Clear Vision

In one form or another, The Clearing House has been in existence since 1853, when it was formed to facilitate the exchange of checks between member banks along the East coast from Boston to Philadelphia. The Clearing House's mission has been augmented since that time, however, and now includes the global electronic clearance and settlement of U.S. dollar payments between member banks and their customers. All told, The Clearing House processes $7.8 billion daily for its 35 participants.

The organization also acts as a meeting place and forum for its 11 owner banks, which include ABN AMRO, Bank of America, Bank One, Deutsche Bank, Citigroup and JP Morgan Chase. As such, The Clearing House has had an active role in the USA PATRIOT Act and other legislation that arose from the attacks of September 11.

The Clearing House has also been active on the business front, recently announcing a merger with the Chicago Clearing House Association, which clears $2.5 billion daily for its seven member banks and 400 affiliates throughout the Midwest.

For the past three years, The Clearing House has been operating under the leader ship of president and CEO Jeff Neubert, a 26-year veteran of the banking industry who has held executive positions with Bank One and Citibank. Neubert took some time recently to talk with BS&T editor-in-chief Paul Doocey about the merger and other issues of importance for The Clearing House participants.

BS&T: How did the deal with the Chicago Clearing House Association come about? What was the rationale behind it?

NEUBERT: There are over 100 check exchanges or clearing houses still operating throughout the United States. They all operate with different rules, different settlement systems and processes. It seems to us there is a need to consolidate those exchanges, just as banks and other institutions have been consolidating. The timing is right for seeking greater economies of scale.

The driving force behind the merger is three-fold: to move to a standard rules set, move to a standard settlement system and, ultimately, to rationalize and consolidate the overall check exchange infrastructure that supports the banking industry.

BS&T: What are these new standards going to be based on?

NEUBERT: There has been an effort under way for the past 15 months driven by the banks to come to an agreement on a standard set of rules and policies. Once they complete the work, and it is virtually completed, then it will be up to the various check exchanges and clearing houses to adopt those rules. The hope here is that since this has been an industry-driven effort, that most if not all the check exchanges will adopt it. We certainly will advocate that.

But this is a good example to the point of rationalizing the system. Each check exchange or clearing house will have to decide if they want to adopt these standard rules. So with 100 of them, you can imagine some will adopt and some won't. If you had one organization overseeing all the check exchanges, that organization's rule set would become the national rule set.

BS&T: How will the merger affect both The Clearing House and the Chicago Clearing House? How will the combined organization be run?

NEUBERT: We are going to merge with the Chicago Clearing House. Ultimately, The Clearing House will be the surviving entity. We will consolidate their various operations into ours. We will be on the look out for best-in-breed systems and solutions and go from there. On a small scale, it's no different than two banks getting together.

BS&T: How will this appear to your customers? Will it be transparent?

NEUBERT: We certainly hope it will be transparent or an improvement, in the case of some of the Chicago Clearing House customers or, for that matter, our customers. Transparency is our first criteria, we certainly don't think it will have any impact in an operational sense. We would also hope that some of the products and services we developed at The Clearing House will be brought to the Chicago Clearing House customers, and likewise that some of their services in Chicago are brought to Clearing House customers.

BS&T: Are you looking to merge with or acquire other clearing houses or check exchanges going forward?

NEUBERT: We are in no active discussions at the moment. But we took a position about a year ago saying we felt that mergers and acquisitions were rational moves for our infrastructure . Our basic proposition is to get a standard rule set.

We also want to develop a standard settlement system. To achieve this goal, we're working with another organization, which I am not at liberty to talk about right now, in moving toward a standard settlement system. This can help in other ways-for example, two large check exchanges or clearing organizations in geographically different locations but on a standard system could back one another up. So in the case of another tragedy like 9/11, we would have a redundant system. Since the two data centers are far apart, it's unlikely they would be impacted by the same event.

BS&T: I believe there's proposed legislation out there now trying to accomplish the same goal.

NEUBERT: Yes, there is a white paper out with guidelines. We have been very actively involved in that working with the Fed and the regulators. It is not yet a regulation, but certainly federal institutions have been involved in developing it with the Fed and are taking it very seriously. There has been a lot of work ongoing since 9/11 to improve the security , resiliency and the redundancy of the critical infrastructure in financial systems.

BS&T: How will technology vendors be involved in this push toward settlement standards? Will you use their systems or develop your own?

NEUBERT: Both. It will depend on the system. In some cases we develop the technology in-house because we want certain systems, like our Clearing House Interbank Payments System (CHIPS) to be proprietary. But in other areas, such as our SVPCo subsidiary for image exchange, we are working with outside vendors. We recently announced a partnership with Sterling Software that will bring a key component to SVPCo.

BS&T: Did Check 21 have an impact on the Chicago Clearing House merger?

NEUBERT: We are very excited about Check 21 and think it is a big step forward. But Check 21 in and of itself had nothing really to do with the Chicago Clearing House merger.

BS&T: Then how is your organization preparing for Check 21?

NEUBERT: Our role is that we are a private sector infrastructure supporting the banking industry. In the case of Check 21, the most relevant entity we have is SVPCo. Within SVPCo, a subsidiary called Electronic Check Services (ECS) has been actively working with our banks to develop an image exchange capability which will allow banks to exchange images with any bank anywhere in the system, whether they have in-house archives or use a third-party archive provider. So we will be the switch, allowing banks to interchange images with one another.

BS&T: How do you fit in the universe with the other image exchanges such as Endpointe and Symcor?

NEUBERT: Well, we believe SVPCo with ECS is the largest provider, the longest standing one as well. We are active in both electronic check as well as image. Endpointe is a new entrant, and is a private sector player not owned or controlled by any banks-it is a commercial entity. So we are a competitor to them. Their focus seems to be smaller- to medium-sized institutions. We are focused on all institutions, although we are owned by the large institutions. SVPCo, with our ACH entity, known as Electronic Payments Network (EPN), does business with over 1,400 financial institutions, from the largest banks to the smallest credit unions.

So we have a diverse universe of users. Our target market is not specific-we will try to service all sizes of financial institutions.

BS&T: Will the check image market eventually shake out to a few dominant players?

NEUBERT: I think what you are going to see here on a smaller scale is what happened to the fiberoptics market. There will be a great rush to seize the opportunity, but more capacity will be built than is needed, and over time there will be a shakeout.

BS&T: A lot of PATRIOT Act stuff is finally coming to fruition. How will you help members adapt to this legislation?

NEUBERT: We are very deeply involved in PATRIOT Act issues. Shortly after 9/11, a lot of work was undertaken by various regulators to develop rules and legislation that ultimately became the PATRIOT Act. The Clearing House was very actively involved in the development of all of that, and submitted a number of papers and opinion letters on it.

With the PATRIOT Act officially out, we have been working with our member banks as well as with regulators, to develop the actual law and rules if you will that become legislation and are ultimately enforced.

BS&T: There's also been a lot of activity recently with Basel II and risk management. Is The Clearing House involved with this?

NEUBERT: Indirectly. We really do not have a lot to do with Basel II. But from time to time we have Committee of Councils meetings. These are the general councils of the owner banks. There have been occasions when they've discussed Basel II and have opined through The Clearing House. We have submitted a letter on the subject within the last year.