Complexity Theory

Stemming from his recently completed two-year stint as the chairman of the electronic payments association NACHA, Leonard Heckwolf, senior vice president at JPMorgan Chase, enjoys a unique perspective on the workings of the financial system. "The movement to electronics has a lot of moving parts to it that have to be well-managed," he says. "All of these trends are more complex than we thought they were."

At New York-based JPMorgan Chase ($771 billion in assets), Heckwolf acts as the bank's ACH and retail lockbox business executive. As such, his main focus for 2005 will be fostering continued growth in its ACH business, managing the transition between paper and electronics for its lockbox customers, and seeking opportunities with its international ACH applications. "We really see a lot of cross-border opportunity around bill payment," says Heckwolf. "Look at companies that offer Web services, like eBay - they're now global players."

Be Careful What You Wish For

The past two years have seen an "incredible uptick" of consumer adoption of electronic banking services, according to Heckwolf. "For years and years it didn't move, and now this is a hot business," he says.

For example, JPMorgan has experienced 20 percent to 25 percent growth in ACH traffic each year for the past five years. "That's a pretty significant shift, and we have to make sure we're aligned to support that," relates Heckwolf.

Since increased ACH traffic implies a decline in check volumes, the banking industry must scale down its collective check processing capacity. But the transition will not happen painlessly for all banks - or even for most of them. "The winners in this game will be the ones who grab the market share on the growing end and can shed their infrastructure on the declining side," says Heckwolf.

A popular alternative to shedding infrastructure has been to find other sources of check volume, so as to "make that takedown more gradual," notes Heckwolf. "The major players are going to try to keep their shops fairly full."

But that creates an interesting market dynamic, Heckwolf observes; during a period of an overall declining volume, the largest players will become increasingly competitive about retaining existing customers. One distinct possibility is a price war. "You can calculate cost at X, but if everyone in the market wants to keep their market [share], it could be X minus something," explains Heckwolf.

At the same time, banks want to migrate their corporate customers to electronic processing. "Two years from now, controlled disbursement needs to be a paper-electronic combination that is seamless to a corporation," Heckwolf says. "You flip a switch, and instead of a paper check going out, it's an electronic disbursement."

By enacting the appropriate rule changes, NACHA can help enable the electronic conversion of corporate checks. But corporations need reassurance that they're not losing anything in the transition, and that's a challenge for banks in 2005. "It's going to be 18 to 24 months before that volume starts to really crank up," predicts Heckwolf.