Sovereign Bank is outsourcing more of its commercial loan processing and to a different provider, in response to a $7 billion increase in its portfolio.

The $36 billion-asset bank more than quadrupled its commercial loan holdings, to $9 billion, when it bought 278 branches and $11.8 billion of assets from the merging Fleet Financial Group and BankBoston Corp. in a divestiture ordered by the Department of Justice.

"That was a massive acquisition," said John McCarthy, executive vice president and chief technology officer, "and we decided we wanted to change our business model regarding commercial loans."

Sovereign switched the outsourcing of its commercial loan processing from Fiserv Inc. to Automated Financial Systems Inc. It also decided to add transaction processing to the data processing function it has been outsourcing.

"We needed a company that would work with us to create a business model, as well as be able to handle a lot of existing functions that we were going to need for the New England portfolio," Mr. McCarthy said. By outsourcing all its back-office work, Sovereign will be able to focus on "those aspects of the value-added chain that are appropriate for us," such as "customer-facing functions and risk management, not number crunching and transaction processing," he said.

A main reason behind its selection of Exton, Pa.-based AFS was its Web-based AFSCommerce product, Mr. McCarthy said. "That is attractive to me for simple reasons. Web-based implementation has ease of use and relatively low cost in terms of development," he said.

AFSCommerce also offers customers greater control over their financial situations. Sovereign's customers are to be able to view their accounts online by yearend and to do basic transactions, such as payments, over the Internet by early next year.

M. Arthur Gillis, president of Computer Based Solutions Inc., said Sovereign's decision to outsource the back-office functions of its commercial lending business is a "breakthrough," considering that banks "tend to clutch on to everything related to their core business."

"I think that the banking industry needs to take advantage of others' expertise and loosen the reins on certain things that other companies can do better," he said.

Brian Blair, managing director of the AFSCommerce product, said the number of banks interested in outsourcing their commercial lending is increasing. AFS has contracts with five more financial institutions and is in talks with nine others that are planning to adopt the AFSCommerce outsourcing model.

Web-based functionality and a desire to engage in more complex lending are driving forces behind the interest in AFSCommerce, he said. Many financial institutions seek new niches, such as international markets, and need to be able to continually price their loans against international rates on a real-time basis.

Overall interest in commercial lending also is rising as many smaller banks look for ways to compete more aggressively. Even larger banks have shown more interest in outsourcing, which Mr. Blair attributed to the year-2000 software overhauls.

"Y2K was a real experience for them." he said. "They spent a lot of money to get their systems up to date, and they don't want to go through that again."

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