Private-sector check processors are beefing up their operations in the nation's midsection to capture business from the Federal Reserve, which is shutting down many of its clearing sites.
Clearing House Payments Co. LLC began a check transportation and clearing service Monday in Detroit, where the Fed plans to close an item processing center next week.
And the Brookfield, Wis., financial services outsourcer Fiserv Inc. says its plan to open check processing centers this month in Memphis and Cincinnati is a response to the Fed's cutbacks.
Jerry Milano, the senior vice president of SVPCO-Check Services, the check processing business of The Clearing House, of New York, said its new courier service will haul checks from four large banking companies to 40 paying banks in the Detroit area.
The four companies - Comerica Inc., JPMorgan Chase & Co., National City Corp., and ABN Amro Holding NV's LaSalle Bank Corp. - asked SVPCO to set up the service to replace the Fed's Detroit center, Mr. Milano said. The four companies are among the 19 that collectively own The Clearing House.
"If you are a Detroit bank, you are used to using the Detroit Fed," he said. "We just want to earn their business on an ongoing basis."
SVPCO began hauling checks for three of the banking companies Monday. Each of the three gathers its items at a single site, where SVPCO picks them up for delivery to receiving banks. The fourth banking company, which Mr. Milano would not name, is expected to start sending its checks in two weeks, when 10 receiving banks will be added to the program.
Mr. Milano said the receiving banks are now getting about 50% to 60% of their checks earlier than they did when the Fed was delivering them, and at a lower cost. The Fed's average charge is a nickel an item, but SVPCO is charging a half-cent an item, plus a small daily fee, he said.
Initially the service is replicating only the Fed's check courier service, but Mr. Milano said he expected the work to evolve over time as more banks adopt image-based clearing.
"As the volume of checks continues to decline, we're going to need to find different ways of doing things just to keep it efficient," he said. "Different banks have different schedules for getting things done."
The Fed, which runs the country's largest item processing operation, expects to shutter its Detroit center April 15 and has been gradually transferring the workload to its Cleveland site.
For several years the Fed has been downsizing its check operations in response to steadily declining volume. In August it announced plans to discontinue item processing by early next year in Detroit; Nashville; Columbus, Ohio; Birmingham, Ala.; Boston; Oklahoma City; Houston; Portland, Ore.; and Salt Lake City. It will shift the work to other Fed branches.
In 2003 the Fed announced plans to close 13 other sites, which have since been closed. By early next year the number of Fed item processing sites will have dropped from 45, two years ago, to just 23.
Bert Ely, an independent banking analyst in Alexandria, Va., said that as the Fed closes sites, the check clearing business will shift increasingly to the private sector.
"That creates a market opening," Mr. Ely said. "It is going to get tougher and tougher for the Fed [to compete] as they close these processing centers."
A Fed spokesman said executives could not be reached for comment.
Ironically, by opening centers in Memphis and Cincinnati, Fiserv is attempting to increase its business in two cities to which the Fed has also been transferring work. Last year it moved processing volume from shuttered centers in Louisville, Indianapolis, and Charleston, W.Va., to Cincinnati, and it moved volume from a closed center in Little Rock to Memphis.
Chuck Doherty, a Fiserv spokesman, said it is pursuing a "dual strategy" of putting new centers where the Fed is pulling back and where it still has check processing operations.
"It makes sense to open a location near where they are" to clear checks that must be routed through the Fed to reach the paying bank, he said.
Mike Touhey, the president of U.S. operations for Fiserv's item processing group, said the new centers will open with a "base client," and Fiserv expects to add more banks over time. He would not name the client banks or even say how many there are.
"We are finding significant market opportunities," both because of the Fed's cutbacks and because a growing number of banks, thrifts, and credit unions are wondering whether it makes sense to continue processing checks in-house, he said.
Imaging technology is playing a key role in Fiserv's strategy, Mr. Touhey said, because it can open more centers with smaller volume than would have been economically feasible in the past.
The new sites are "satellite centers" that will capture check images and forward them to another site for processing, he said.
The Cincinnati center will not provide some basic check-related services, such as return item processing. That work, along with statement production and customer support, will be done at Fiserv's center in Columbus. The Memphis center will handle all those tasks except for statement production; Fiserv did not say where that work would be done.
