The August announcement that Chemical Banking Corp. and Mellon Bank Corp. were forming a joint venture to provide stock transfer and related services attracted attention because the two companies were competitors in a highly concentrated market.
But industry experts say that such alliances between big banks will become increasingly common in transaction processing businesses that require costly technological support.
Bankers and industry experts say that alliances are a way for banks to cut costs and gain economies of scale, goals that have traditionally been achieved through mergers and acquisitions.
In such alliances, partners can share technology investments - such as pricey imaging systems - while reducing labor and occupancy costs.
It's also a way for banks to seek out new business as a third-party provider, which can generate greater fee income and bigger profits.
"We are seeing the beginning of a groundswell of this type of venture," said Lawrence A. Willis, managing vice president with First Manhattan Consulting Group, which has been involved in several such deals, including Chemical-Mellon. "We see this as a very powerful strategic option for any institution that has an established franchise in selected fee-based services."
The alliances are likely to be in areas such as global custody institutional trust, merchant processing, mortgage processing, check processing, and other transaction-oriented businesses, experts say.
While some consultants - among, them Mr. Willis and Robert Tetenbaum, his colleague at First Manhattan - foresee a grounds-well of alliances, they note few have been formed to date.
Some recent examples include the check processing venture between Bankers Trust Co. and First Fidelity Bancorp., and it merchant processing alliance between Wells Fargo & Co. and a major nonbank processor, Card Establishment Services Inc. Both were formed last year.
"Some of these joint ventures are in conjunction with outside technology vendors," said Mr. Willis. It's a way for banks "to maintain their position in these businesses," he said.
Another major alliance was the 1992 formation of Electronic Payment Services Inc., the joint venture involving CoreStates Financial Corp. and three other superregionals that operates the Mac automated teller machine network.
Richard Crone, senior manager at KPMG Peat Marwick in Los Angeles, agrees that there will be an increase in what he calls "virtual consolidations."
But he cautions that there are organizational, technological, and cultural hurdles. "You have to resolve conflicting corporate goals and objectives," he said.
Rocco Maggioto, managing partner with Coopers & Lybrand's financial services industry consulting practice in New York, agreed.
"Institutions have to understand where the decision to merge fits in with overall strategic goals," he said.
D'Arcy LeClair, a Chemical senior vice president who is also chairman of Chemical Mellon Shareholder Services, said that forming the joint venture was more complicated than simply buying up a competitor.
"In some respects it is more difficult. It takes a little longer, it's a little more work to do," he said. "But at the end of the day you probably secure yourself a better world."
Mr. LeClair said both Chemical and Mellon shared the same basic philosophical approach, which made the deal possible.
But each side brought different strengths. "Mellon brought a very strong reputation in data processing," he said. "Chemical brought some creative product technology to bear ... and had a much more sizeable revenue base."
The company, which will begin operating early in 1995, is expected to jump to first place in stock transfer market share. Currently, Chemical ranks second and Mellon ranks fifth.
The new company will operate independently as a 50-50 venture. The president, James Aramanda, reports to a board evenly divided between representatives of both banks.
"When it comes to procurement of vendor services, he will act with independence," said mr. LeClair.
He said the primary goals for the venture were cost cutting and the ability to gain a preeminent position in shareholder services. The bank expects to reap savings of between 20% and 25%, he said.
"In this particular business, we didn't think there was sufficient scale to make a volume play, at low prices" by going it alone, he said.
With the alliance, he said "you have one management structure instead of two. You have one commitment to a singular technology of two."
Michael Gallagher, an executive vice president at First Fidelity, said the bank's 1993 check processing alliance with Bankers Trust has been meeting its cost-saving goals.
He credits the venture's success partly to the banks' previous experience with outsourcing. These outsourcing arrangements reflected a willingness on the banks' part to turn to an outside party they believed could perform tasks more efficiently.
Mr. Tetenbaum said one essential element of success is a willingness to share the benefits of an alliance fairly.
He said the other reasons driving alliances include "continued pressure from enhanced functionality and timeliness of information reporting, combined with a pressure to reduce costs."
Mr Willis noted that these some of these transaction processing businesses have already undergone a great deal of consolidation.
He also noted the industry is also operating with an overcapacity - as much as 40%, he said.
The alliances, he said, offer a "breakout" opportunity that in the securities processing area can cut costs by as much as 40%.
"This allows them to compete more effectively, and potentially maintain their control over certain of these businesses - and not lose them to nonbank processing entities," he said.
