The Clearing House Gets a Simpler Structure

By reorganizing under two limited-liability corporations, the family of payment processing and settlement companies known as The Clearing House say they have accomplished two chief goals: making life easier for the banks that own them, and strengthening their role in influencing payments policy.

The biggest change is that the six quasi-independent payment companies that did business under The Clearing House banner were streamlined, as of Thursday, into a limited-liability corporation, The Clearing House Payments Co. LLC, which replaces the 151-year-old New York Clearing House.

The new company does the same things as its predecessors - check clearing, wire transfers, automated clearing house transactions, check electronification, and check image exchange - but under the management of one board rather than six, and with less confusion and bureaucracy, executives say. The 19 owners are large and midsize banks.

"It's kind of a 'Who's Who' of the banking community," Jeffrey P. Neubert, the chief executive officer of The Clearing House Payments Co., said in a telephone interview Thursday. "The payments company will now have a voice on strategic matters" that will speak louder with the Federal Reserve Bank and other policy-making bodies.

The second limited-liability corporation, set up simultaneously with the first one, is The Clearing House Association LLC, which tackles legal, regulatory, tax, and accounting issues that are important to the owner banks. Its structure and function are much the same as they were under the old setup, executives said.

But The Clearing House Payments Co.'s organizational chart looks quite different, even though the same people will be in charge.

The "before" picture included six entities: Small Value Payments Co. (SVPCo) and Electronic Clearing Services (ECS), which handle check electronification and image exchange; the Clearing House Interbank Payments System (CHIPS), which handles wire transfers; Electronic Payments Network (EPN), the ACH operator; National Check Exchange, the check-clearing operation; and The Clearing House itself.

The "after" picture funnels those six companies into four divisions: CHIPS for wire transfer, EPN for ACH, SVPCo/ECS for check electronification, and Check Services to run the check-clearing houses the company operates in the Northeast, the Midwest, and the West. The Clearing House merged with the Chicago Clearing House Association in November and acquired the check-exchange operations of the Western Payments Alliance a month later. (WesPay remained an independent ACH association.)

The business line heads are all senior vice presidents and business managers. They are John R. Mohr at CHIPS, George F. Thomas at EPN, Hank Farrar at SVPCo/ECS, and Gerard F. Milano at Check Services.

In addition to those four operating divisions, there is the Strategic Payments Forum, a think tank to be run by R.C. "Rick" Leander.

"I think it will be very helpful to have 19 banks debating, discussing, and taking positions on critical strategic issues in the industry," Mr. Neubert said.

One of the matters the forum will address is the growing role nonbanks are playing in the payments business. Having that competition "is fine" for banks, he said. "Nonetheless, the banks have been, if not complacent, somewhat passive in thinking through, from a safety-and-soundness standpoint, how the business should evolve."

The forum already has come up with some recommendations on safety and soundness as they relate to deposit account access, and it will meet with Federal Reserve Board representatives to discuss them, Mr. Neubert said. "When we sit down with the Fed or with Nacha, we're now speaking on behalf of 19 banks - substantive institutions - so they're going to listen."

From an operations standpoint, the new structure will let Clearing House executives "focus more time on the business rather than board meetings," he said. Banks that retained interest in multiple companies within the old structure will now have a single relationship with the company, so there will be fewer contracts to negotiate and less time spent managing multiple relationships.

Under the old system, "we were not realizing all the synergies we could," Mr. Neubert said. About 18 months ago the boards of SVPCo and The Clearing House realized it was time to make changes - that the disparate organizations either had to come together or go their separate ways.

It was touch-and-go for a while to see which direction they would take, Mr. Neubert said. At times it looked like there were insurmountable conflicts of interest that would scuttle the unification efforts. But the realities of the payments system - including convergence among what had been wholly separate systems - made the one-company concept too attractive to pass up.

The Check Clearing for the 21st Century Act, which, come October, will give banks the right to present substitutes to paper checks, "is a facilitator and an accelerator of that convergence," Mr. Neubert said.

Further, relatively new services, such as check truncation at the lockbox, have blurred the distinctions among some of the old Clearing House companies and undercut the rationale for having separate organizations for each payment type, he said.

There was also the long-term decline of the paper check to consider, Mr. Neubert said. "If ever there was a time for consolidation, this is the time for check consolidation."

He said he saw opportunities for further consolidation in the check-exchange business, where his company competes with the Fed, the National Clearing House Association of Dallas, and numerous local clearing houses.

Once the decision was made to simplify the structure, there was a matter of ownership to be settled. The old Clearing House had 11 owners, all of which retained their stakes. However, the 11 banks that had held stakes in SVPCo but not in The Clearing House were asked to put up extra capital to get an ownership stake in the new company and gain a seat on its board.

Nine of the owners put up the extra capital. The two that did not: M&T Bank Corp., which decided to remain an owner but did not secure a board seat, and Mellon Financial Corp., which withdrew its ownership position but continues to use both the ACH and electronic check services.

The Clearing House Payments Co. is owned by the following banks or their U.S. banking affiliates: ABN Amro Bank, Bank of America, Bank of New York, Bank of Tokyo-Mitsubishi Ltd.'s Union Bank of California, BB&T, Citibank, Royal Bank of Scotland's Citizens Bank, Comerica Bank, Deutsche Bank, HSBC Bank, JPMorgan Chase Bank, KeyBank, M&T Bank, National City Bank, PNC Bank, SunTrust Bank, U.S. Bank, Wachovia Bank, and Wells Fargo Bank.

John R. Beran, an executive vice president and the chief information officer at Comerica, was the chairman of SVPCo's board and a co-chairman of the transition team that handled the restructuring.

Mr. Beran said in an interview Thursday that SVPCo's members had approached The Clearing House nearly two years ago about combining the two organizations. The 11 Clearing House banks were also among the 22 SVPCo owners, and "it just seemed redundant" to have them operating separately. "We used the same operational services, the same infrastructure, the same systems, we allocated the same people [to serve on boards and committees], yet we operated different companies."

The combination streamlined governance, "so we could focus on the direction of the payments industry, as opposed to contracts with service providers and things like that," Mr. Beran said. Comerica was a member of SVPCo but not of The Clearing House.

Mr. Beran praised "the openness, the candor, the objectivity" of the participants. "It was, in my opinion, just incredible. That's what made this happen. The banks left their proprietary interests at the door to do what's best for the industry."

For instance, there was the issue of whether to name the new entity after SVPCo or The Clearing House, Mr. Beran said, but partisans laid aside personal preferences in favor of "what makes sense."

The streamlined organization could help individual banks, and the industry as a whole, to take a fresh look at the payments business he said.

"We manage payment systems in silos," as banks and as the Clearing House, looking at ACH as a separate activity from checks, he said. "We make business decisions around a particular system, rather than a holistic view of payments."

Thomas S. Kunz, a senior vice president and director of payments and e-business at PNC Financial Services Group Inc. of Pittsburgh, predicted that the reorganization would lead to innovation in the development of payment products and better business opportunities. PNC was an owner of SVPCo but not of The Clearing House.

"The industry needs to do a better job of thinking about payments, less from the silo perspective and more from an enterprise view," Mr. Kunz said. The streamlined organization should help the banks do that. "I think that's very powerful for The Clearing House and should make our job easier to think across payment systems."

Erick Peterson, an executive vice president at ABN Amro North America Inc. and the head of its treasury management business, emphasized the opportunity for innovation.

"With all these businesses in front of us and the silos eliminated, we can better look at the interaction among the silos" to find business opportunities, Mr. Peterson said in an interview.
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