LAS VEGAS — A new joint venture for processing automated clearing house transactions could disrupt the payments industry, cutting costs for the industry's biggest originators but driving up expenses for smaller financial companies, according to several executives.
Some observers say the startup, Pariter Solutions LLC, will offer healthy competition in the rapidly changing payments space, but others are concerned that its two backers, Wells Fargo & Co. and Bank of America Corp., plan to settle some transactions through the new venture, which would reduce volume for the two existing network operators.
"It could have a huge impact," said Ed McLaughlin, the executive director and editor of RemoteDepositCapture.com, an electronic payments market monitor.
Pariter is expected to handle ACH originations for the two banking companies, but Wells has also said that the venture would be able to clear internally the "on-us" ACH payments shared by the two banks. It would not have to send them over the payments networks operated by the Federal Reserve banks or the Electronic Payment Network unit of The Clearing House Payments Co. LLC.
Wells also hinted said it would consider offering the same service to other financial companies, potentially removing even more volume, and more transaction revenue, from the existing networks.
B of A and Wells Fargo are, respectively, the No. 2 and No. 3 ACH originators, and Mr. McLaughlin estimated that as much as 25% to 30% of their ACH payments are shared. "That volume goes away from EPN and away from the Fed," he said, and adding other users could further reduce volume on the networks.
The plan to create a new ACH processing company generated plenty of buzz this week at the Payments 2008 conference here, with some executives calling it the biggest change in the ACH industry since 2002, when two network operators, Visa Inc. (then called Visa U.S.A.) and Payments Resource One (which merged with the National Clearing House Association last April to create PaymentsNation), quit the business of transporting ACH files, leaving only the Fed and EPN.
George Thomas, the principal of Radix Consulting Inc., agreed that Pariter could significantly change the ACH landscape.
"This has long-term implications for the network if they move forward," he said.
"It would hit volumes on both EPN and the Fed" but would likely be more of a hit for EPN because Wells and B of A both transmit much of their ACH volume through its network, said Mr. Thomas, who retired in January 2007 as an executive vice president at EPN's parent.
Though the shared-clearing approach could save money for participating banks, "it could hurt some institutions," Mr. Thomas said, because the two networks "would have to charge more."
Rossana Salaris, a senior vice president at The Clearing House and the head of EPN, said she was not worried about Pariter's potential impact because any decline in volume would not be significant.
EPN's customers merge periodically, she said. For example, the network lost some volume after JPMorgan Chase & Co. bought Bank One Corp. in 2004, combining the top two originators at that time. But it "wasn't significant," she said. "EPN is still here."
Regardless of their shared volume, Wells and B of A still would have to use the ACH networks to clear transactions with the rest of the industry, and the market is growing at a healthy pace, Ms. Salaris said. "As their volume grows, our volume grows," she said. "I'm looking at it as a win for us."
Steve Ellis, the chairman of Nacha, the electronics payments association, said the concerns were overblown. "It's not about being a utility," he said. "It's a high-fixed-cost, low-variable-cost business. You can push a lot of volume through the system at a very low incremental cost."
He also said that ACH volume continues to expand, from both organic growth in existing formats and new uses for the networks, notably international payments, which are likely to begin burgeoning in 2009. "That's going to be important long-term," he said.
Mr. Ellis, who is also a Wells Fargo executive vice president, said the prospects of "on-we" ACH clearing "had nothing to do with it," and that Pariter's main goals were "all about scale and competing globally."
Elliott C. McEntee, Nacha's chief executive, said that financial companies cleared more than 4 billion transactions on-us in 2007.
"Lots of bankers' banks act as processors," he said. "It makes a lot of sense."
Pariter promises to be a big project. Wells said last week that the processing system, based on its proprietary technology, will be production-ready by the end of 2009. Both banking companies are expected to have their ACH volumes fully converted by the end of 2010.
Several executives said that Pariter will have to deliver on its promises for its two creators before seeking out other users.
"The big challenge is getting the first two customers up and running," Mr. McLaughlin said. "They've got a lot of upgrades and changes they've got to make if they're going to make it a multibank system."
And it will take several years for the venture to prove itself, Mr. McLaughlin said. "EPN has time to decide what they want to do."
Danne Buchanan, an executive vice president at Zions Bancorp. in Salt Lake City and Nacha's vice chairman, said he found the Pariter concept invigorating. "I think innovation anywhere in banking is good," he said.
Mr. Buchanan disagreed that developing a large-scale processor would necessarily harm others. "There are scale businesses, but by and large, banking isn't," he said. If scale were the key to success, big banks would have efficiency ratios better than their smaller rivals, he said, "but they don't."
Susan Feinberg, the research director in the wholesale banking group of TowerGroup, a Needham, Mass., independent research group owned by MasterCard Inc., said many questions about Pariter remain unanswered.
"I think it's a bigger deal than people are saying it is," she said.
"They don't want to broadcast what their long-term strategy is. They've got a lot to bite off in the short term in integrating their two platforms," she said. "Long term, it could have a very significant, disruptive impact."
