The automated clearing house system rang up a 17% increase in transactions last year-yet it lopped off almost two dozen banks that had been sizable network participants.

Those organizations, which were among the top 100 originators of the recurring electronic payments in 1995, did not disintegrate. They merged into larger companies or saw their payment operations consolidated with those of affiliates.

The fact that those banks no longer register in the annual American Banker review of automated clearing house activity-see pages 10 and 11- illustrates how swiftly and profoundly the iron laws of technology and economies of scale can realign a market. The distribution of automated payments also reflects basic changes in the commercial banking business.

To wit, Chemical Bank, the No. 10 automated clearing house bank in 1995, was quickly subsumed by Chase Manhattan Corp., which has only added to its longstanding ACH lead.

Three banks owned by Chase accounted for 340 million, or 13%, of the 2.56 billion debits and credits that the National Automated Clearing House Association said were originated by financial institutions in 1996. Chase's share of commercial banking assets is about half that.

Several affiliates of both Boatmen's Bancshares Inc. and First Interstate Bancorp were among those that lost their places on the Top 100 list because of mergers. Their departures contributed to the market power of the biggest holding companies in terms of consolidated transactions, including Chase, Norwest Corp., Banc One Corp., and NationsBank Corp.

A three-tier market has emerged, said Elliott McEntee, president of the National Automated Clearing House Association: "The biggest corporate cash management banks are increasing their volumes and market shares at the expense of the second tier-mid-level banks that rank between about 15 and 200.

"Under that is the third tier-community banks, savings and loans, credit unions. They are seeing significant volume increases."

But most of those are too small to show up in the American Banker survey of the automatic debits and credits that flow between financial institutions.

(On-us transactions, though not counted in the ACH rankings, are a growing factor in private-sector activity. Mr. McEntee's group said it totaled 743 million of the 3.3 billion private-sector entries last year, their proportion of the total rising to 22% from 18%. The 2.56 billion interbank debits and credits were 16% better than a revised total for 1995. Government credits, led by Social Security deposits, rose 4% to 625 million.)

"Clearly this is a game of scale," said Leonard Heckwolf, national electronic payments manager for Banc One Corp., who formerly headed Chase's big operation in Tampa. "You have to have scale to play-or to make money at it."

"We had 450% volume growth from 1990 to 1996," boasted Keith Theisen, ACH product manager for Norwest Corp., which as of last year had consolidated its processing at its lead bank in Minneapolis. He said that puts Norwest, No. 2 to Chase, in a stronger position to compete for the widely anticipated explosion in transactions.

Banc One, No. 3, is similarly relying increasingly on its lead ACH bank in Springfield, Ill., which grew 46% last year to become only the third commercial bank with at least 100 million ACH transactions. (Six holding companies share that distinction when their subsidiaries' volumes are aggregated.)

In line with its parent's strategy to be big in all chosen markets, Banc One "will pick selected industries and build ACH expertise with them," said Robert DalSanto, senior vice president at the Illinois bank and manager of national ACH services. "We want to be the No. 1 or No. 2 provider to those industries.

"More and more, clients are looking for specific functionality and systems and enhancements that only the larger competitors offer," he said.

Perhaps in no other part of banking can the impact of scale be more clearly and conclusively documented. Economists and analysts have been hard-pressed to prove that bigness pays off across the broad portfolio of banking businesses. But the automated clearing house is widely viewed as a self-contained technology business that increases in efficiency as volumes grow.

At the same time, the ACH requires highly specialized expertise to meet major transaction-generating clients' needs, and the biggest banks seem to be cornering it.

Because they tend to revolve around corporate banking relationships, originations of ACH payments such as payroll deposits and bill payments have always been concentrated among the larger banks. But the concentration accelerated in 1996. The American Banker data, gathered from regional clearing houses and many of the banks, yielded several indications:

The top five holding companies in ACH volume-Chase, Norwest, Banc One, BankAmerica Corp., and NationsBank-fell within 11 million entries of a combined billion items. Their combined 38.6% market share was up from five- company ratios of 37.7% in 1995 and 33% in both 1994 and 1993.

Growing by 13%, Chase Manhattan Corp. did not generate enough new transactions to increase its overall market share. But 13% growth meant 40 million additional debits and credits. Only 16 holding companies and 15 individual banks had total volumes exceeding 40 million.

Chase Manhattan Corp. widened its lead over Norwest to 127 million items from 118 million, even though Norwest's percentage growth was 17% to Chase's 13%.

Looking at individual banks-as listed in the table on page 11-the top 10 controlled 46% of the market, a big jump from 39% in 1995 and 36% in 1994.

Only 44 banks originated at least 10 million payments, down from 52 in 1995 and almost as low as the 42 of 1994. But holding companies originating at least 50 million entries grew to 15-corresponding to Mr. McEntee's "top tier"-from 11.

Although more banks may be coming in at the low end of the market, aided by inexpensive computer software that helps them meet the payment and cash management needs of small businesses, American Banker estimates 130 banks, thrifts, and credit unions initiated at least a million ACH payments last year, down from about 150 the year before.

It took only 1.9 million transactions to qualify for 100th on the list, down from 2.5 million in 1995 and 2.7 million in 1994. That threshold broke through 1 million in 1988 and 2 million in 1991 and had not declined until this survey.

The removal of almost a quarter of the Top 100 because of mergers and consolidations made room for newcomers that included the second credit union, Research Federal, at No. 96. Based in Warren, Mich., it serves General Motors Corp. technology center employees. The only other credit union, which joined the list in 1991, is the Appleton, Wis., institution associated with Aid Association for Lutherans, or AAL, which jumped 17 places in 1996 to No. 77. (Kansas Blue Cross/Blue Shield Credit Union in Topeka generated 1.2 million items, falling short of the Top 100.)

Among thrifts, Top 100 veterans USAA Federal Savings Bank and First Financial Bank of Stevens Point, Wis., were joined in 1996 by Great Western Bank of Chatsworth, Calif., at No. 92.

EFS National Bank, Memphis, joined the list at No. 69 with 4.6 million entries. Owned by the transaction processor Concord EFS, the bank indicates the growing importance in the ACH of credit card and other point of sale transactions. First Premier Bank of South Dakota, a card specialist, is No. 64. First Data Corp. is a major source of the volume that puts First National Bank of Omaha in the top 25. First Union Corp. was one of several beneficiaries of a decision by the Discover Card organization to transmit ACH payments to merchants-generating volumes that only began to kick in at the end of last year.

Aside from the growing card contribution to ACH volume is the fact that the two industries have taken on similar characteristics. Visa U.S.A. is one of the Federal Reserve's private-sector competitors in the clearing business.

"There are a lot of economies of scale," said Mr. McEntee, the national association president. "In merchant processing you see heavy concentration of the business in five or six players. The same is happening here."

Mr. Heckwolf at Banc One said he hopes the ACH processing structure evolves to a more "streamlined model" that resembles the credit card industry. Meanwhile, Mr. DalSanto said Banc One, which will be a Top 5 credit card bank through its acquisition of First USA Inc., has yet to book card-related ACH business but intends to and is in conversations with several processors.

Still, ACH strategists remain focused on their bread and butter. Even as they are completing a strategic planning exercise aimed at better responding to bank card, remote banking, Internet, and other emerging opportunities, most of their current growth is in basic direct deposits and bill payments.

It is still possible for a bank to become a significant commercial player almost overnight: LaSalle National Corp., a growing business-banking force, increased ACH volume more than 150% last year to 8.4 million and expects to double again in 1997 thanks to a newly signed customer, said product manager Laura Listwan.

"Each bank is doing something different, but most are working with employers," said George Thomas, senior vice president at the New York Clearing House Association. "Some are even setting up special programs for the unbanked."

The New York banks have been at the center of a Second Federal Reserve District campaign to boost direct deposit participation, currently a below- average 38%. In a year they have signed 225,000 people, generating six million ACH transactions a year.

"Direct deposit of payroll has more than 50% participation in the private sector," said Mr. McEntee. He expects that to take another five years to level off at 75% to 80%. Within that time it will be mandatory for all federal government beneficiaries to be paid electronically, and states are likely to follow.

"A lot of our growth is consumer bill payments, direct deposits, and commercial applications," said Mr. Theisen of Norwest. "A whole new area opening up-a huge potential-will be retailers truncating checks at the point of sale" and transmitting the data electronically.

Mr. Theisen also sees the government mandate having a snowball effect: "People like my grandpa in South Dakota who never believed in anything but checks will see the benefits. It will open up a whole new level of consumer acceptance."

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