May 05, 2004

Electronic Payments Network (EPN, New York) settles and clears automated clearinghouse (ACH) transactions for over 1,600 banks, savings institutions and credit unions. That calls for diversity in connectivity approaches. "We're trying to make sure that we provide whatever communication method our banks want to use," says George Thomas, EPN's president.

EPN competes with the Federal Reserve in processing ACH transactions and earns one-quarter of a cent on each transaction. (EPN processed 2.5 billion transactions in 2003.) "We have to do billions of payments to make any money," says Thomas. "Item processing is a commodity, so we have to come up with other value-added services, like centralized OFAC [Office of Foreign Assets Control] screening and [ACH] fraud detection."

While many financial institutions connect to EPN using a private leased line utilizing proprietary security protocols, others take a simple off-the-shelf approach.

For Commerce Bank (Cherry Hill, N.J.; $24 billion in assets) and Union Planters (Memphis; $32 billion in assets) the channel of choice has been File Transfer Protocol (FTP), a common Internet standard. Since these banks already use FTP to exchange files with their own customers, reusing the same technology with EPN saves the banks the expense of new software and dedicated leased lines.

By providing the banks with FTP connectivity, EPN can approach its prospects with a wider array of options. "We're going to find more banks that have this [FTP] capability downstream," says Thomas. "The investment we make for these two [banks] is going to pay off in the long term."

Furthermore, FTP connectivity will enable EPN to simplify its connections with existing customers that use legacy technologies, says Thomas. EPN also offers its Windows-based PCAIMS software as a connectivity option, mostly for smaller institutions managing each individual payment.

But when it comes to bulk payments for big banks, the standard toolset typically includes PEP+ ACH from CheckFree Corp. (Atlanta) for ACH processing; Connect:Direct from Sterling Commerce (Columbus, Ohio) for file transfer; and a SWIFTNet connection for financial messaging.

EPN itself uses Sterling Commerce's software to send files to SWIFT, and it's getting ready to receive files back from banks via SWIFTNet. This should help EPN connect with banks that have existing SWIFTNet investments, says Edward W. Adams, regional director, SWIFT Pan-Americas (New York). "It lowers their cost of getting connected to EPN if they don't have to put separate lines in and separate security structures in place," he says.

Seeing Double

But banks with both EPN connections and SWIFTNet connections will have a choice of which network to use for payments. "Some of the banks may have two private lines," says EPN's Thomas. "They may want to have one as the primary connection to us, and they'll only use SWIFTNet if they need to in a contingency, so they'd only pay [SWIFT] if they needed to use the backup line."

SWIFT envisions a different outcome. "A lot of the cost structure in putting an infrastructure in place is what we call an 'iceberg,'" says Adams. "What you see above the waterline only represents 20 percent of the costs."

The cost of running a leased line between two entities is fairly visible, Adams explains. But below the waterline, there are hidden expenses for disaster recovery procedures, operating procedures and the requisite legal agreements. "It's not for the lines and the routers, it's for all of the supporting costs that go underneath it," he explains.

Rather than run multiple networks, SWIFT advocates making the most of its network, while reaching out to corporate customers in novel ways. "Some of the medium-tier banks have gone to corporations that they had not been able to penetrate in the past, and said, 'Let me be your contingency bank,'" says Adams. If a corporation's primary bank were to experience a failure due to a power outage or some other adverse event, the contingency bank could step up by drawing upon the resiliency and capabilities of SWIFTNet. "Then you're using SWIFT to get into the door," adds Adams.

SWIFTNet can handle more than simply payments-related messages. "We now have other tools you can use - FileAct, InterAct and Browse - to solve business efficiency needs," says Adams.

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