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A Thing

Driving the Migration from Paper to Electronic Payments

In an effort to "electronify" the billions of checks written in America each year, SVPCo is launching an ambitious check image exchange program that is expected to result in a fully operational national interbank check image exchange service by first quarter 2004.

SVPCo (which stands for Small Value Payments Company) was founded in 1998 by a group of large U.S. banks with a mission to build an electronic foundation for payment system initiatives. These banks (individually and collectively) possess the technical skills and transaction mass needed to effect real change in the payment-processing arena.

Twenty of the largest banks in the nation hold ownership positions in SVPCo. Together, these banks processed more than 60% of the 40 billion-plus checks that were written last year by American consumers and business and government agencies. They represent 55% of U.S. commercial bank deposits, totaling $2.3 trillion.

As further testimony of its owners' sphere of influence, last year SVPCo's Electronic Payments Network (EPN) service processed more than one billion Automated Clearing House (ACH) items.

"The SVPCo strategy for success," said Hank Farrar, President and COO, "is to offer banks a low-cost, industry-led alternative for migrating to electronic payments."

In the new check image exchange program, SVPCo is working closely with several image-enabled large U.S. banks, the Federal Reserve, BITS (the Banking Industry Technology Secretariat), and ECCHO (Electronic Check Clearing House Organization, the electronic check rules group).

Eliminating the Interbank Paper Shuffle

Despite the increasing popularity of electronic payment instruments (such as debit cards), paper checks remain the most popular method of non-cash payment in the U.S. economy. The Federal Reserve estimates Americans wrote 42.5 billion checks in 2000. By comparison, retail electronic payments, such as credit and debit cards and retail ACH transactions, totaled 28.9 billion.

SVPCo banks - and the entire banking industry, for that matter - have invested heavily in technologies and processes that have made interbank check clearing a highly efficient operation. The industry also supports electronic payment systems.

Rather than scrapping one set of investments in favor of another, SVPCo provides banks with a means to "electronify" the check-collection process and stop (or at least delay) the interbank paper shuffle normally associated with checks.

SVPCo supports three separate businesses; each addresses a different point along this check-to-electronic payments migration path:

  • SVPCo's Electronic Clearing Services (ECS) unit converts more than 3.4 million checks a day from paper to electronic files, expediting the interbank clearing and settlement process.

  • The Electronic Payments Network's ACH service handles 28% of the industry's ACH transactions, clearing and settling these electronic transactions between banks throughout the nation. By the end of 2003, EPN expects to capture 40% to 50% of the ACH processing market in the U.S.

  • SafeCHECK is an industry-owned electronic verification and conversion service for checks written at the point-of-sale (POS), operated by SVPCo in collaboration with regional ATM networks.

"SVPCo provides a truly electronic infrastructure for payment clearing and settlement, and this infrastructure is owned and operated by the banking industry," Farrar said. "SVPCo demonstrates that banks can cooperate and compete while supporting and enhancing their payment system franchise. Bankers understand the efficiency improvements an organization like SVPCo can bring to the payments business."

Electronic Clearing Services (ECS)

ECS embraces the notion that Americans will continue to write checks for the foreseeable future. Collecting banks using ECS digitally capture bank account and payment information from deposited checks, load that information into electronic files and transmit those files in advance of the physical presentment of checks to paying banks.

The process, commonly known as electronic check presentment (ECP), gives banks a head start on the clearing cycle, which in turn reduces operating costs and opportunities for check fraud.

Coupled with check imaging technologies, ECP eliminates the need for physical check exchanges altogether. Imaging makes digital pictures of checks, and the various check clearing and settlement routines are performed using those images to the maximum extent possible, in lieu of the paper checks.

"The confluence of imaging and ECP is the single most important event in check processing since the introduction of MICR technology," says Susan Long, Executive Director of ECS. "With over 40 billion checks written annually in the U.S., the opportunities for growing ECP volume seem almost limitless." That's why the volume of ECP items handled by SVPCo is expanding at a rate of about 70% a year.

Today, SVPCo operates the nation's only private-sector ECP system, with connections to 91 sites nationwide. Last year, SVPCo helped banks clear and settle an average 2.4 million electronified checks each day, up from an average 400 million items a day in 1998. In 2003, SVPCo is expected to clear in excess of 4.1 million electronified checks a day.

The next strategic undertaking for ECS is Image Exchange, which eliminates any need for the physical exchange of paper checks.

A study, conducted for ECS in May 2002 by Deloitte Consulting and Global Concepts, revealed significant opportunities for savings on the part of banks and ECS through such consolidations. The study identified key efficiencies for individual banks, with benefits comprising 67% operational-cost savings and 33% from accelerated posting. Overall, the study indicates annual industry savings of nearly $2.1 billion, even if interest rates remain low and check volume falls.

Electronic Payments Network (EPN)

EPN is the ultimate check electronification method, replacing the use of a check with an electronic file record, processed through the interbank ACH system. ACH transactions are electronic alternatives to routine consumer check payments, such as paychecks and insurance premiums, and also are used for corporate transactions.

EPN is the largest of two private-sector networks that process ACH payment exchanges in competition with the Federal Reserve, a long-time provider of ACH services to financial institutions.

Of critical importance to financial institution executives, EPN is the lowest-cost option for ACH processing. It achieves this, in part, by sharing a technology infrastructure with ECS.

In 2001, U.S. financial institutions used EPN to exchange more than one billion ACH transactions, worth a total value of $4.1 trillion. But that was just the beginning of an exceptional growth trend that anticipates EPN processing 5 billion ACH items in 2005 and challenging the Federal Reserve as the nation's largest provider of ACH processing services. Last year, financial institutions exchanged more than 5 billion transactions via the Fed and private-sector ACH networks combined.

"EPN provides an important alternative for the payments industry because its governance is under control and direction of the nation's banks," said Kevin Purcell, Senior Vice President, Wachovia Bank, and Chairman-elect of the EPN Board of Directors.

Collectively, the financial institutions represented on the EPN Board of Directors originate 70% of all commercial interbank ACH transactions. Fourteen of those banks are originating ACH files through EPN; taken together, these banks represent about 28% of the national ACH processing market.

EPN's latest expansion is a strategic partnership to provide ACH services to the Western Payments Alliance (WesPay), which includes more than 1,000 financial institutions in the western U.S. and Pacific region. WesPay members, combined, processed nearly 800 million commercial ACH transactions in 2001.

"Electronic Payments Network will give WesPay members yet another quality option for executing their growing number of ACH transactions at competitive prices," explains WesPay CEO Gerard F. Milano.

As more banks move ACH transactions to EPN, overall costs are sure to drop. "We expect our ACH transaction-processing costs to continue decreasing as the other financial institutions in our markets complete their migrations to EPN," said Quintin Sykes, Executive Vice President of The South Financial Technology Group.

With a membership that includes the largest banks in the country and customers in all 50 states, EPN offers products and innovations that aren't available from other ACH networks - innovations such as transaction warehousing.

EPN is participating in a project dubbed iC&S. The goal of this project is to facilitate straight-through payment processing (STP), or the automation of electronic payment and remittance information from payment origination to account posting.

The iC&S project will result in both system enhancements and industry best practices. The first feature developed under iC&S is the proprietary Universal Payment Identification Code (UPIC), which has been available to EPN members since early 2002.

The UPIC is a unique number assigned to a company's bank account that masks confidential banking information while facilitating the transmission of payment instructions via electronic networks.

"We understand the payments business, and we understand what our participating financial institutions need from a payments system to accommodate electronic commerce," says George Thomas, President and COO of EPN. "And we can move quickly to adopt lower-cost innovations that help financial institutions offer a wider range of options for customers."


SVPCo's latest innovations support the conversion of checks presented at the point-of-sale into online electronic transactions. SafeCHECK - a cooperative venture undertaken by SVPCo, three of the largest EFT networks and 11 banks - practically eliminates POS check fraud. That's because SafeCHECK is the only retail payment mechanism to support real-time access to demand deposit account (DDA) information at the point of check acceptance. With SafeCHECK, checks written by consumers to a retailer effectively become "single-use debit cards."

"This is a huge step in the fight against check fraud," said Carol Malicki, Senior Vice President of Strategic Payments Migration at Wachovia and Chairman of SafeCHECK. "Just as important, SafeCHECK is the only industry-owned initiative on check verification and conversion."

SafeCHECK made payment-system history by becoming the first company to move check debits over EFT networks in January 2001. Combining check conversion with valuable real-time account information requires no major investment in new technology by merchants or by check processors who provide the capability to retailers.

Consumers write more than 10 billion checks each year at supermarkets, restaurants and other retail establishments. Banks participating in SafeCHECK include many of the nation's largest. Collectively, these banks hold more than 45% of DDAs at U.S. financial institutions.

"The ability to turn a check into a real-time debit is unprecedented," Malicki said. "The conventional wisdom in banking for years had been that check information could not be moved across retail EFT networks; SVPCo proves this thinking wrong with this new service that creates substantial new opportunities for electronifying check payments."

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