Banks Are Getting Squeezed in Lucrative Check-Handling Business
Electronic data transmitters can process corporate remittances faster and cheaper
MAJOR banks are being sideswiped on the emerging ``information superhighway'' as corporations increasingly spurn bank checks and make payments electronically through data transmission companies.
The banks are steadily losing an estimated $500 million to $1 billion-a-year business to data transmitters, which collect and disseminate remittance information quicker, cheaper, and with greater sophistication, according to industry analysts.
The accelerating trend is imperiling the jobs of corporate bookkeepers, clerks, check handlers, and other workers who sort, record, and haul 15 billion corporate checks every year.
The shift in the remittance medium from ink to electrons has been sped up by the federal government; Washington plans to make its own procurements electronically. Most conspicuously, the Internal Revenue Service, beginning this fall, will require corporations to pay taxes and employee withholding through electronic data transmission.
Many corporations apparently do not need Uncle Sam to show them the savings and efficiency of electronic transfers. The cost of sending a check through a data transmitter is 50 cents to $2 cheaper than through a bank, says Ned Hill, a professor of business at Brigham Young University. He specializes in what is called Electronic Data Interchange (EDI).
Thirteen banks recently began a venture to safeguard their majority share in the handling of corporate remittances.
Acting with the Chicago Clearing House Association, the consortium of banks on April 18 announced an October startup for EDIBANX, a network of banks capable of sending highly detailed remittance information along with the payment.
The 13 banks, which control more than 60 percent of the market in corporate remittances using checks and electronic transfers, ``feel threatened with some of the other ways that electronic payments are being made today,'' says JoAnn Becker, senior vice president at the clearinghouse and business manager of EDIBANX.
The banks' rivals are the data transmitting services under AT&T Corp., British Telecom, General Electric Company, and a joint venture between IBM Corporation and Sears, Roebuck & Company.
The nonbank upstarts are urging corporations to give them control of the remittance data and hire the banks only to shunt money. They are underpricing banks that charge corporations hundreds of millions of dollars to pass along the data that correspond with paper checks.
From the start, some banks have had a key advantage over their rivals because they have a hold on the corporate payment stream. Consequently, they are able to send the payment and its related data together, rather than require corporations to match the money with the information like the nonbank data transmitters.
``We've got the payment, we've got the key part. No matter how our competitors offer EDI services to our corporate customers, banks have the corporate franchise,'' Ms. Becker says.
Still, only 700 United States banks can send the detailed remittance data most corporations require, says Bill Nelson, executive vice president at the National Automated Clearing House in Herndon, Va. The remainder of the country's 11,000 banks can handle only comparatively simple electronic payments.
US banks apparently ignore EDI at their peril, even though only about 1 percent of corporate remittances are handled by EDI and just 10 percent of corporations routinely use electronic funds transfers.
The National Automated Clearing House estimates that within a decade between one-quarter and one-half of corporate payments will be made electronically.
Moreover, the Chicago Clearing House Association estimates that by 1997 the market in electronic remittances by corporations will swell to $3 billion.
Electronic transfers offer a corporation savings. By eliminating checks, corporations need not maintain the legions of employees who handle the paper and accompanying flurry of data. By sending money and information together, they need not devote manpower to matching the dollars.
``There is no reason for a company to have so many people passing data related to accounting and numbers - let their bank do that,'' Becker says.
Moreover, unlike with the unwieldy check system, remittances through EDI offer corporations detailed, up-to-date, and clearly catalogued information on the comings and goings of their money. By clarifying cash flow, EDI enables a corporation to invest money that it otherwise would have to keep in reserve.
Some corporate treasurers will probably criticize EDI for undercutting the potentially lucrative ``float'' strategem. When interest rates were especially high in the early 1980s, corporations retained millions of dollars in interest each year by ensuring that their checks lagged through the banking system. With EDI, money flits through a fiber optic cable.
Still, ``you can be just as lousy a payer in the electronic world as you are in the paper world, it's just that people know what you are doing,'' says Dr. Hill at Brigham Young. ``You can't say, `The check's in the mail.' You can only say, `The photons are stuck in the light fibers.' ''