Electronic Check Clearing Alternatives Take Shape (1993)

There's a brave new world of check clearing on the horizon, and paper checks have little to do with it . . . maybe If your memory is long enough in this business you'll recall numerous attempts at rolling back the sea of paper checks processed and cleared by banks each year. The automated clearing house system, after all, was intended to do this. While it has slowed check growth, it hasn't reversed the upward trend of check volume in the two decades since the system was created. Check truncation, electronic check collection, and other efforts to reduce the paper flow have also been introduced, and some of them remain active. Will the '90s bring a different approach to check processing? Quite possibly, yes. For one thing, increased competition continues to press banks to contain costs and improve operating efficiency. For another, electronic technology has advanced a lot farther than the early days of the ACH. As a result, several electronic check clearing and truncation projects hold promise for reducing or at least maintaining the cost of clearing paper checks. Proponents admit that big cost reductions won't come in the short term. But there is a strong possibility that banks will see reductions in loss exposures, a general containment of the estimated $40 billion tab spent each year on check clearing, and new opportunities to enhance revenue streams through check services. Privatization. By modernizing the check clearing process, many bankers also hope the industry will be able to wrest control of the payments system from the Federal Reserve. Privatization of the payments system is absolutely necessary for the survival of banking, insists Dick Ercole, president of Huntington Technology Co., Columbus, Ohio. It's really the last franchise we have. The Huntington Bancshares unit manages a new national check-exchange system called the National Clearinghouse Association (NCHA). The system is an example of a joint-venture approach to check-clearing that competes with the Fed and works to improve revenue streams for member banks. NCHA, which is also known as CHEXS (for Check Exchange System), is the product of an alliance between Huntington; Littlewood, Shain & Company (an Exton, Pa.-based consulting firm); and U.S. Check (a Columbus-based air courier service). The organization was created in 1992 to provide a national check clearing and settlement apparatus through member participation in local clearing houses. Beyond check clearing. The primary intent of NCHA was to undercut the prices charged by Federal Reserve Banks for check-collection services by expanding the local clearing house mechanism nationwide. But already, NCHA members are preparing to exploit their affiliations with the group to enhance correspondent and corporate cash-management services. There are a lot of products that can come out of these initiatives, notes Ercole. Among them: check clearing for downstream correspondents, electronic check returns, and enhanced cash-management reporting. At last count, there were 18 banks participating in the CHEXS system, exchanging checks in about 30 cities. Banks participating in NCHA agree to accept checks from all other members of the national clearing house for presentment to paying banks through local clearing house affiliations. From the vantage of Ercole and others, NCHA is ideally suited for banks looking to contain costs without the large up-front investments required of other, high-technology approaches to check clearing, like electronic check presentment (ECP). NCHA members, Ercole explains, incur a total cost of 1.05 cents for each check cleared through the system, compared with anywhere from one cent to five cents per item for clearing checks through the Federal Reserve. And unlike electronic check presentment, NCHA requires no new investments in software. It's definitely cheaper than ECP, says Ercole of the NCHA approach to clearing checks. …