Susan Farnsworth, assistant treasurer at Reebok
International, takes a keen interest in solutions that could link payments to
remittance data. Reebok gets remittance detail separately, 10 days before an ACH
transfer, from one major customer and has to pay its bank big bucks to link the
payment manually to the remittance information. If EPN could eliminate that
bottleneck, she'd care which processor her bank used. But that question won't be
answered until EPN offers real services that can be tested an event not expected
before the first quarter of 2003.

Replacing Bank Account Numbers

Coming sooner (testing in February 2002, full rollout expected in April 2002) is
another EPN initiative designed to please treasury managers. It would replace
bank account numbers in payment-related communication with universal ID numbers
that would deter fraud and make it easier for treasury managers to change bank
accounts.
The EPN number, which would look like an account number and fit in the ACH
standard field for account numbers, would mask the real number but provide a
unique destination for the funds, Thomas says. The numbers would attach to the
payer or payee and would not change when either changed bank accounts or even
banks. It could be used only for the more secure ACH credit transactions, at
least initially.
If it works, such a system could get treasurers' attention. In the past,
Hollingsworth, who also chairs the Association for Financial Professionals'
payments advisory group, paid no attention to where his banks processed ACH
transactions. But he notes that fraud protection is a hot topic among treasury
pros these days; if EPN could provide better fraud protection with its
non-account numbering system, he'd listen to their story.
Today, corporate payers are reluctant to provide
their bank account numbers for ACH debiting because of the danger of fraudulent
debits, Thomas says. In fact, more and more companies are putting debit blocks
on their accounts, he notes, to prevent all ACH debits. Having a universal ID
number in an EPN database could enable treasurers to change bank accounts and
only have to report the information once?EUR?to the EPN data base?EUR?instead of
sending new account information to a long list of ACH payment partners, Heitema
points out.
To be sure, EPN has a daunting challenge ahead: Until 2001, the Fed controlled
85% of the market. And the Fed already seems to be trying to fight back.
We're pushing hard to find operational savings, says Rich Oliver, senior vice
president of the Federal Reserve Bank of Atlanta and head of the Federal Reserve
System's retail payments office.
Still, Elliott McEntee, president and CEO of NACHA: The Electronic Payments
Association, in Herndon, Va., believes that no matter how the Fed's market share
is affected prices on processing will fall dramatically. ?We think it's a very
positive step, says McEntee, an ex-Fed Board of Governors Associate Director.
It stimulates more competition, which should be good for everyone. Prices
already are coming down, and the providers are looking for value-added services
they can offer.
Since last month, EPN has been offering discounts to the nation's largest cash
management banks, which generate most of the 6.9 billion ACH transactions
completed annually. Although slowed by the Sept. 11 terrorist attacks, EPN has
recently regained its aggressive marketing approach.
Cheaper processing is only one incentive EPN is dangling in front of large ACH
originators. EPN is a for-profit enterprise formerly limited to banks in the New
York City area. Now banks like Mellon, PNC, First Union and Wachovia have signed
up with EPN, become equity partners and get seats on the EPN board.
With the addition this year of five large banks?EUR?First Union, BBT, Mellon,
Wachovia and PNC?EUR?which all committed to give their ACH processing to EPN, EPN
will see its market share vault to 18% to 20% from 4% to 5%, Thomas reports.
Transactions should grow to over 1 billion in 2001 from 450 million in 2000, he
estimates.

Value-Added Services

Traditionally, banks, not corporate treasuries, choose their ACH processors
since they pocket most, if not all, of the savings. Still, EPN is also targeting
treasury managers in its campaign against the Fed by pitching innovative
business services.
While cost savings may drive banks into the arms of EPN, the issue for corporate
treasurers is likely to be value-added services. Here also EPN is taking an
aggressive posture and hyping initiatives that could push hot buttons in
corporate treasuries. The failure of the ACH to meet demands for a viable
e-commerce settlement mechanism helped to persuade the Fed to open the
floodgates of competition.
Given the national obsession with productivity and cost-effectiveness, the Fed's
Board of Governors bowed to growing pressure in an October 2000 ruling that
eliminated a pricing advantage long enjoyed by the Fed's ACH processing
operations and leveled the playing field for private processors. And while EPN
is presenting itself as the primary catalyst for change, there are two other
private sector firms in the competition?EUR?Visa and the American Clearing House
in Phoenix?EUR?which have yet to be heard from. Their problem: In the
capital-intensive ACH processing business, economies of scale loom large. EPN
has an edge because historically it has been an instrument of the large New York
banks and now it has been able to parlay aggressive prices, profit-sharing
participation and board seats into agreements with other high-volume banks
around the country.

Squeezing the Little Guy

Small operators will be squeezed, observes Jack Walton, manager of the retail
payments section at the Fed Board of Governors. EPN is definitely the big
gun now. They're competing very aggressively. In banking circles this
power shift is not quite as dramatic as the demise of Glass-Steagall, but
clearly it has potentially larger ramifications. Pure ACH processing is a
commodity service, but as EPN bids for the allegiance of treasurers and as the
Fed and perhaps other private sector processors counter with their own
value-added service offerings, momentum will build to make the ACH an efficient
settlement option for B2B e-commerce. And that could bring major cost savings to
corporations.

Traditionally, the venerable ACH has been considered an indispensable tool for
depositing paychecks and Social Security payments and for concentrating
corporate funds. But treasury staffs have long regarded ACH processing as an
arcane and irrelevant matter of inter-bank operations. They buy ACH services
from their cash management banks and seldom know or care how the bank handles
the technical business of clearing and settling the transactions with other
banks?EUR?as long as it works, which it almost always does.
A few observers see a downside to the raging competition. To the extent that EPN
can skim off the largest banks with the largest volumes and leave the Fed as the
processor of last resort for the smaller banks, a two-tiered market could
evolve, with the large banks enjoying the lowest prices, says Dewite North,
payment systems representative for the Independent Community Bankers Association
in Washington. Higher prices for smaller banks might cause some of them to drop
ACH services, undermining the ubiquity of the ACH, which has been one of its
biggest attractions, he says. And that might be a price that corporate treasury
staffs would hate to pay, especially if it undermines direct deposit of payroll.