A Match Made In Heaven?

  Officials in the United Kingdom have announced that, starting in late 2007, British businesses will get even large wholesale payments cleared within hours instead of days. The UK Faster Payments Initiative will allow companies to initiate the payments, complete with complex remittance information, with their bank or over the Internet and get quick clearance. That has many Americans wondering if something similar can happen here.
  Nearly all U.S. banks and credit unions use the automated clearinghouse system, which distributes and settles electronic credits and debits between financial institutions. But transactions typically take a day or two to clear. For years, industry officials and experts have talked about forging a new payment system that would combine the speed of FedWire, the country's main wire-transfer system that clears transactions immediately, with the low cost of ACH transactions.
  But few concrete steps have been taken, as institutions to date have focused mainly on getting check paper out of the system. Banks also have been reluctant to reduce the fee revenues they earn from wire transfers. So it could take years before any progress is made to merge the two systems unless the potential savings in doing so produces bait even the biggest naysayers cannot ignore.
  Eliot McEntee, the longtime CEO of the Herndon, Va.-based National Automated Clearing House Association, which sets rules and coordinates ACH transfers throughout the United States, says he gave a speech about a decade ago to a bankers' group during which he suggested developing a common set of rules for the ACH and wire-transfer systems. But the bankers showed only mild curiosity.
  "There was not a lot of support," he says. "It would've required thousands and thousands of financial institutions and their processors to change the way they initiate ACH and wire transfers."
  The institutions would have had to rewrite software, retrain employees, negotiate new deals with customers and, above all, somehow work out agreements with one another on how the new system would work.
  But the effort to combine the two systems may get a boost from a study published this January by Nancy H. Atkinson, a senior analyst with The Aite Group, a Boston-based consultancy. The report outlines possible cost savings and benefits.
  "This has been studied for over 20 years, so it's not a brand-new idea from me," Atkinson says, adding, though, that the case for convergence has become more compelling.
  For example, the U.S. government has become more serious about shutting down any international transactions with the thousands of individuals, including suspected terrorists and criminals, listed with the U.S. Office of Foreign Assets Control. Since ACH transactions are sent in huge batches, financial institutions rarely have time to examine them carefully enough to meet the agency's standards.
  "It's one of the reasons ACH can be done much cheaper; you don't have all these layers and layers of people" combing through the transaction documents, Atkinson says.
  But even though banks automatically can cross-check any wire transfer with the agency's list, the transfers cannot carry the volumes of information, such as contractual details, that usually accompany corporate payments. That puts U.S. businesses in a tough spot, Atkinson adds, since they increasingly make purchases overseas.
  If the ACH and wire-transfer systems were converged, she says, the U.S. would have one system with the near-immediate settlement and solid risk protection offered by wire transfers, and the low cost and ability to contain remittance information through the ACH system.
  Atkinson estimates U.S. financial institutions, vendors and processors spend $26.3 billion each year to train separate groups to run their payment networks, buy separate software and equipment, keep up with different regulatory schemes and perform other operations. Switching to one primary system, she says, would save at least $7 billion annually.
  "That's a conservative number, to be honest about it," Atkinson says, especially since the businesses using the new system would eliminate similar redundancies.
  A spokesperson for the U.S. Federal Reserve, which administers FedWire, says the agency would not comment on the issue.
  McEntee also believes that changes in the world economy may give Americans banks the nudge they need. He points to the advent of the Internet. In the past, electronic payments were sent a number of different ways, including by facsimile transmission or through dial-up modems. But now, everyone uses "a common way to send both ACH and wire transfers," McEntee says.
  However, even though technological advances may have made the two systems more alike, McEntee cautions that any attempt to recalibrate them would take years.
  CONCEPT SUPPORT
  Still, it eventually could streamline staff and generate cost savings. "It's worthwhile to explore," McEntee says.
  Financial institution executives also sound supportive. "We've been looking at this for some time," says Michael Knorr, managing director of payments for Citigroup's corporate and investment banking. Knorr believes the systems eventually will converge and has spoken with other banks on how it could work. But the talks have been very informal, he says.
  "We're far away from [doing] this," Knorr says.
  Even still-developing nations have begun to move ahead of the U.S.
  In January, Scottsdale, Ariz.-based eFunds Corp. announced that it would provide the application software for an association of commercial banks in Thailand that is building that country's new payment network. Like the upcoming British system, the Thai network would process bulk payments much like the American ACH system does but settle them on the same day.
  "The technology is in place to do this," says Rick Lyftogt, eFunds director of ACH product management. "There is no reason [ACH clearance] has to [take place] the next day."
  CHANGING DIFFICULT
  But other countries may have it easier. The American ACH system was put together in the early 1970s and was one of the first of its kind in the world, says Dave Kvederis, president and CEO of San Francisco-based Bankserv, which provides about 100 banks with software applications that help process funds transfers.
  "It makes it difficult today to make changes because we've built up this infrastructure over the last 35 years," he says.
  In addition, most countries have far fewer financial institutions. The U.S. has about 9,000 banks, Kvederis says. "If you want to convert a system, you need to get agreement" from everyone, even small, rural banks, he adds.
  EFunds' Lyftogt points out that many banks may see wire transfers, which cost consumers roughly $15 to $25, as a revenue stream and might be reluctant to accept changes. Any new system that combined wire transfers and ACH transactions, which cost only pennies, would have to have a price structure attractive to banks.
  Kvederis predicts that the FedWire and ACH systems eventually would run on the same platform, but with a range of offerings where the cost is based on speed.
  For example, companies using it to pay employees every two weeks would get their funds cleared through a cheaper option, since they would not need instant approval, he says. And if a company needs materials from a supplier who would not release them until the payment clears, they might pay extra for a service that transfers funds almost instantly.
  CitiGroup's Knorr says banks today are focused on other things. For example, since the 2003 passage of the Check 21 law, which allows the processing of paper checks electronically, banks have concentrated on eliminating paper from the payment system. "That's where the focus is," Knorr says.
  With such tools as PayPal and Google Checkout helping facilitate quick and cheap payments between consumers, banks and the federal government eventually will have to put their heads together and design something similar for the nation's corporations.
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