Two newly formed nationwide check clearing houses appear headed for direct competition, raising questions about whether both can survive against the powerful Federal Reserve System.
Even before establishment of these two groups, the field was crowded. The newcomers will be competing with the Fed's payment services, bilateral arrangements between banks - and with each other.
Both new clearing houses are run by banks. The first to be established was the National Clearing House, owned by Chexs, a joint venture of Huntington Bancshares Inc., consultant Littlewood, Shain & Co., and air courier U.S. Check. The National Clearing House has eight bank members, including Huntington, based in Columbus, Ohio.
The second clearing house, announced this month, is Payment System Network, set up by 11 big banks and consultant J.D. Carreker & Associates as part of a larger bank consortium called the Electronic Check Clearing House Organization, or Eccho.
The two payment systems will provide competitive services in check transportation, clearance, and settlement. These services are the heart of the National Clearing House's offerings, but only a portion of what Payment System is planning to do.
Payment System and National Clearing House are both targeting some portion of the billions of items that are sent from one Fed office to another.
But Payment System will primarily target checks that are currently sent from one correspondent bank to another, bypassing the Fed. National Clearing House will primarily focus on the six billion checks cleared by the Fed, although it also intends to go after checks sent in bilateral "direct-send" arrangements.
Big Share of Volume
Currently the Fed clears about 35% of interbank checks, with the rest handled by regional clearing houses or direct sending from one bank to another.
Officials of the National Clearing House and Payment System Network play down any potential competition.
"Some of the functions are overlapping," said David Walker, a principal at J.D. Carreker. However, "even though the two might not serve every [institution] equally, banks will be able to pick and choose which courier makes most sense," Mr. Walker added.
Privately, bankers say that some of the big money-center and superregional banks - the primary drivers of Payment System - are reluctant to join an organization such as National Clearing House because of Huntington's central role in it, providing settlement and deriving fees from the service.
And one banker who asked not to be identified said that, while his bank would join National Clearing House for the cost savings, which he said would be almost immediate, his bank volume would probably migrate to Payment System as time goes on.
National Clearing House officials have greeted the decision to form Payment System Network with some wariness.
One of the tasks of Richard Ercole, president of the newly formed Huntington Technology Co., is to court Eccho. "We would like to work toward an affiliation or alliance with Eccho," Mr. Ercole said.
Huntington officials said Mr. Ercole was a natural choice for this role because, in his previous job as a vice president at Security Pacific Bank, Mr. Ercole was on Eccho's board. Mr. Ercole left the board in June and said Payment System was formed after his departure.
"I really think what we're doing complements Eccho," he added.
Overall, the two groups have very different objectives. While the sole purpose of the National Clearing House is to reduce check operating costs by eliminating or reducing the fees that banks pay to the Fed and each other, Payment System has a much wider mandate.
It is aimed at accelerating the transmission of check data from one large bank to another to reduce interest expense, and at increasing amount the corporate funds available for investment.
Payment System's clearing house would parallel the National Clearing House for those checks that have already been posted through early notification by electronic check presentment.
For example, while the National Clearing House will use U.S. Check for check transportation, Payment System has contracted with First Express, a unit of First Tennessee Bank, for similar services.
And the network has approached the New York Clearing House Association to act as its settlement agent. Huntington acts as the settlement agent for the National Clearing House.
Payment Service won't be up and running until sometime next year, so it poses little immediate threat to the Huntington venture. It makes sense for banks to join the National Clearing House now, bankers said.
Banks make only slight changes to their check clearing procedures to join the National Clearing House. Checks formerly sent to a regional Fed office are now routed to the commercial bank in that city that is a clearing house member.
Quick Savings Seen
Banks that are members of the National Clearing House say payback is quick - they will start to save money within a year, according to W. Allen Brown, director of operation support systems at Barnet Technologies Inc., a unit of Barnett Banks Inc.
But a bank could spend between $500,000 to $1 million in software modifications to do electronic check presentment through Payment System Network, Mr. Brown added. He should know; his bank is a member of both the National Clearing House and Eccho.
After both systems are up and running, the market may well be big enough for all, with the National Clearing House serving primarily the regional and small banks, and Payment System dedicated only to the biggest banks.
One reason is that the Fed, although its officials deny it, appears to be limiting its role in the payments business. The adoption of new check posting schedules by the Federal Reserve Board in September could push more banks to clear checks through correspondent banks or the new check clearing houses, according to bankers.