The automated clearing house network is making some risk managers nervous.
One of the oldest and most proven of electronic funds transfer mechanisms, the clearing house is being used more and more for payments it was not designed to handle - large-dollar transactions that many bankers would prefer to see routed over the Federal Reserve System's Fed Wire.
The bankers say the clearing house works perfectly for direct payroll deposits, Social Security, and other recurring, low-dollar payments that pose relatively low risk in case of delay, diversion, or failure to settle.
But the corresponding low cost of a clearing house payment, typically a few pennies compared with up to $15 for Fed Wire, has taken business away from that Federal Reserve service. It is such transactions, which can amount to millions or tens of millions of dollars each, that the Fed network was built to handle with minimal risk, bankers say.
"The only advantage the ACH has over Fed Wire is cost, but it is also more risky," said Donald R. Hollis, executive vice president of First Chicago NBD Corp. "It would blow my mind that someone would worry about a $2 or $3 savings."
In contrast to the automated clearing house, which routes transactions in large batches with a built-in delay in interbank settlement procedures, the Fed Wire moves money in "real time" and provides for immediate settlement.
In the eight years through 1994, the average value of an automated clearing house credit - money transferred from one bank to an account at another - rose by an average of more than 4% on an annual basis.
In 1987, Mr. Hollis said, there were 206.8 million commercial ACH credit transfers with a dollar value of $410.7 billion, for an average of $1,986. By 1994, those numbers had risen to 955 million credits moving $2.5 trillion, for an average of $2,618.
While the ACH figure is still far short of the $3 million each that Fed Wire averages on some 300,000 transfers a day, "there is value creep," Mr. Hollis said. "Some of it would occur anyway because there has been inflation." But the rise in average ACH transaction value outpaces the rate of inflation - and it increases banks' risk exposure.
According to the New York Clearing House Association, which processes ACH payments for the Second Federal Reserve District, there were nearly 17 million such credits last month, totaling $65.1 billion.
Of those, 402 were payments of $20 million or more, for a total value of $16.2 billion. That represented about "25% of the entire dollar risk" for the district, said George F. Thomas, senior vice president with the New York Clearing House.
Those 402 were among about 7,000 payments above the $1 million mark - with a combined valued of $37.4 billion, or almost 58% of the dollar-value risk.
Mr. Thomas said, "0.0004% of the payments represented over half of the dollar risk."
In the rising-dollar trend, concerned bankers see too many transactions that exceed a value they consider prudent for the network.
Several people cite anecdotal evidence. Mr. Thomas said one corporation - which he declined to name - recently authorized a set of automated clearing house credits totaling $1 billion. Because the ACH is designed to handle transactions of less than $100 million, this particular credit had to be broken into several smaller payments - which in aggregate still would have cost far less than a Fed Wire.
Such transactions pose potential problems for both the bank sending the transaction and the one receiving it.
The sending bank risks that its corporate customer will not have the necessary funds in its account, leaving the bank to cover the amount of the transaction. A receiving bank is at risk if it releases funds prior to final settlement and the originating bank fails.
Though either occurrence would be rare, a single mishap involving a billion-dollar transaction would pose significant problems for most financial institutions, and could reverberate throughout the banking and payment system.
For example, a corporation might originate clearing house credit payments on a Wednesday night. Those funds would get posted to the receiving banks the next day. The corporation has to credit its account before the Federal Reserve settlement debit, which occurs Friday.
Because most corporations are not required to pre-fund or guarantee ACH credits, the originating bank would be underwriting the exposure on the transaction for up to two days.
If an originating bank does not have those funds, it goes into an overdraft position on its Federal Reserve account and has to pay daylight overdraft fees to compensate.
Daylight overdrafts are intraday loans from the Fed that occur when banks transfer funds in excess of the balance in their Federal Reserve accounts
"A bank could end up being in a fairly large overdraft position right at the opening of the business day," Mr. Thomas said.
"It is not clear to me or to others in the industry that the myriad of users all understand the relative degrees of risk," Mr. Hollis said. "There may be people making uninformed decisions and therefore incurring more risk than they might realize."
Nicholas Alex, senior vice president of NationsBank Corp., Charlotte, N.C., said he is "uncomfortable" with corporations that "flout the spirit of the payment system's architecture."
"People became comfortable with the ACH and realized not only is it pretty easy, it's a lot cheaper," the banker said.
But he added that banks are "really are on the hook for those payments on settlement date. For an extra $20, a client clearly should have been using a better payment system."
Large-dollar automated clearing house payments are "really not appropriate" Mr. Thomas said, adding that he has seen the ACH used for foreign exchange transactions, commercial paper settlements, securities settlements, and "some tax payments valued in the $20 million to $50 million range."
Automated clearing house and payment system experts stress that the ACH is safe, despite the concerns they raise. They are focused on that fact that it does not give banks the ability to manage the types of risk they expose themselves to with large-dollar transactions.
Yawar Shah, a senior vice president with Chemical Banking Corp., said officials at both Chemical and Chase Manhattan Corp. - with which Chemical is merging - favored "looking at the ACH with an eye toward risk management."
Mr. Shah suggested that clearing house prices may require rethinking to bring them into line with transaction risks - a process that no bank could carry out unilaterally.
"Bankers increasingly need to look at value-based pricing as opposed to historical transaction-based pricing," he said.
Even as large-dollar transactions go through without incident, the concern over risk is leading to calls for dollar limits.
Mr. Thomas said the maximum allowable transaction for the ACH should ultimately be no higher than $100,000, but he said he'd settle for $20 million as a start.
Mr. Shah said Chemical supports "having some type of dollar limit in place to make the system more risk averse."
"We have never published specific thresholds for payments, nor do we monitor that," said Dara Hunt, a senior vice president at the Federal Reserve Bank of New York who manages wholesale payments for the Federal Reserve System.
"However, it is clear that Fed Wire was designed as a large-dollar payment system," she said, adding that she hopes bankers would continue to see the benefits of using it for the bigger funds transfers.
Mr. Thomas said the National Automated Clearing House Association recently rejected a proposed $20 million ceiling. He said that group "wants the ACH to be all things for all people. We openly disagree about this."
Elliott McEntee, president and chief executive officer of the national group, said the proposal was rejected not just by "ACH people," but by bank executives on an executive committee task force.
"Some people are critical of Nacha's opposition to the cap because they believe that Nacha only wants to promote the ACH," Mr. McEntee said.
"We are not a proponent of using the ACH for larger payments," he added. "Wire transfers are suited for most large-dollar value payments," but a cap could result in confusion and create a large number of "exceptions" requiring special attention.
If bankers insist on using the clearing house for large-dollar transactions, they must scrutinize their customers.
Edwin Link, a vice president with First Union Corp., said the Charlotte, N.C., bank does a "great deal of credit approval and credit checking" of prospective corporate customers.
"The old maxim is 'know your customer,'" he said. "For ACH credits, you had better know all about them."