The National Clearinghouse Association has added five new members, bringing to 41 the total number of bank holding companies that participate in the two-year-old association.
The new members are AmSouth Bancorp, Birmingham, Ala.; National City Corp., Cleveland; NBD Bancorp, Detroit; Shawmut National Corp., Hartford, Conn.; and State Street Boston Corp.
In addition, Chemical Bank - a member since April through its subsidiary Texas Commerce Bank - said it plans to begin routing checks through the association. That will make Chemical the second New York City bank to participate, after European American Bank.
Fed Is the Loser
These companies join a growing trend to shift check clearing volume away from the Federal Reserve system to privately owned clearinghouses. These moves have long been anticipated by many in the industry.
While the most frequently mentioned reason for the shift involves cost, there are others as well. One is the same-day settlement rules that the Fed set on Jan. 3 of this year. Before that, the Fed had a competitive advantage over banks, because they charge presentment fees for settlement of same-day checks while the Fed provided funds for interbank check-clearing the same day without additional fees.
Wants to Be Competitive
Now, the rule is that banks may not charge extra fees for same-day funds availability if presented with checks before 8 a.m.
Florence M. Young, the Fed's assistant director of checks and ACH, said the Fed anticipated that more banks would move to the private clearing houses. Though Ms. Young agreed that "It would be less costly to go through an intermediary," she pointed out that "the Fed's objective still is to be competitive.
"The Federal Reserve is obviously looking at ways to be more competitive," Ms. Young said. "Each reserve bank is looking at ways to see if it can be done in the most cost-efficient way."
And despite the migration to private clearing houses, the Fed is still the dominant check clearinghouse in the nation. According to the Federal Reserve's estimates, the total number of checks cleared in the nation, including on-us items, was 59.4 billion in 1993, of which the Fed cleared 19 billion, or 32%.
Ron Ciechanowski, vice president of Chemical, indicated that the bank would be shifting volume from the Fed and potentially other correspondent banks to the National Clearinghouse Association.
"The whole premise of NCHA is to gain entry to local clearing houses," said Mr. Ciechanowski. "We're looking at areas of the country where we feel we'll get the most benefit."
But the greatest benefit of private clearing houses is cost. The average weighted per-item cost of check clearing through the Federal Reserve is 2.5 cents, considerably more than the costs charged by many private clearing houses.
For example, the National Clearinghouse Association has a two-component cost structure.
"There is an administration fee of 0.3 cents and a sorting balance adjustment of 0.0055 cents," explained Ned Miltko, administrator.
Mr. Miltko added that if a bank received the same volume that it sent, then the sorting costs would offset and "the out-of-pocket costs would only be 0.3 cents."
One new member, National City, currently clears 696 million checks a year. Virginia Otter, vice president, said the bank will use the National Clearinghouse as another check clearing mechanism.
Looking for Savings
"There will be cost savings, depending on the geography, for clearing checks in remote places," she said. "Some volumes currently cleared through the Fed will be cleared using the NCHA network."
Suzanne Sobol Downs, vice president with State Street Boston, indicated that the bank will shift approximately 15% of its check-clearing volume from the Fed to the National Clearinghouse to take advantage of the cost savings.
The clearinghouse was established in the spring of 1992 and is owned by Chexs, a joint venture of Huntington Bancshares and U.S. Check, both based in Columbus, Ohio; and the consuiting firm of Littlewood, Shain & Co. of Extort, Pa.
Members of the association include 30 of the nation's top 50 bank holding companies.