In one of the biggest of all bank outsourcing deals, Chase Manhattan Bank announced it will turn over management of its massive check processing operation to Fiserv Inc.
The contract is worth at least $480 million over 12 years, Fiserv officials said.
That eclipses a 1992 technology outsourcing agreement between a unit of International Business Machines Corp. and Continental Bank Corp., at the time one of the largest financial institutions to turn over management of its core accounting systems.
Chase also represents the largest single financial processing services deal ever for Milwaukee-based Fiserv, which until now has mainly focused on outsourcing for banks under $5 billion in assets.
"It makes a statement that we are strong in the item processing world" and can handle the back-office work of the largest banks, said Leslie M. Muma, Fiserv's president and chief operating officer.
Starting March 1, Fiserv will take control of four Chase check-clearing facilities in New York, employing over 700 people and processing nearly 700 million items per year. Fiserv already processes checks for Chase Manhattan Corp.'s Connecticut bank subsidiary.
Chase officials said they expect to reap significant cost savings through the arrangement with Fiserv, but they added that greater efficiency was not the only factor in their decision.
They said as part of the deal, Fiserv will install a multimillion-dollar imaging system from Unisys Corp. to streamline the processing of deposited checks.
"The critical factor was how could we accelerate new products to market, like those using imaging technology," said Charles H.S. Mallis, global marketing executive for Infoserv, Chase's technology services unit. "And our management was convinced Fiserv is very much focused on the issue of service quality."
Mr. Mallis declined to identify other outsourcing firms that bid on the item processing contract, but sources said they included Electronic Data Systems Corp. and Integrated Systems Solutions Corp., the outsourcing subsidiary of IBM.
With the agreement, Chase becomes the largest financial institution in the United States to outsource the check processing function, an activity that was once considered at the very core of the services banks provide to their customers.
But today, "check processing is increasingly seen by bankers as a commodity service," said Lawrence A. Willis, executive vice president of First Manhattan Consulting Group in New York.
At the same time, banks are faced with making large capital investments in order to stay competitive with new technology such as check imaging systems, Mr. Willis said.
As a byproduct of the Fiserv contract, Chase will become the second- largest U.S. bank to utilize an imaging system for the "proof-of-deposit" function, whereby paper checks are scanned and converted into digitized images so they can be more efficiently processed. BankAmerica Corp., the country's biggest check processor, is installing a similar imaging system from IBM.
Fiserv also will install software to produce so-called image statements for Chase customers. Image statements have laser-printed mini-copies of canceled checks instead of the actual paper items, lowering a bank's postage and sorting costs.
Chase and Fiserv officials stressed that no layoffs will occur. "They felt our employment practices matched theirs and we will give all their (check operations) people a job," Mr. Muma said.
Mr. Mallis also said the contract with Fiserv is not a typical outsourcing deal, as Chase will maintain strict controls over service quality and product development. "We still control the relationship with our customers," he said.
"This deal gives Chase the ability to dig in and make their investment (in imaging) pay off," said M. Arthur Gillis, a bank technology consultant based in New Orleans. "I don't think you're going to see big banks like Chase outsource everything, but instead they'll cut out pieces of the pie that make the best business case."
Mr. Willis said he expects more large financial institutions will look at outsourcing check operations in the near future.
