An image-exchange network set to go live this week is touting its capability to settle payments within a single region - a sharp divergence from the dominant model of connecting banks that are often separated by great distances.
The new network is only for customers of United Bankers' Bank of Bloomington, Minn., but could serve as a model for local image-clearing networks and could provide an alternative exchange system for community banks.
Analysts said the new network model could help promote adoption of image exchange among small banks and might throw a curveball into the pricing structure for this evolving payments format.
LendingTools.com Inc., the Wichita vendor behind the network, plans to develop similar ones with other bankers' banks and correspondent banks, and it forecasts that such "community hosts" eventually could clear more than 80% of their customers' volume, reducing the cost of clearing and settling check-image payments.
United Bankers' Bank, the main operating unit of United Bankers' Bancorp. Inc., and LendingTools plan to announce the settlement service's availability today at the Bank Administration Institute's annual TransPay conference in Orlando. The "on-we" cash-letter settlement service is open to the banks that use UBB's image-exchange network, UNETexchange.
Such closed-group networks have been under discussion since the earliest exchange networks began transmitting check images. Just as a bank can settle payments "on us" if both the payer and the payee are its customers, saving on expenses in the process, trading partners within a network can cut costs by conducting the entire clearing and settlement process within a closed group.
William C. Rosacker, the president of United Bankers' Bank, said its first task is to explain to its customers exactly what it is offering.
"I think there are still some community banks that think 'on-we' is a French perfume," Mr. Rosacker said.
United Bankers' Bank, the nation's oldest bankers' bank, has more than 700 customer banks in Minnesota, North Dakota, South Dakota, Montana, Nebraska, Iowa, Michigan, and Wyoming. About 400 of those banks rely on it to provide the debits and credits to their accounts to settle their transactions with trading partners. About 100 banks now transmit image cash letters over its electronic network.
Charles C. Hokans, UBB's senior vice president of marketing, said it plans to offer the settlement service to all 400 customers for which it now settles paper cash letters. "We estimate a large number of those folks are going to end up joining the exchange."
Mr. Rosacker said that in a test that began in October with a group of 11 customers, some banks were able to settle as much as 75% or 80% of their volume within the "on-we" group, while others settled as little as 25% that way.
He expects that percentage to rise as more of UBB's customers begin image exchange.
Holdouts ultimately will be forced to adopt imaging, especially in the remote, thinly populated areas that UBB serves in the upper Midwest, he said. "They have to be on a system where they can push it down a telephone line, because there's nobody stopping by with four wheels to pick up the metal suitcase."
Eric Goering, the president of LendingTools, said, "We believe what we have here is the answer for the future."
He said he believes the "on-we" approach will prove attractive, even though it has to compete against better-established image-clearing systems, such as Fiserv Inc.'s Fiserv Clearing Network or Metavante Corp.'s Endpoint Exchange network.
"They're signing up banks across the country, rather than focusing on an area and concentrating that volume," Mr. Goering said.
By contrast, for community banks, "most of their volume is close to home," he said. "The UBB has such a strong set of concentrated relationships it allows us to catch a high density of endpoints."
LendingTools connects to Fiserv and to First Data Corp. for transactions that cannot clear within UBB's "on-we" network, and it is working on making more such connections, he said.
"We've been contacted by a number of the megabanks," Mr. Goering said. "These are the most expensive endpoints to get to."
LendingTools announced in September that Bankers' Bank of Kansas had agreed to offer "on-we" settlement to its bank customers, but Mr. Goering said that will be a separate service.
"Each correspondent bank gets to have its own competitive circle," he said, with control of issues such as pricing, cutoff times, and legal agreements.
Mr. Rosacker said UBB has worked with Bankers' Bank of Kansas as it has developed its service. "They're going to have their circle of friends, and we're going to have our circle of friends. Eventually, they're going to want to talk to each other."
Bob Meara, a senior analyst at the Boston research and consulting firm Celent LLC, said the strategy could make such newcomers competitive with better-established service providers.
"This is a growth market for everybody right now," Mr. Meara said. "When it ceases to be a growth market, then very different dynamics will come into play."
Aaron McPherson, the research manager of payments at the Financial Insights Inc. research unit of the Boston technology publisher International Data Group Inc., said that even Endpoint Exchange, which claims 4,000 institutions as members, represents no more than 40% to 50% of the potential market for image exchange.
Also, many institutions want multiple relationships, Mr. McPherson said.
He speculated that the emergence of new alternatives could make image-exchange more of a local service, as clearing checks traditionally has been.
"Maybe we're starting to see the evolution of a different model, from having national exchanges to having clusters of local exchanges that feed into the national networks," Mr. McPherson said.
