Banks are gearing up to test a long-awaited wire transfer format that would cut their costs but may not initially be worth the effort.
The Clearing House Payments Co. LLC and the Federal Reserve banks say that incorporating remittance data into wires will encourage more businesses to pay each other electronically, a payment method cheaper than paper checks.
The Clearing House and the Fed are requiring banks to show by November that they can receive payments using the new format. However, the installation of systems needed to originate the payments is optional, and analysts say the up-front costs — potentially millions of dollars for each bank — might not justify the potential payoff.
"It's going to create significant cost expenditures for banks that choose to implement it, with frankly not a lot of opportunity to recover those costs," said Nancy Atkinson, a senior analyst who focuses on wholesale banking and business-to-business payments for the Boston research firm Aite Group LLC.
The Fed and The Clearing House, which operate the nation's two wire transfer networks, first announced plans to develop the format in 2008. Most business-to-business payments are still made by check because the funds must be accompanied by detailed invoices that explain the purpose of the remittance.
The Clearing House said Monday that banks could begin testing the format, which includes a field that lets businesses include up to 9,000 characters of text. Banks that use its Chips wire transfer network are expected to be able to receive the payments by Nov. 8. The message field can hold invoice numbers, payment amounts and other information.
The Fed, which operates the Fedwire Funds Service network, also expects banks to certify readiness by early November and will begin testing with users in May.
Both network operators are tentatively aiming for Nov. 22 to officially begin offering bank users the option of incorporating remittance data into wire transfers.
Atkinson predicted that banks will be slow to offer their corporate customers the option of originating wire transfers with remittance data.
A wire transfer on average costs a bank customer $15, Atkinson estimated. However, according to a 2006 survey by the Fed and The Clearing House, corporate customers are willing to pay, on average, another $1.67 to include remittance data.
Though Atkinson said she supports the concept of incorporating remittance data to transfers, she was dubious that the extra revenue would be enough for banks to recoup their costs.
"You're talking about probably spending millions per bank to get it in place," she said.
The option has been discussed in the payments industry for years as a way to drive adoption of electronic payments and help businesses better manage their cash flow. "The reason companies are still writing those checks is it's not as efficient for them to do electronic formats if you cannot carry the remittance information with the payment," said Rossana Salaris, the senior vice president of payments products at The Clearing House. "Corporate customers have said to us over the years, you need to make electronic payments as efficient for us and as easy as writing a check."
More than 80% of corporate payments are sent using checks, according to the 2006 Fed/Clearing House survey. Moving just a fraction of that volume to the wires could save banks and their customers time and money clearing large payments, experts said.
The move will address "the needs of a corporate client that wants to make these types of remittance payments and wants to do it on the wire system to get the quick turnaround time," said Frank Behlmer, executive vice president and chief operating officer of global operations at Bank of New York Mellon Corp., which uses both Chips and Fedwire.
Because banks must be able to receive wires using the new format but can opt not to originate them, it could be difficult for financial companies to establish a uniform process for handling the data, said Aaron McPherson, the financial services practice director at IDC Financial Insights.
Ideally, banks would want "buyers' accounts payable systems to queue up the payment with the remittance data, send it out as a wire, have the bank receive it, transmit the remittance data as an addenda unchanged to a supplier who would then import it into their accounts receivable system," he said. But if some banks don't offer the option of sending a wire payment with remittance data, such a system would not work.
Banks concerned about customer adoption could offer a "hybrid solution" that can mediate between paper and electronic wire transfers, McPherson said.
"Initially, that's quite expensive, but I think the investment is worth it, because once corporates see there is a reliable avenue for getting this done electronically … , then you'll start to see more corporates sign up" for the electronic option, he said.
There's also a question of how fervent demand is for a new message field, especially given that automated clearing house transactions, albeit slower than wires, already can transmit large quantities of remittance data.
The Fed and The Clearing House survey found that 94% of respondents considered remittance data "valuable" for wire transfers and 58% said they were willing to pay more to use such a service.
Similarly, the Association for Financial Professionals surveyed 331 respondents in May 2009 and found that 95% said remittance information would be valuable to their organizations if available with wire transfers.
"There's significant interest," said David Bellinger, the director of payments at the trade group.
AFP has been a vocal backer of adding remittance data to wires.
Still, Bellinger that some banks will probably choose not to originate wire transfers with remittance information initially, which could give competitors an advantage.
"Some corporates will decide to move their business because their banks are not going to support origination," Bellinger said. "Whether that will be a big movement will really depend on how swiftly the banks will be able to respond."
Merrie Tolbert, a spokeswoman for BB&T Corp., said the Winston-Salem, N.C., banking company's clients have not inquired about including remittance data with wire transfers, though she said this could be related to "potentially limited knowledge about this change" on the part of businesses.
BB&T is working with its vendor, which it would not name, to upgrade its systems by June to handle the additional data.
Bank of New York Mellon's Behlmer said banks are interested in the format but have limited funds available for technology upgrades. "You don't build a bridge to have two people walk over it," he said. "You want to make sure that what you're building" is in demand.