Demand for financial electronic data interchange services is hitting a level that may induce thousands of banks to participate more fully in the business, according to industry executives.
The prediction, from executives at the National Automated Clearing House Association and from bankers, comes in response to a survey by the trade group in which 64% of corporations responding said they would increase their participation in financial EDI if all banks were EDI-capable.
Financial EDI is the exchange of payments and trade-related documents, such as purchase orders, invoices, and other information, in computerized formats.
The survey is part of an effort by the clearing house group to convince financial institutions of EDI's revenue-generating potential.
Though a number of financial institutions have offered EDI to cash management customers for years, few banks have made the service profitable, experts said.
As a result, a waiting game has developed, with corporate customers looking for more trading partners before immersing themselves in the business and banks looking for more demand before investing in an EDI infrastructure.
The association's study, which polled 220 corporations of various sizes, could play a role in breaking this gridlock, experts said.
"What I'd like to see is every bank in the country having the ability to process an EDI transaction by the end of 1995," said Elliot McEntee, the clearing house group's chairman and chief executive.
The Herndon, Va.-based trade association, which is charged with developing rules for the automated clearing house network, conducted the study as a part of a broader strategic effort to ensure that the needs of banks and corporations are met.
General adoption of financial EDI has been in holding pattern since bankers first embraced it over a decade ago. One of the greatest barriers to bank acceptance of the potentially lucrative service has been its high start-up costs, which can often run into the millions of dollars.
Given the low demand from all but the largest cash management customers, most cash managers have been content to put off investing in EDI equipment.
Still, as cash management customers have begun to realize the cost saving benefits of EDI, the service has experienced a steady, if slow, acceptance.
The clearing house group said that about 735 financial institutions meet its definition of an EDI-capable bank. That definition says the institution is able to process remittance data sent with payments within two days. Other observers place the number of EDI banks at less than 300.
But the increased demand for EDI, coupled with the group's efforts to promote the automated clearing house as a pipeline for EDI transactions, is expected to cause an uptick in usage among banks in the coming year.
The clearing house whose expressed goal is to become "the recognized leader in developments in the electronic payments system," has been rather busy in the last two years.
It has worked vigorously to improve itself by developing a strategic plan and new rulemaking processes in an effort to eliminate barriers to expanded automated clearing house usage.
As part of this improvement effort, the association asked technology vendors to develop an affordable EDI remittance handling service. The trade group's offering of such a service could give a tremendous boost to EDI usage.
"We plan to enable financial institutions to be EDI capable, especially on the receipt side," said William B. Nelson, executive vice president with the association. "When that happens, and done at low cost, I think it is going to take off."
The request for proposals from EDI vendors, which drew 14 responses, resulted in a contract with an alliance of MCI Communications Corp. and Maxxus Inc.
Officials said development of the new service, called Rapid EDI, is on schedule for a pilot program next quarter and will be commercially available in the fall.
With an affordable service in existence, Mr. Nelson said the association will consider instituting in 1996 a rule requiring that all commercial banks provide EDI information to their corporate customers.
"The banking industry is committed to financial EDI," Mr. Nelson said. "We've really raised the stakes and have made an important initiative within the ACH network."
Meanwhile, several other organizations are continuing efforts to develop affordable EDI products, despite not winning the contract. For example, an alliance between Card Establishment Services and GoldLeaf Technologies expects to make its remittance processing system, called Translink, commercially available this month.
According to the study, the release of these systems comes at a perfect time, for cash management customers eagerly await the availability of EDI services.
The survey also found that businesses were generally satisfied with the automated clearing house network's support of electronic data interchange services, with about 90% of respondents indicating that the network was either good or very good in meeting their EDI needs.
However, the survey also suggested that the automated clearing house often falls short of providing some of the more advanced EDI services.
"This survey told us was that we are doing a pretty good job, but it also said that we need to improve some things," Mr. Nelson said.
Nick Alex, senior vice president with NationsBank, indicated that the study will "wake up the banking industry as to what corporations really want."
"Our biggest clearing house, the ACH, has realized what it takes to be a player," Mr. Alex said.
Among the demands for more advanced services: 64% of respondents want end-to-end acknowledgements rather than relying on the no-news-is-good-news approach. An acknowledgement assures that a payment has reached its destination.
Also, 63% wanted native EDI capability, which is the ability to send so- called X12 transmissions that do not have to be wrapped within the standard clearing house format.
In response to these findings, association officials said the network will add these services sometime this year.
In other areas, 44% of respondents said third party value-added- networks, or VANs, will still play a role in EDI. This percentage is surprising, given that 87% of the responding corporations prefer the clearing house network for financial EDI payments.
VANs are currently used by more than 40,000 companies to transmit business-related data. Torrey Byles, a director with BIS Strategic Decisions, a market research firm based in Norwell, Mass., said the association's initiatives may have short-term "negative effects" on VANs.
"It could have a small negative effect because it might allow banks who were using a VAN to switch over to this lower-cost platform," Mr. Byles said.
"But I think in the longer run it will probably have a more positive effect because it would encourage companies to use EDI and other forms of electronic commerce."