Visa U.S.A., the New York Clearing House Association, and the Arizona Automated Clearing House Association plan to begin testing in the next few weeks a link that will allow member banks to transfer funds directly, bypassing the Federal Reserve System.

The test, which will link the nation's largest private automated clearing house systems, will begin once legal agreements are ironed out later this month. Several banks from each organization are expected to take part, but the banks have not yet been chosen.

The automated clearing house is typically used for electronic transactions such as corporate cash concentration and payroll, consumer, and federal benefit payments.

Driving Down Costs

Visa, the New York Clearing House, and Deluxe Data Services of Milwaukee, which processes for the Arizona clearing house, have been in talks for over a year about forming a nationwide alternative to the Fed.

The Fed dominates the clearing of interbank automated clearing house items, handling about 80% of the 1.4 billion transactions generated annually by financial institutions and the 500 million Federal automated clearing house items.

By expanding their services geographically, the private sector organizations can reduce their fees and mount tougher competition to the Fed.

Fed Competitive

The Fed has also geared up to compete more effectively. This summer, the Fed completed a transition to all-electronic delivery of transactions, and on Oct. 1 it plans to institute improved processing schedules.

In response, banks are considering using the automated clearing house to offer new services, such as offering flexible processing schedules that would allow corporations to initiate payments even later in the day and still have them processed for the next day.

Separately, several southeastern automated clearing house organizations have launched a study among their members to determine the feasibility of private-sector processing in the region.

The regional expansion of banks in the Southeast such as NationsBank, Signet Banking Corp., First Union Corp., and Barnett Banks Inc. could bring significant interbank volume, hence cost savings, to a private-sector arrangement, observers said.

|Is There Advantage?'

Participating in the study are the Payment Systems Network, an automated clearing house association based in Orlando, Fla; the North Carolina Automated Clearing House Association; the Virginias Automated Clearing House Association; Wachovia Automated Clearing House Association, and Southeast Switch Inc., operator of the Honor shared network.

"We're trying to answer the question "Is there a competitive advantage to a regional exchange?'" said Douglas Hartsema, a senior vice president at Wachovia.

Instead of evaluating the services offered by private-sector processors - as previous studies by Payment Systems Network and the Virginias clearing house had done - this study will focus on what banks would want from a private-sector processor.

Among the banks that will be interviewed for the study are: Bank South Corp., Crestar Financial Corp., NationsBank, SunTrust Banks Inc., One Valley Bank, Barnett Banks, First Union, Signet, and Wachovia.

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