Back in the late 1990s many people in the banking industry believed the world of e-commerce would require new payment instruments. Entrepreneurs came up with virtual cash schemes, while bankers worked by consortium to develop electronic checks.
But e-checks failed to take off, largely because they did not fit neatly into the existing check processing infrastructure. The experience highlighted the dominance of the automated clearing house and the industry's reluctance to undermine it.
Today's efforts on the payment-development front are more moderate. The e-check experiment, along with another late-'90s project called BIPS (for Bank Internet Payment System), have evolved into a project being headed by the Financial Services Technology Consortium that emphasizes the importance of legacy systems.
The consortium's Universal Value Exchange system would transmit payments with remittance data. That combination is not common in payments systems today but would offer a major convenience to corporate customers. It also would act as a payment gateway, able to translate one type of payment into another.
"The big idea with UVX is that whatever we do, it has to interface with systems that are already there," said Ron Gafron, a senior vice president and the chief technology officer at Glenview State Bank in Illinois. Mr. Gafron is leading the consortium's project, which officially began in December.
Back when e-checks were in vogue, the Treasury Department tested two ways of processing them. One converted the e-checks into ACH transactions halfway through the process. The other differed from the traditional check processing system only in transferring all the relevant information by e-mail instead of on paper.
The latter method, which followed the traditional check-processing route more closely, proved the better option, said Chuck Wade, who worked on the test as a consultant at BBN Technologies, a Cambridge, Mass., research and development division of Verizon Communications Inc. As with regular checks, the funds tied to these e-checks were available after only one day. The e-checks converted into ACH transactions offered three-day funds availability, as regular ACH transactions do.
"When you convert e-checks to ACH you get all the disadvantages of the ACH," said Mr. Wade, who is now a principal of Interisle Consulting Group in Hopkinton, Mass. "It's a terribly antiquated technology."
E-checks were at the center of a three-year pilot test in which the Treasury Department processed about 4,000 electronic checks totaling about $20 million on behalf of the Defense Department. The test, in which Bank of America Corp. and FleetBoston Financial Corp. participated, sought to create a new type of document that met all the legal and operational criteria of a paper check but could be transferred electronically.
The test ended in June 2001. It proved the security and technology of the system as well as the business case for merchants receiving the payments. But the banks could never make the new payments system work profitably for them.
That was not for lack of acceptance from businesses, Mr. Wade said. One Defense Department payee was able to reduce its number of processing clerks from nine to one, he said. "We never had a problem with businesses buying into it," he said.
"But it threatened banks' ACH business," Mr. Wade said. "That was the fundamental problem."
The ACH offers the industry tremendous advantages. The investment that banks made in the system in the 1970s still serves them - and it puts up a barrier to new competitors. But as the e-check experience shows, its existence may also stifle payments system innovation.
But moving to the better, "purer" version of e-check required the cooperation of the banking industry.
"One of the biggest mistakes was that we tried to set up a whole new payments system," said Steve Schutze, who led the e-check project for NationsBank (now Bank of America Corp.), which ultimately dropped out of the pilot. "We needed to ride on the backbones of what was already there."
In further hindsight, Mr. Schutze, who is now the director of e-strategies at the American Bankers Association, said, "We tried to make the banks set up a new infrastructure, but they're just not going to do that."
E-Trade Group Inc.'s announcement last month that it is letting customers fund brokerage accounts "instantly" by granting them a credit until ACH transactions are fulfilled days later shows the lengths to which financial institutions are going to manipulate the existing payments system to meet new needs.
Though the Treasury Department tested e-checks only for business-to-business transactions, the technology could be used to support E-Trade's goal of faster account fundings. In fact, the securities industry was one of the major proponents of the e-check experiment, Mr. Wade said.
Though e-checks never panned out as envisioned, the Treasury test did result in the formation of two businesses.
- In March 2000, FleetBoston spun out Clareon Corp., which changed its focus from e-checks to the automation of remittance and payment data. Clareon declared bankruptcy in November; FleetBoston reabsorbed it and plans to integrate Clareon's products into its own cash management operation.
- The test also produced Xign Corp. of Pleasanton, Calif., a privately held company that also turned its attention from e-checks to the handling of payment and remittance data. Last year Xign, which counts Charles Schwab & Co. and Sprint among its customers, began offering what it says is a distinctive accounts payable service that automates the receipt, approval, and processing of invoices. The service can reduce the time companies take to pay a bill by 35 to 40 days, said Christopher Rauen, Xign's marketing communications manager.
The e-check experience also taught a lesson: that the ACH is a force to be reckoned with in payments innovation. As a result, changes in the payments system are likely to occur in small steps rather than leaps and bounds.
