First Data Corp., bidding to become a major force in payment systems, said Tuesday it is launching a check processing service for corporations.
Teaming up with KeyCorp, First Data will accept check payments on behalf of corporate clients in the Rocky Mountain region. It plans to eventually expand the service by joining forces with other banks around the country.
The service is the latest in a series of forays into payment systems by Hackensack, N.J.-based First Data. The company, a leader in credit card processing, joined with Microsoft Corp. last year to form MSFDC, which processes electronic bill presentment transactions. First Data also has been forming joint ventures with merchant-acquiring banks in the card field.
The strategy brings First Data increasingly into businesses that once were strictly the province of commercial banks.
Some experts are warning banks against alliances that welcome nonbank players into the payment system. But others say there are clear benefits.
"All the old rules have fallen by the wayside and all bets are off," said Edward Furash, president of Furash & Co. "You have to find a way to get the products you want while limiting the amount of investments and risk exposures you are taking."
As their first client, First Data and KeyCorp have signed Tele- Communications Inc., the Englewood, Colo.-based cable giant. The deal is expected to give the new business annual volume of about 100 million items.
No terms were disclosed-for either the alliance or the TCI contract.
Cleveland-based KeyCorp is also a participant in MSFDC.
"This complements MSFDC; we would become a full-service payments processor," said Jack Calabrese, senior vice president of operations, Integrated Payments Systems.
"A biller could come to us not only for full electronic presentment, but actual remittance processing and manual check handling," he said.
From KeyCorp's perspective, the deal will let it offer its customers low-margin lockbox services in a new geographical area, and pursue new depository relationships with corporations. In exchange, the bank will sponsor First Data's access to the Federal Reserve-mandated payment systems for clearing checks.
Coleen Merritt, senior vice president at KeyCorp, said the company's the Rocky Mountain region was not able to offer such services before.
"We have several new clients there and now we will be able to offer value-added services," she said.
KeyCorp had mostly restricted its lockbox business to its home base of Cleveland.
The idea of providing the services through an alliance is not altogether novel, according to Ernst & Young's 1997 cash management survey. Since lockbox services are heavily driven by scale economies, most banks have opted to drop out of the retail remittance and payment processing services in order to focus more on business-to-business payments, where the profit margins are somewhat larger.
"Most banks are doing what KeyCorp is doing," said Lawrence Forman, cash management analyst at Ernst & Young. "Banks do this because they do not have imaging, and they need imaging."
But Jim Wells, director of strategic alliances at Electronic Funds & Data, Southampton, N.Y., cautioned of the threat to the banking industry's payment systems by nonbank participants such as Microsoft and First Data.
Although he professed respect for First Data's services as a competitor, he said, "I am disillusioned when banks outsource something as basic as check processing.
"Checks are the defining commodity of commercial banking, and to outsource that to a nonbank is dangerous," he said. "To lose control over the check creation process would seem to me that a bank is giving up its defining product."
Mr. Furash, for his part, said he expected to see more such alliances with former "enemies" going forward, for few institutions can comfortably afford the kinds of investments in technology required to serve large corporations.
