First Premier Bank of Sioux Falls, S.D., a $554 million-asset institution that is nevertheless No. 42 in automated clearing house transactions, will "insource" from CheckFree Corp. for support of the CheckFree ACH software it uses.
CheckFree employees on First Premier's premises will run the Pep Plus software for the bank and handle maintenance and software upgrades. Bank personnel have been doing those jobs.
Financial terms of the three-year contract were not disclosed.
Such "insourcing" arrangements are slowly emerging as an economical way for banks to operate their slim-margin, low-revenue automated clearing house businesses.
First Premier said it chose the mainframe-based Pep Plus system to help it prepare for an expected boom in ACH volumes. The bank focuses on such transactions and expects to double its originations in two years, to more than two million a month.
Ron DeWit, vice president of contract services at First Premier, said it chose to insource so it could focus on its core business of selling and providing banking service to its customers and not have to worry about finding employees to run the system in-house.
"CheckFree has vast knowledge in technical aspects and programming," Mr. DeWit said. "Outsourcing the support side of it really made sense."
Eight of the top 50 ACH originating banks, and six of the top 20, are participating in CheckFree's two-year-old insourcing program, said Denny Oswalt, senior vice president of CheckFree's automated clearing house business unit.
Bank merger activity, growth in ACH transaction volume, and newer applications like Internet banking and associated electronic bill payments, are spurring the interest, he said.
"You put all of that together, and our customers are starting to ask us to provide more help in their space to get these things done quicker," Mr. Oswalt said.
Bank of America Corp., Citigroup Inc., Amsouth, FleetBoston Financial Corp., Wachovia Corp., and Harris Bankcorp also use CheckFree's insourcing service. About 80% of the largest 100 bank companies in terms of assets have licensed the software for use in-house.
Insourcing provides CheckFree with another source of recurring revenues from a product that is 14 years old.
"Our market is primarily banks, and that market is not growing, it is probably shrinking," Mr. Oswalt said. "We have to find ways to keep this part of the business growing, so we have to do more things for current customers."
Though a handful of the large ACH bank companies, including Chase Manhattan Corp. and Norwest Corp., have developed their own in-house automated clearing house processing systems, CheckFree dominates the ACH processing software market. Competing providers include Deluxe Corp. and Transaction Systems Architects Inc.
James Marks, an analyst at Credit Suisse First Boston, congratulated CheckFree on winning a new contract but he said he doubts it points to a trend.
Similarly, Transaction Systems of Omaha has said it believes there is no great demand for third-party automated clearing house services. It has not developed an insourcing service like CheckFree's.
