Reconciling Image-Exchange Rules

The industry's transition toward image exchange holds the promise of greater efficiency and lower cost. But adoption of image-exchange technology and the introduction of related business-process changes represent a significant investment by a financial services organization. Many executives are struggling to understand the differences between the business models of the private-sector image-exchange providers, rules governing exchange and the processing modes being employed. Today, large institutions appear to be gravitating in one direction while thousands of smaller organizations are committed to a different approach.

Financial institutions, some of which will be clearing and settling through multiple providers, want agreed-on rules to enable them to manage the risks in exchanging check images, and most believe the fewer sets of rules the better. Multiple sets increase the difficulty, cost — and risk — in compliance.

Is a single set of rules the goal? Should it be?

"Actually, it will be two sets of rules," says David Walker, president and CEO of Dallas-based ECCHO, the Electronic Check Clearing House Organization through which member banks have created a 400-page rule set for image exchanges. "One that applies to exchanges that go through the Federal Reserve and one that applies to private-sector exchanges."

The Fed has long played a central role in check processing because it is the only organization that touches every financial institution endpoint and because many financial organizations settle transactions on a net basis through reserve or clearing account balances. The Fed has its own rule set and offers a full suite of image-exchange products. It has been in image-exchange production with a small number of banks for months.

"ECCHO and the Federal Reserve have an active project to minimize the differences between the two sets of rules with the intention of eliminating potential barriers that delay bank decisions to implement image exchanges," Walker says.

Susan Goold, a spokeswoman for SVPCO, the national check processing business of the Clearing House Payments Company, New York, agrees that differences between Fed rules and ECCHO rules are important. "We've worked closely with the Fed on formats; ECCHO has worked closely with them on rules," she says. "I suspect that any differences are going to be washed out pretty easily during the next year or so."

The importance that banks place on interoperability in check processing explains why a great deal of attention is lavished on efforts to bridge differences between major private-sector players. One significant split is construed as between ECCHO and Endpoint Exchange, operated by CheckClear, LLC, Oklahoma City.

Many of the nation's largest banks are members of ECCHO, which exists to promote electronic check presentment and image exchange. Many of those same banks are owners of SVPCO. SVPCO, whose members process between 50% and 60% of the nation's check volume, has licensed ECCHO's rules. A handful of SVPCO bank pairs have just begun clearing and settling a small number of checks as images.

Endpoint Exchange has more than 4,000 clients, predominantly small banks and credit unions, but including five Top 50 banks — M&I Bank, Milwaukee; Bank of the West, San Francisco; Commerce Bank, Cherry Hill, N.J.; North Fork Bank, Melville, N.Y.; and Synovus Corp., Columbus, Ga. Endpoint was the first to market with image exchange. It has operated in one form or another since 2002, using different rules and a different primary exchange model.

As far as rules are concerned, the differences really are between ECCHO and the National Clearing House Association (NCHA), which Endpoint uses for settlement.

"We agree with ECCHO that there should be two rule sets — the Fed set and a private-sector set," says Mark Craig, general manager of CheckClear. "We use the X9.37 (American National Standard draft) format (for image cash letters)...and we use it in accordance with national rules that have been written by the banks participating in Endpoint Exchange." He says the banks created their own because there was no widely accepted national rule set at the time.

Walker says an important development occurred last summer, when Milwaukee-based Metavante, the financial technology arm of bankers Marshall & Ilsley Corp., Milwaukee, acquired Advanced Financial Solutions of Oklahoma City. AFS owned CheckClear.

"Endpoint is owned by Metavante, which is owned by M&I Bank. M&I Bank has recently become an ECCHO full member," Walker observes. "In a recent press release announcing that membership decision, Frank Matire, Metavante's CEO, expressed his support for a single set of image exchange rules. M&I's ECCHO membership is one additional key step in achieving universal acceptance of a single set of private-sector rules."

Paul Danola, the Metavante senior executive vice president who will sit on the ECCHO board, has said that the company looks forward to driving adoption of common rule sets and procedures among exchanges through its ECCHO membership.

Last fall, Metavante positioned itself as a potential bridge between ECCHO and Endpoint/NCHA when it acquired VECTORsgi, Addison, Texas. VECTORsgi developed the distributed traffic agent (DTA), which manages exchange of financial transactions among SVPCO network members. That gave Metavante a significant financial stake in two major private-sector exchange networks.

Endpoint's Craig says ECCHO and NCHA are very close to an accommodation, probably one in which NCHA would receive some type of license to administer the ECCHO rule set, much as SVPCO does. "Once that's finished, we have a single private-sector rule set so that everybody can play by the same set of rules," he says.

Fred Redeker, president and CEO of NCHA, confirms that his organization is in discussions with ECCHO about using ECCHO rules.

"We are considering how best to use ECCHO rules — have been for some time — at least as part of the answer and as a way of satisfying the needs of our members who are involved with ECCHO," Redeker says. "Another part may be the Fed rules in some form since all of our members will be using the Fed rules. What else may be needed in terms of supplementing that, I can't really tell you.

"As a national trade association representing some 230 institutions, we have to make sure that whatever we're doing with rules satisfies all of our members' needs," says Redeker. "Obviously, it's not going to be a cluttered landscape with rules for image because there aren't that many sets."

Another image-exchange hurdle involves processing modes. SVPCO, the Fed and the nation's biggest bank check processors clear checks in batch mode, bundling checks according to endpoint, dispatching cash letters periodically throughout the day and settling at the end of the day. As their internal processes are built for batch, they plan to exchange images that way, too.

Endpoint's primary processing mode is transactional, an image at a time, sent when available. Settlement is done at the end of the day. The model enables banks to avoid the cost of the big communications pipe needed to send batches of large image files, while a lot of the bandwidth is underused during most of the day.

But Craig says Endpoint is set up to accommodate the three major exchange models — batch, transactional and shared archive. In shared-archive, championed by Charlotte-based Viewpointe Archive Services, images are shipped to a central archive instead of bank to bank. Exchange partners would share access to a single image in an archive.

SVPCo's Goold says Endpoint's translation capability is important. "As long as Endpoint can interface its image-by-image basis with another network or endpoint that requires batch mode, they should be fine," she says. "Otherwise, they'd never really be able to exchange with the high-volume providers."

— Clint Swift