The Check ACH Coalition's decision to abandon its efforts to link the automated clearing house system with image exchange networks acknowledged that the project was too complex — and had been all but mooted by market forces.
The coalition, backed by four major banking companies, hoped that merging the two payments systems would increase electronic settlement by making it possible to settle electronic payments with almost any financial company.
Its members spent much of last year struggling to figure out how to connect two systems that were never really designed to talk to each other. At the same time, the number of banks connecting to electronic image exchange networks, which until then had grown slowly, suddenly began to take off. Related Link
But Earl Jennings, a senior vice president for check processing at JPMorgan Chase & Co., another backer, said the group concluded that it had taken on a "Herculean" task. And with image exchange surging, there was less need for a new system designed to boost electronic settlement. "We came to a consensus that things were working," he said.
The remaining bank backers are Wells Fargo & Co. and Zions Bancorp. The four companies launched the initiative last May with presentations at two major industry meetings — the Bank Administration Institute's TransPay conference and the Payments 2006 conference sponsored by Nacha, the electronic payments association.
The four companies were all early movers in image exchange and had expressed frustration that they were unable to deliver check images to many other banks. When they unveiled the Check ACH project, the coalition said it wanted to find a way to deliver payment information about imaged checks across the ACH system, which reaches virtually every bank, thrift, and credit union in the nation.
At the time, bankers feared that a significant portion of the industry would either resist the transition to check imaging technology or be slow to adopt it.
However, observers said, imaging has soared in popularity since last spring, in effect outrunning the solution that the Check ACH proposal was designed to supply. The Electronic Check Clearing House Organization reported that 5,978 routing and transit numbers, representing about 5,480 institutions, were able to receive images for clearing in October, the most recent data available. This total was more than double the 2,497 routing and transit numbers that could do so in October 2005 and more than four times the 1,392 that were hooked up to image networks in January 2005.
Bob Meara, a senior analyst at the research and consulting firm Celent LLC in Boston, said that imaging's success persuaded the coalition not to proceed. "If small banks are adopting like gangbusters," he said, "maybe we don't have a problem to solve."
The Check ACH project was always acknowledged to be complex. One of its key assumptions was that images would have to be stored in vast, centralized archives and be available on demand to banks. The ACH network was not designed to carry check image files, which are much larger than the payments data within instructions in ACH files, and the coalition instead proposed using the network to deliver instructions for gaining access to the image file within the network, much as one might use a call number to find a book within a library. However, no such archive exists to serve the entire industry.
There were also several daunting legal and operational hurdles. The group would have needed to devise a legal framework that would bridge Regulation CC, which governs checks, and the differing provisions of Regulation E, which covers ACH payments.
It would also have had to come up with rules to oversee the new network, which would have required input from banks, vendors, and associations.
In the end, the project's complexity proved too unwieldy. "It took years to get the current networks and standards in place, and to get adoption past the tipping point," said Jim Fancher, who was named Wednesday as general manager of Endpoint Exchange LLC, which supplies image-transmission services to more than 4,000 mostly small and midsize institutions. "They were fighting an uphill battle to establish a new standard," he said.
Twelve of the nation's 25 largest banks have signed up to use Endpoint — a unit of Metavante Corp., the technology subsidiary of the Milwaukee banking company Marshall & Ilsley Corp. — which enables them to settle payments with all those smaller financial companies. "The large banks see that is a great way to get out to those R/T's [routing and transit numbers] quickly, through our network," Mr. Fancher said.
Steve Mott, principal of Stamford, Conn.-based BetterBuyDesign, agreed that the existing systems are beginning to achieve their potential. "A lot of people are probably relieved that they're not going to have to re-engineer another solution," he said.
Still, Mr. Mott and others applauded the coalition effort. "I relish the fact that somebody took the bull by the horns" and tried to get more banks to accept check images, he said. "The way they approached it may not have been perfect, but the fact that somebody stuck their necks out to see if there was a silver bullet, I think was a good thing."
Celent's Mr. Meara said the effort brought together checking and ACH experts who historically worked in separate operational silos. For that reason alone, "it will serve the industry well as we merge check and ACH to a larger degree," for example, by increasing check conversion at the lockbox and in merchants' back offices.
And JPMorgan Chase's Mr. Jennings said the coalition will continue to promote the electronification of payments as a way to cut costs and streamline the clearing process. "The work hasn't stopped. It's more of a transition," he said.
The coalition's committees are to wrap up their work and document their findings. Members of the coalition said they would present a more detailed report at this year's TransPay show, to be held this month in Orlando.
