like the automated clearing house. Apart from the traditional data processing services offered by veteran bank processors, outsourcing has taken strides in recent years, most notably in the development of wide-area networks and in PC-based desktop support. Venerable institutions do not hesitate to hand over such major work to a third party, as Bank One Corp. did last month when it awarded two deals to International Business Machines Corp. and AT&T Solutions totaling $1.82 billion. But banks seemingly hold their slim-margin, low revenue ACH business close to the vest. Jeanie Morrison, a senior sales consultant for Deluxe Electronic Payment Systems, a Phoenix-based unit of Deluxe Corp., is on the front lines of the sputtering industry, and can attest to the difficulties in trying to sell the service. Deluxe's two-year-old outsourcing service has only three bank customers. Ms. Morrison said applying tried and true principles of outsourcing "to the ACH arena is new, and it takes a little getting used to." "It will take a few leaders in the industry to take a step forward, and then I think the others will follow." Deluxe's core business remains check printing, but it is spreading its wings in the electronic payments business in anticipation that newer electronic payments services will ultimately eat into the 65 billion checks written each year. The company recently signed $2.7 billion-asset Silicon Valley Bank of Santa Clara, Calif. to its ACH outsourcing service, boosting Deluxe's volume to three million monthly transactions. The ACH, which can be used for home banking payments and corporate-to- corporate payments, grew to 4.5 billion transactions in 1997, according to the National Automated Clearing House Association. The system is used for several applications, including recurring consumer bill payment, home banking, and wholesale business payments. The ACH is used to deliver direct deposits of payroll. Deluxe claims that its service can reduce a bank's ACH processing expenses by as much as 30%. It can also let corporations initiate large dollar funds transfers later in the day, often within minutes of the Federal Reserve's deadline for accepting such payments for clearing and settlement. With nearly every financial institution in the country participating in the ACH system, and since only a handful of banks have the scale advantages to justify in-house processing, observers say it is an operation that may be ripe for outsourcing. But "it has not taken off, in my view, simply because there are other issues that are overriding," said Lawrence A. Willis, executive vice president at First Manhattan Consulting Group, New York. "It is not a significant enough in revenue or costs within an institution to be at the top of the list," he said. Thomas Gregory, a former ACH banker for CoreStates Financial Corp. and now a director of decision support for Automated Financial Systems, an Exton, Pa.-based developer of software and consulting services, largely agreed with Mr. Willis' assessment, noting that bank mergers and year-2000 concerns easily usurp ACH outsourcing decisions. "I do not see this as a real top strategic thing that banks think about these days, given their bigger fish to fry," Mr. Gregory said. However, he said ACH product managers should explore ACH outsourcing anyway, observing, "It is a good project to do from time to time." "Banks should see what is out there, see what banks like First American and others are doing." First American National Bank of Nashville and Bank One served as beta test sites for Deluxe's ACH outsourcing service last year. Silicon Valley Bank is a welcome addition to Deluxe's roster of clients - SouthWest Bank of Houston is another customer - but Bank One formally ended its test in March, deciding not to buy the Deluxe service. Bank One officials said ACH processing would remain inhouse once the merger with First Chicago NBD is complete. "I thought the Deluxe process was pretty strong, it was just that the amount of effort within the bank to transition to it made it somewhat prohibitive," said Leonard J. Heckwolf, vice president at Bank One. "It's not that it wasn't cost-effective: It did not justify the effort," he said. Ms. Morrison maintained that financial benefits await banks if more banks move to ACH outsourcing. Outsourcing to third parties lets banks keep up with newer technologies, she said. Furthermore, a single investment to improve the service would be enjoyed by an entire client base. But third-party vendors will have to work through the pride that bankers have in owning their payments systems, Ms. Morrison said. Announcements that banks have outsourced something like the ACH are used by competitors for their own ends, she said. "Bankers have received negative responses from clients when they announce that they are outsourcing their ACH business," Ms. Morrison said. Consider Harris Bankcorp, a unit of Bank of Montreal, which decided to farm out its ACH software maintenance to Checkfree Corp. earlier this year. Apart from Bank One, Harris is the largest bank to have its name attached to ACH outsourcing. Bank officials stress the announcement was misconstrued. It did not "outsource" its ACH business, for it retains control over the corporate relationships, operations, and ultimate responsibility to the customer. "There were customers that required clarification," said Linda Spielman, director of electronic product. "I think we have worked really hard with our customer base to ensure they feel we are still in the driver's seat," she said. Checkfree's Pep Plus software for processing ACH transactions has been sold to 80% of the largest 100 banks in terms of assets. A handful of the large ACH banks, including Chase Manhattan Corp. and Norwest Corp., have also developed in-house systems. Sean Feeney, president of Checkfree's software division, said Harris is part of an alliance processing program it launched two years ago, as is NationsBank Corp. The program, however, recently underwent slight changes in focus amid customer resistance. "We found that a number of people were kind of opposed to outsourcing that critical an application," he said. It remains to be seen whether the early opposition to ACH outsourcing will remain. Transaction Systems Architects Inc. of Omaha, believes it will, and thus has purposely opted not to develop an outsourcing service. The company develops ACH processing software, called Coach, which was been sold to 13 banks globally, including BankAmerica Corp. Jeffrey Hale, senior vice president of corporate business development, views Checkfree's moves into ACH outsourcing as a natural progression since it has a processing background. By contrast, "we are a software company by culture," Mr. Hale said. "At the end of the day, Checkfree's Pep Plus customer base really doesn't buy much," he said. "It's in maintenance mode" and must find ways to benefit from the 15% annual growth rate in the ACH transactions, he said. However, Mr. Hale firmly believes that banks should think carefully whether to outsource their ACH operations. Although he agreed there may be a market for smaller institutions, the ACH is an important piece of the larger cash management product line. Banks manage their payments systems credit and operational risks using many measures, and would be loath to let transactional information reside outside the institution, he said. What is more, cash management banks want to sell "a complete suite of integrated products," he said. "By outsourcing one of those products, your whole story goes out the window."

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