Clearing Houses Seek to Bypass Fed
Visa, 2 Regional Operators Hold Preliminary Talks
Officials from Visa USA and the New York and Arizona automated clearing house associations met early this month to discuss ways to bypass the Federal Reserve's payment system.
The talks were preliminary. Participants said an agreement would enable the clearing house associations to lower their fees to member banks by as much as a third.
Banks that use an ACH service do so to make recurring payments, such as company payrolls, taxes, and bill payments. The Federal Reserve has an 80% share of ACH processing volume.
Speed and Savings
"The private sector needs to join together on services it can do better than the Fed at a lower cost," said Paul Finch Sr., president and chief operating officer of the Arizona Clearing House Association.
A national private ACH system could process transactions faster than the Fed.
The added speed would reduce the risk that a bank will lose money if a corporate customer goes out of business.
A 3-Day Delay
The Arizona ACH offers a same-day settlement service, while the Fed processes transactions over three days. In one case, that means banks must pay out funds for corporate payrolls three days before employees receive funds in their accounts.
Arizona, the smallest of the three private clearing houses, pays the Fed about $40,000 a month in fees. Mr. Finch said about half of those fees would be eliminated if the private ACH organizations were to transfer transactions among themselves.
Member institutions must pay fees of about 1.5 cents for each transaction received from or sent out of state.
Before private ACH organizations can join, there are a number of issues to be worked out, Mr. Finch said. Members have not yet been consulted, and if they give the go-ahead, there will still be issues of technology, settlement method, and pricing to be negotiated. Each of the organizations operates under different settlement rules.
In a recent study conducted by Global Concepts, an Atlanta-based financial services consulting firm, 70% of Florida banks said they wanted to explore alternatives to the Fed. The study was conducted on behalf of Florida Payments System Inc., the Florida ACH association.
However, the study also found that the Florida banks would not use the services of private ACH providers unless their fees went down. Although these providers charge less than the Fed, transactions from out of state still must be processed by the central bank. Even if the Florida members switched to VisaNet or another private provider, their costs would go up -- because nearly 80% of their ACH business is out of state.
"It's clear that if the private-sector ACH is to grow beyond where it is now, it will have to find a way to break the Fed's monopoly on ACH payments," said Steven Ledford, a consultant with Global Concepts.