Clearing House Payments Co. LLC says the settlement feature it has added to its image exchange network reduces risk and simplifies operations for the banks that use it.
Bankers and observers agreed that the feature, which went live Monday night, reduces the complexity of clearing and settling checks through images, but they said other operational issues must be tackled before the industry's shift from paper-based check clearing to using images accelerates.
George F. Thomas, an executive vice president at The Clearing House, said this week that the New York organization had long planned to add the settlement feature.
"We have an extensive history of doing settlement. We've been doing it 150 years," he said.
To reflect the upgrade, The Clearing House has renamed its image exchange system the SVPCO Image Payments Network, Mr. Thomas said. "Now it is a true payment system. Before, it was more of an information exchange that you had to settle somewhere else."
Six large banks - units of Bank of America Corp., JPMorgan Chase & Co., KeyCorp, National City Corp., Wachovia Corp., and UnionBanCal Corp., which is mostly owned by Mitsubishi Tokyo Financial Group Inc. - are using the network to transmit images to each other.
Susan Long, a senior vice president at The Clearing House and the head of SVPCO Electronic Clearing Services, said some of the banks have begun exchanging images with more than one partner. The system keeps track of each file - technically an X9.37 image cash letter - that moves over the network and monitors the debit or credit position of each bank.
The Clearing House uses its connection to the Federal Reserve System to provide multilateral net settlement twice a day, at noon and 4 p.m. eastern time, when each bank's reserve account is debited or credited to settle the payments.
For example, the Tuesday noon settlement covered 18,552 checks worth $3.85 million. Ms. Long said the system provides more safety and soundness than the third-party settlement that the banks used in the past, "because it is a seamless process."
Mr. Thomas said The Clearing House could establish additional settlement times, within the Fed's check settlement hours of 8:30 a.m. to 5 p.m. eastern time, if the participating banks ask for them.
Mark A. Migliaccio, a senior vice president at Union Bank of California, said in an e-mail that it had previously used the FedWire service to transmit payments for daily settlements with National City. But the two companies have been exchanging images - generally a few hundred transactions a night in each direction - through the SVPCO network since April.
"By eliminating the need to initiate FedWires, the automated settlement process is operationally more efficient and reduces wire transfer risk to the bank," Mr. Migliaccio said.
Peter Frank, a senior vice president at Wachovia, said the network has performed smoothly so far. "Everything is in balance. The settlements have worked fine. As one guy [on Wachovia's staff] said, it has been a nonevent for them. So that's good news."
Mary Ann Francis, a senior vice president and the manager of global trade and treasury solutions at National City, said the Cleveland company is negotiating with several more potential image-trading partners.
"I'm encouraged by how many people are interested," she said. "There's momentum, certainly more so than in the last six or eight months."
But she cautioned that the adoption of image exchange would likely remain slow. "We're still in our infancy on any of the stuff to do with image exchange."
Aaron McPherson, the research manager of payments at Financial Insights Inc., a Framingham, Mass., unit of International Data Group, said the development is a natural step in the evolution of check imaging, and should provide a benefit to the banks that use it.
"It will give them an advantage over clearing systems that don't have integrated settlement … but I don't think this is going to be the missing link that's going to make image exchange take off," he said.
For instance, standards are still evolving for issues such as image quality, Mr. McPherson said. "None of the banks that we've talked to has told us that integrated settlement is holding them back from image exchange. It has much more to do with processing the images that they receive."
