This article from CXO Media examines the union of technology and business processes as Wells Fargo implements electronic check clearing — and moves toward its ultimate goal of processing and settling payments throughout the day. The article includes: How the bank partnered with Oracle and Synoran to create its transaction system. The drive toward — and benefits of — intraday, inter-bank settlements. Links to related CXO resources. Q&A with The Tower Group's Susan Feinberg about electronic payments.

As Published In February 2005

Electric Money
By Carol Hildebrand and the staff of CXO Media

Wells Fargo looks to the future with a new net settlement system.

For an industry that in some ways lives on the cutting edge of technology, the amount of paper processing that goes on in banking is surprising. U.S. banks clear between 40 and 50 billion paper checks per year, even in this age of wire transfers and debit and credit card use.

But with the advent of the Check Clearing for the 21st Century Act (Check 21), which took effect on October 28, 2004, the banking industry has taken another step in its ongoing effort to speed the processing and reduce the costs of financial transactions. And for companies such as Wells Fargo & Company, Check 21 is an important step toward its ultimate goal: the ability to process and settle payment transactions throughout the day, and with a system that will eventually be able to work across all of the bank's processing systems.

With that in mind, Wells Fargo, the fifth-largest bank in the United States, has acquired a net settlement system from Synoran—powered by Oracle database technology—that will eventually allow it to aggregate and settle a multitude of transaction types.

Smart Money

"We're looking beyond just checks," says Mitch Christensen, executive vice president of payment strategies at Wells Fargo. "It's an opportunity that gives us the capability of net settlement functionality for multiple payment types."

Snapshot Wells Fargo & Company www.wellsfargo.com Location: San Francisco Customers: more than 23 million Assets: US$422 billion Banks nationwide: approximately 6,000 Products and services: Oracle Database 10g, Oracle Real Application Clusters, Oracle9i Application Server, software and consulting services from Synoran

What Christensen is referring to is the myriad systems that banks depend on to process all types of financial transactions between institutions on a daily basis. There's the automated clearinghouse (ACH) network, which allows banks to clear bulk files of electronic transactions such as payrolls and insurance premiums through an electronic host, be it in-house or third-party. Other functions include automated teller machines, retail point-of-sale systems, wire transfers, automated online bank payments, credit cards, cash, and so on. Many of these products fall under separate business divisions within a bank and are processed by separate systems that are not connected to each other. Banks often don't know what they've taken in and dispersed until they've consolidated the information from separate systems at day's end, making it difficult for a bank to know clearly its positions at an enterprise level.

The potential of iPayment—the ability to provide flexible electronic payment processing and routing—is huge. Wells Fargo plans to have the opportunity to settle its interbank accounts throughout the day, giving it the vital information it needs for making smart business decisions much more quickly.

Taking Control

CXO Resources To learn more about Check 21 and other financial services initiatives, check out these resources, courtesy of CXO Media and IDG. To read these stories, go to www.cxo.com/profit-resources/.. Checkpoint for Check 21 U.S. banks have reached the first mandated milestone on the way to what's arguably the biggest change in the way they process checks since the intro- duction of magnetic ink character recognition almost half a century ago. U.S. Bancorp, VeriSign Team on Banking Security U.S. Bancorp will use a hardware-token-based authentication service from VeriSign to secure access to commercial banking services for its customers and may soon introduce a similar service for consumer banking customers, according to a VeriSign executive. Agents of Change Autonomous agents may one day play a key role in everything from setting market prices to creating more-resilient networks. Financial Firms Compare Notes on Disaster Recovery IT executives at some of the nation's leading financial services companies met in 2004 for the first time to share disaster recovery schemes and discuss future technology-based recovery strategies. And what they found was that they had a lot in common—including headaches. Find Out More For more information about Oracle's solutions, visit oracle.com/industries/financial_services/index.html

"We would know intraday what our balances are, instead of collecting batch transactions and settling once a day," says Christensen. "This application has the potential of doing settlement multiple times a day, or what we refer to as near real time. The attraction is not so much the technology, per se, although it is unique," says Christensen. "It's the business functionality and opportunity."

Wells Fargo executives became interested in the possibilities of net settlement when the company acquired the rights to American Clearinghouse, an ACH operator. Although intrigued by these possibilities, Christensen and his team realized that they needed a new technical engine to drive it into a new era. "American Clearinghouse had an application, but we didn't think it was robust enough," says Christensen. "It's been over the last year that the concept has moved from theory to reality, with an active settlement engine."

Wells Fargo installed Synoran's technology, moved it through testing, and is now ready to implement it. The next step is to move forward into business applications. "Right now we have the capability ready to go," says Christensen. "We're looking for business opportunities to bring this to life."

For example, he sees this as a possible service for other banks that lack their own net settlement capability. "We believe that the ability to do clearing and net settlements for other institutions in a myriad of transaction types—be it wire, check, ACH, debit card, or even cash—is invaluable," says Christensen. "Banks must have some way to route and settle transactions, and unless they've built the connections themselves, they'll need a service for that." It could also be used in a joint venture, by a correspondent-banking business, or to exchange and settle transactions for corporate clients.

Approaching Paperless

According to Bill Randle, Synoran's CEO, when version 2 of his technology comes online, the possibilities expand considerably. "It will give Wells Fargo the ability to provide intraday monitoring of the liquidity of its organization versus others in the network," he says. It should also help with Basel II compliance, because the ability to monitor transactions throughout the day provides an improved picture of capital adequacy and a more detailed picture for enhanced risk management.

"There's a lot that will happen in the next couple of years around this sort of initiative, because the concept of paperless is where the banking world is going," says Randle. "It's more efficient and faster and serves the customer better."

Clearly, the folks at Wells Fargo agree. "It's something that will offer great opportunities," says Christensen. "It's a little ahead of the curve, but we believe that it has great economic potential for us in the future."

Q & A: The Tower Group's Susan Feinberg talks about Electronic Payments. We looked for insight and trends on e-payment strategies from Susan Feinberg, senior analyst of wholesale banking research at The Tower Group, a Needham, Massachusetts-based research and advisory firm for the financial services industry. PROFIT: Tell us about Check 21 legislation. What will be the impact on the electronification of payments? FEINBERG: Check 21 is just a first step, because it doesn't eliminate paper checks. It's about how banks can process them more efficiently. That said, the number of checks written in the U.S. is finally starting to decrease significantly, and there are a couple of reasons why. Consumers are using more debit and credit cards and bill payment services to pay, for one. Another major impact is a relatively new ACH [automated clearinghouse] payment type called ARC [Accounts Receivable Conversion]. It takes advantage of the ACH network, which has traditionally been used for things such as direct deposit. ARC transactions allow banks that process receivables for corporate customers to convert checks to ACH transactions for more-efficient clearing and settlement.This has made a big dent in the volume of checks that must clear on a daily basis. PROFIT: Where does that leave Check 21, then? FEINBERG: With Check 21, somebody will write a check that then might be converted to an image replacement document. [Check 21 legislation allows banks to accept an electronic image of a check in lieu of the physical check.] Banks can send images and settle with each other, based on the image. Initially, in most cases, a bank is going to print out that image, and it will still be processed as a check. But Check 21 has a huge potential impact in terms of banking payment systems, in that it will let banks process transactions more efficiently by eliminating the physical transportation of checks and subsequently reduce or eliminate the float from a customer perspective. This has an impact on consumers and corporations that continue to write checks in terms of managing their balances, because they can no longer count on the banking system's taking several days to clear a check. PROFIT: Will e-payments affect banks at a more holistic level? FEINBERG: One of the most important words right now is convergence. Most banks are still siloed as far as how payments are processed—different functions such as credit cards, debit cards, ACH, and wires are managed separately. They don't talk to each other, and customer information is not consistent. But as we have initiatives such as Check 21 and ARC, things start to blur from a customer perspective—particularly corporate customers. Large companies have invested heavily in large accounting or enterprise resource planning [ERP] systems that can generate automated payment files. These companies want to send that payment file to the bank without having to worry about splitting it between different types of payment in different formats. The ideal situation is for the bank to accept that file in the format the company generated. Banks are starting to offer services such as this where they accept ERP files. PROFIT: What happens next? FEINBERG: The largest banks, the leading banks in corporate cash management, are making significant investments and strides in this area. The next piece is that the banks are building payment hubs, so that when files come in, they have software with business rules and logic that determines the best way to route and clear those payments. That software is going to take into consideration the date the payment needs to be made, the value, the currency, and what kind of remittance information has to go along with the payment—something that very few payment silos can currently handle. It really allows the bank to operate within the parameters defined by the customer rather than vice versa. It then reports back to the customer, giving confirmation that payments were initiated or that transactions were posted against a particular account. Customers don't want to be getting information from four or five different systems that report on the status of their account within that particular silo. They want it in a consistent format to make it easy to feed back into the ERP system. PROFIT: Sounds as though banks are becoming more customer-driven. FEINBERG: Right. It's just like ordering something online, where you have multiple delivery options. Certain types of payments need guaranteed delivery by x time or date, so customers can have agreements with banks that say, "Here's my payment file, and I want these payments handled in this manner and these payments handled in another manner." The idea is for the banks to build a set of business rules that customers can configure. Banks are trying to simplify their internal systems spaghetti, so that for multiple payment systems, there's only one interface from the hub. This hub doesn't replace the different siloed payment systems, but it insulates the customer by putting on a front end so they don't have to see the silos.