The Federal Reserve Bank is expected to announce today that it will utilize Small Value Payments Co.'s still-in-development check image exchange network, a step that could dramatically increase the volume of checks being settled in image format by the middle of next year.
The agreement is an important vote of confidence in SVPCo's planned network. And because legislation to encourage check imaging became law more quickly than originally expected, SVPCo may skip a planned March pilot for its system in favor of diving into high-volume traffic by mid-2004.
"We are building an industrial-strength network," said Hank Farrar, the president and chief operating officer of SVPCo, in New York, which is owned by 22 of the largest U.S. banks and the Clearing House (formerly the New York Clearing House).
The agreement reflects the Fed's desire to avoid building a network big enough to duplicate SVPCo's efforts, he said. "We're not moving thousands of images - we're going to be moving billions of images. We are going to be able to push a lot of volume through this network."
The Fed has its own image network, FedImage Services, which it plans to continue to operate but was not built to handle such a high volume of transactions.
However, Fred Herr, a senior vice president with the Federal Reserve Bank of Atlanta's retail payments office, said the network would need to be revamped in order to fully support the anticipated shift to image-based clearing and settling.
Just under 59% of the checks the Fed is now clearing are drawn on the 22 SVPCo member-owners. All of that image traffic will be moved across the SVPCo system instead of FedImage.
"This is the next logical step," Mr. Herr said. "It's two networks that will be talking to each other."
Paul Obermeyer, the senior vice president in charge of operations services at Comerica Inc. in Detroit, said the SVPCo network will do more than just allow the Fed to avoid the costs associated with expanding its network, but it will also link both systems and effectively extend the reach of the two networks. "This will enable the Fed to become a node on our network and exchange images with the SVPCo banks."
Comerica is one of the financial institutions driving the SVPCo image project, and Mr. Obermeyer has been involved in it from its inception.
Steve Ledford, the president of Atlanta market research firm Global Concepts Inc., said that currently "the best way to reach an SVPCo bank is through SVPCo" and that the best way for an SVPCo bank to reach a Fed customer is by going through the Fed's system. "You need to have a way to make sure that different organizations can work together, because it does nobody any good if they can't."
SVPCo in recent months has signed a string of deals to link its network with other organizations. In May it agreed to exchange images with Fiserv Inc., which processes items for 1,700 small and midsize banks. Last month it forged similar agreements with Unisys Corp., Empire Federal Credit Union, and the Canadian transaction processing outsourcer Symcor Inc.
These deals give participating banks the ability to clear checks in image format with more potential partners. The Symcor deal also gives SVPCo a way to exchange images across the U.S.-Canadian border, and Mr. Farrar said he expects to eventually be clearing cross-border transactions with images.
But the Fed deal dwarfs the others, he said. "This is unprecedented. This is a biggie for me."
Though SVPCo is still building its system, Mr. Herr had no qualms about committing to a network that was still unproven. "There is no reason to believe the technology won't work. The technology is there, and we intend to use it."
The agreement also means that the Fed will be collaborating with one arm of the company that is also its chief competitor in processing automated clearing house transactions. The Clearing House also owns the Electronic Payments Network, which, along with the Fed, are the two major ACH systems.
SVPCo has been aiming to bring its network up for a pilot program late in the first quarter of next year, but Mr. Farrar said those plans may be changing.
The Check Clearing for the 21st Century act was signed into law last month and will take effect next October, much sooner than many in the financial services industry had expected. As a result, banks are scrambling to prepare image exchange programs, and some may be ready to start trading images in high volume by midyear, he said.
In lieu of a spring pilot, Mr. Farrar said SVPCo may go directly to all-out image exchange by next summer.
The Fed banks will be on a similar schedule, according to Mr. Herr. "We feel we will be in position to exchange files as soon as the law goes into effect, or whenever our clients are ready."
However, he said it will likely be 2005 before the industry fully embraces image exchanges. "The industry has to do an awful lot of reengineering and retooling. In the next 12 months we will see more and more image exchange, but the real volume won't happen until 2005."
