Norwest Corp., the second-largest originator of automated clearing house transactions, has joined a bank-owned network that hopes to loosen the Fed's grip on ACH processing.
Minneapolis-based Norwest has joined the Private Sector Automated Clearing House Exchange, commonly known as Pax. It consists of the Arizona Clearing House Association, the New York Clearing House, and Visa U.S.A.'s ACH subsidiary - the Federal Reserve's three competitors in that part of the electronic payments business.
Norwest will likely bring a large number of transactions into the fledgling network.
Keith Theisen, Norwest's ACH services manager, said that the bank is satisfied with Fed services, but that the time is ripe to shift at least part of its volume to Pax in the interest of healthy competition between the public and private sectors.
Norwest's analysis indicates that Pax volume is "going to be substantial," said Mr. Theisen, whose bank originated 152.2 million transactions last year, second only to Chase Manhattan Corp.'s $186.9 million.
"If some of the other banks join, it can easily be that 10% to 15% of our volume will go to Pax," Mr. Theisen said.
"Norwest is going to use us as a window into some of the Pax volume that we've all been trying to build," said Paul Finch, president of the Arizona Clearing House. "We anticipate that to be in process by the end of the year."
Norwest's anouncement that it would join Pax was the first of several made last week at the National Automated Clearing House Association conference in New Orleans.
One came from Frank Sardina, executive director of the New York Automated Clearing House. He said Empire Corporate Federal Credit Union in New York, a settlement agent for about 300 credit unions, plans to be using Pax within two months.
And Ralph Joy, a vice president with Visanet ACH Services, announced that four other institutions have committed to shifting volume to Pax.
He added that PNC Bank Corp., Pittsburgh, is scheduled to begin piloting a new Servantis System Inc. software module through Pax. The software package allows ACH payment files to be split and sent to either the Fed or Pax.
The ACH network handled three billion paperless debit and credit transactions in 1994. Pax, founded in April 1994, accounted for only a fraction of this number: roughly 350,000 items a month among the three private sector operators.
But this could change. Pax is attracting an increasing number of financial institutions by offering lower transaction prices than the Fed.
The Fed's prices for ACH transactions are 1.4 cents for inter-regional items and 1 cent for local items. Pax's highest price is 0.95 cents, and the local item charge is 0.75 cents.
Banks' ACH systems are typically tied to only one operator at a time. But when a Pax member sends ACH transactions to a non-Pax member, the Fed's higher price scales kick in, eliminating any cost savings.
For all the promising news related to Pax, the network must figure out how to overcome the barriers to adding volume while operating under the Fed's rules.
The Federal Reserve, besides being a formidable competitor, is also a regulator that bankers view as intent on retaining its control over payment systems. The Fed currently handles about 80% of ACH transactions in the United States.
"I think there's been some serious stonewalling of progress and some very some serious structuring to make sure the private sector couldn't compete," said Mr. Finch.
There are several practices that both the National ACH Association and the New York Clearing House have petitioned the Fed to modify, including the method of settlement.
Currently, the three private-sector operators cannot initiate Fed Wire transactions to settle accounts. Individual banks must initiate wire transfers for settlement.
This structure limits banks' ability to participate in Pax. So far, only 240 banks send transactions through Pax.
"In the long run, we have to have an easier way for Visa or for any of the private clearing houses to do settlements to make Pax viable," Norwest's Mr. Theisen said.
Mr. Sardina said he expects Pax's monthly volume to increase to about a million items, provided that "we can obtain a national net settlement system from the Fed which will allow us to easily add the rest of our participants to the exchange."
As far back as 1992, the New York Clearing House addressed this issue when it asked the Fed to implement a national net settlement system independent of the Fed Wire, the central bank's electronic funds transfer backbone.
As recently as February, Nacha sent several recommendations to promote "fair competition" among all ACH operators, again referring to the settlement issue.
But whether the Fed will publicly respond to the New York Clearing House's request - the organizations have been in private negotiations for years - remains to be seen.
Meanwhile, bankers have raised questions about future pricing of ACH services once the Fed completes a large-scale systems consolidation.
There are 11 regional Fed ACH operators in the nation, with the New York Clearing House playing a dual role as ACH operator for its member banks and for the second Federal Reserve district.
In an effort to streamline its payments business, the Fed launched an ambitious effort to consolidate its regional sites into an operation in New Jersey.
The East Rutherford, N.J., site, which is running six regional banks' Fed Wire applications and all 12 district banks' accounting systems, has yet to process any ACH transactions. The Minneapolis Fed had been scheduled for conversion in January.
The new conversion date for the Minneapolis Fed is scheduled for sometime this fall, with the rest of the regional banks anticipating moves to the system during 1996, officials said.
The delay has led to speculation that the project may be experiencing cost overruns.
Some fear the Fed will attempt to recoup consolidation costs through its future pricing schemes.
But Sarah G. Green, senior vice president with the Boston Fed, brushed aside any suggestion of problems or excessive costs, saying that the future streamlined operations will yield cost savings.
"We look at this as being much more efficient and cost-effective over the long run," Ms. Green said.
The new ACH systems will have continuous-flow processing, which allows for immediate transaction processing instead of the current batch processing cycles. She added that the project is on schedule.
"It's very important that we do full-scale testing of this because there is a lot of new functionality in the software," Ms. Green added. "We have to make sure that it all works effectively."
