for the companies, it's better for the banks," she said. "2010, we believe, is going to be a critical year."
Others are skeptical that the transformation of the payment system is really at hand. Aaron McPherson, the research manager of payments at IDC Financial Insights, said the shift away from check payments, and especially business check payments will have a long period of slow growth followed by an acceleration and ultimately a leveling off the industry moves to electronic payments.
"We've been expecting for some time it would go up, because of all the value that is there to be unlocked," he said. "But the problem is not having remittance data. The problem is making it machine-readable, making it human-readable and integrating it with all the software that is already out there."
Salaris acknowledged that the timing was uncertain, but argued that once businesses begin initiating more native electronic payments, the pace will quickly increase. "It's the network effect. That's what is key here," she said. "You have to get all the parties in the chain enabled. Once you're enabled, it's like flipping a switch."
David Bellinger, the director of payments at the Association for Financial Professionals, said that corporate treasurers ultimately would embrace electronic payments, though he would not speculate as to when it could reach critical mass.
In the long run, the business case will be too compelling to ignore, he said. "There is an economic payoff for the corporates to have a higher percentage of electronic payments. That will drive a lot of what those banks do."
Thomas S. Kunz, a senior vice president and director of payments and e-business at PNC Financial Services Group Inc., said The Clearing House's electronic payment initiatives mirror what his Pittsburgh company is doing to encourage retail and corporate clients to make more payments electronically. (The Clearing House is owned by 19 banking companies, including PNC.)
"Despite the Great Recession, innovation continues to be very important in payments. "Demand for innovation has not slowed," said Kunz, who has been involved in the organization's work.
The shift to check images has been one of The Clearing House's biggest success stories, and is now nearing completion.
From a standing start in late 2004, the industry has converted almost all its check processing to digital images rather than paper checks, Salaris noted.
Founded in 1853, the company is the nation's oldest provider of check-clearing services, but it has been systematically dismantling those operations. It closed down its West Coast paper check exchanges in June and its Midwest sites in October. Its last paper check exchange is scheduled to close Dec. 31 in New Jersey.
The Clearing House has also been changing its organizational structure since the first quarter. The current effort differs from the corporate, structural reorganization that the outfit undertook in 2004, Salaris said.
That time, The Clearing House consolidated an independent set of siloed businesses, each with their own ownership groups and management structures under a single corporate umbrella. But the three main units — the Electronic Payments Network for ACH, the Clearing House Interbank Payment System for wires and SVPCO for checks — continued to operate as separate entities, Salaris said.
This reorganization of the Clearing House is more ambitious. "We have aligned our structure more with how the banks and the industry and our peer organizations are aligned," she said.
"It's all under the Clearing House now. We are one company," she said. "EPN and Chips are product names. They are no longer separate logos. We have one brand."
With that, some long-standing employees moved into new jobs, a transition that occurred in June. Salaris said she is now in charge of all the organization's payment products, while Hank Farrar, who formerly headed Chips, is now in charge of customer relationship management and sales, and Susan Long, the former head of SVPCO, now is running The Clearing House's forums and committees.
In the longer term, Salaris said she envisions a system in which banks can offer their customers a choice of payment options, and one that masks the internal complexities of the various payment systems.
"It's not about the ACH network or the wire network, it's about the characteristics of the payment that we focus on," Salaris said.
"If a customer wants to reach this country and transact in this currency and do it in this amount of time, that's all the corporate customer should need to know. They shouldn't have to worry about the alphabet soup we have in the ACH with all the different formats. That's the pipes. Pipes should be hidden."