Open Solutions Inc. has begun transmitting check-image files directly to Bank of America Corp. on behalf of a correspondent bank.
The core processing and item processing software and services provider says that the service is less expensive than routing the images through the Federal Reserve banks, as it typically does now. Analysts said that other companies are likely to take advantage of direct connections.
Dave Reim, Open Solutions' project manager on the direct-link effort, said the Glastonbury, Conn., company sent its first image cash letter to Bank of America on May 10 on behalf of a small Massachusetts bank. He would not identify the sender but said it sends 35% to 40% of its volume to B of A.
"If we can cut down that per-item charge, that's very important to them," Mr. Reim said.
The image processing took place at Open Solutions' center in Windsor Locks, Conn., which handles check-image processing for 23 banks in California, Connecticut, Idaho, Arizona, and Texas. The bank that sent the cash letter is sending about 3,500 to 4,200 check images to Bank of America nightly.
Open Solutions provides item processing services to other banks, in California and Texas, that exchange more than 100,000 items per night with B of A, and are expected to begin using its direct image cash letter service.
The current participant in the image project is "a good proof of concept," Mr. Reim said, but "our pipeline banks are much bigger."
The Massachusetts bank is not receiving image files back from B of A but is expected to do so starting in the third quarter, he said. Settlement is handled through Bankers' Bank Northeast, also of Glastonbury. Open Solutions sends encrypted image files over the Internet, using secure file-transfer protocol, Mr. Reim said.
Doug McKinley, a senior vice president at Bank of America and the head of the Charlotte company's image product engineering team, said B of A has been receiving image files since the Check Clearing for the 21st Century Act took effect in October 2004.
Analysts said these sorts of direct connections, which bypass the Federal Reserve banks, will probably become more common, especially for companies that are clearing a large percentage of their checks with a single trading partner.
"The Fed's role is important but not all-encompassing," said Bob Meara, a senior analyst at the Boston research and consulting firm Celent LLC. As banks build out their image networks, they may turn to the Fed only to reach low-volume endpoints that need image replacement documents, Mr. Meara said. "The Fed may be relegated to being an IRD printer, not necessarily the preferred intermediary," he said.
A spokesman for the Fed declined to comment.
Aaron McPherson, the research manager of payments at the research firm Financial Insights Inc. of Framingham, Mass., a unit of the technology publisher International Data Group Inc. of Boston, said that sending image files across the Internet is not a high security risk, but that such transmissions could be vulnerable to denial-of-service attacks and other quality-of-service issues. "Someone downloading a movie could get in the way of your image file," Mr. McPherson said.
To avoid those problems, Mr. Reim said, Open Solutions plans to install a dedicated data link to Bank of America at some point.
Open Solutions could set up similar connections to other big correspondent banks, Mr. Reim said, and it is in talks to send image cash letters to Viewpointe and SVPCO.
A handful of other institutions have established direct connections for sending images to trading partners. Frost Bank of San Antonio, a unit of Cullen/Frost Bankers Inc., began using a direct connection last August to exchange images with Southwest Corporate Federal Credit Union of Dallas.
Mr. Meara predicted that clearing will become highly automated, with systems that can evaluate different prices for clearing options according to the time of day, the cutoff times of trading partners and intermediaries, and interest rates.
"There will be an increasing competition with decisions being made in real time, not unlike what float managers have done in the paper world but with a much higher rate of change," he said. "All these complicated variables will be part of the soup. Banks will stir the pot and see what comes out of it."
