A pair of Canadian joint ventures have U.S. bankers looking north for insight into whether fierce banking competitors can cooperate effectively, experts said.
The ventures, involving Canada's five largest financial institutions, change abruptly the face of bank back office processing in that country.
Last week Canadian Imperial Bank of Commerce and Scotiabank announced a broad alliance that, in effect, merges their back offices. The two Toronto-based banks will set up a company to manage their item processing, telecommunications networks, and data centers.
Earlier in the month, a consortium formed by Royal Bank of Canada, Toronto-Dominion Bank, and Bank of Montreal announced a separate deal involving only item processing.
If successful, the alliances, which are aimed at building scale and reducing processing costs, could inspire changes in the United States, industry experts said.
"I think the more proactive banks are thinking very seriously about forming processing alliances," said Stan Lepeak, program director at Meta, a consulting firm in Stamford, Conn. "It's taken on the form of a religious debate."
Joint ventures make sense "from a scale point of view," added Doug Halvorsen, marketing manager for Payment Solutions, the document processing unit of International Business Machines Corp. that has consulted with banks on alliances. "But the idea has met with some resistance here."
Executives at Canadian Imperial and Scotiabank cited cost pressures and the need to get access to new technologies as reasons for their joining forces.
"The key was to pool our resources so we could control our destiny," said Albert Wahbe, executive vice president of operations at Scotiabank. "We didn't have the resources and the expertise to keep up with the technology on our own."
Their new company will have an annual operating budget of $650 million and will reduce the annual operating costs of the banks involved by 15%, said an executive at $128.8 billion-asset Canadian Imperial.
Executives involved in the venture said other Canadian banks eventually may participate, but they declined to be specific.
"We're creating a best-of-class approach," said Burt Napier, executive vice president of operations and technology at Canadian Imperial. "I believe the other institutions might see value in sharing."
A spokesman for Royal Bank said their consortium would consider expanding its item-processing venture before looking outside for other processing services. "We're not locked into what we have," the spokesman said. "We could be at the same point they are at in the future."
One of the differentiating factors between the two ventures is that Canadian Imperial and Scotiabank already have chosen at least one nonbank processing partner.
Fiserv Inc. of Milwaukee has been tapped to handle check processing for the new venture. The two banks expect to choose others to manage their computer centers and telecommunications networks in the upcoming months.