LendingTools Sparks Growth with Image Exchange for Small Banks

LendingTools.com, a Wichita-Kansas-based technology company that a year ago began offering regional image exchanges for community banks based on an ASP model, says it is processing items at a rate of 10 million per month, with more growth in store in 2008. As smaller banks leave paper-check exchanges and begin participating in image exchange, LendingTools is adding between two and 10 financial institutions a week to its service, says Eric Goering, the company's president and chief executive. “Growth is ramping up,” he says. LendingTools, whose image-exchange network is called “OnWe” to reflect the involvement of so-called community hosts, or correspondent banks, running exchanges for other financial institutions in their regions, will double the number of such hosts from nine to 18 this year, Goering predicts. The total roster of participating institutions, he says, will likely grow from more than 300 to 800. The growth reflects a movement by smaller banks to adopt image exchange, which allows banks to send and settle electronic images of checks rather than the original paper. Indeed, many of LendingTools' clients are new to check processing, let alone image exchange, Goering says. “Bascially, they're correspondent banks doing this,” he says. “They concentrate on those [geographic] areas where they have a lot of business.” As more community banks participate in end-to-end image exchange, the networks gain value for their sending institutions, since more receiving institutions mean collecting banks don't have to print as many substitute checks, the paper printouts of images authorized under the Check Clearing Act for the 21st Century (Check 21). Substitute checks are necessary for institutions that aren't equipped to receive images, but they drive up the cost of image exchange. Getting to smaller banks without printing substitute checks has been a challenge since Check 21 became law in October 2004, so LendingTools' networks are attracting increasing interest from larger banks. In a move that will add to the company's growth this year, SVPCO's Image Payments Network, part of New York City-based The Clearing House Payments Co. LLC, struck a deal last week to link to the OnWe system. Controlled by many of the nation's largest banks, SVPCO operates the biggest image exchange in the country. It has embarked on a concerted strategy to reach smaller banks, having already linked to the Federal Reserve's network and Endpoint Exchange, a network of mainly smaller institutions owned by Milwaukee-based Metavante Corp. “LendingTools shows the momentum [we have] in that space,” says Susan Long, the senior vice president at The Clearing House who is responsible for the image-exchange network. Goering says the OnWe network has allowed community banks to step in with image-exchange capability where local paper-check exchanges have begun to recede and at a time when the Federal Reserve is hiking prices to collecting banks for handling paper. For 2008, the Fed raised it rates for paper items 12.5%, while dropping them for image items by 3.2%. “Paper exchanges are falling apart, and we're taking in customers,” says Goering. LendingTools' pricing for its network falls into fractions of a penny per item. The community hosts then resell the service at prices they determine. As a result, Goering says, the OnWe network is attracting some of the last holdouts against all-electronic exchange. “It's the ones who say, 'I'll be the last guy to convert,'” he says. For 2008, Goering says LendingTools will concentrate on image quality and on making available to correspondent-banking departments the item data it collects. His thinking is that these data will help the departments buttress their positions within their banks, which will help LendingTools. “So often correspondent banking is the red-headed stepchild in commercial banking,” Goering says. “If we can increase their value they'll buy more services [from us].” But, above all, managing growth will be the company's biggest challenge. “This year is really a year of execution for us,” Goering says.