First Data Corp. gave the outsourcing concept another shot in the arm this week as it landed what is likely to be the biggest processing contract in the credit card business.

First Data said it signed a letter of intent to handle the credit card operations of Chase Manhattan Corp. and Chemical Banking Corp. after their merger is completed.

The banks' decision is the latest indication that outsourcing is no longer just for smaller institutions that lack economies of scale. General data processors like Alltel Information Services and Electronic Data Systems Corp. have their sights on big accounts, and the same trends are at work in credit cards.

While industry observers were not surprised at the new Chase's choice of First Data, which is the leader among card-processing specialists, there had been a possibility that the New York banks would prefer to do their own processing.

The contract would make the merged institution by far First Data's biggest customer - and the biggest bank card issuer to rely on an outsourcing company.

With $21 billion in consolidated card receivables, the post-merger Chase would rank third among bank card issuers, behind Citicorp and MBNA Corp., which continue to rely on in-house operations.

Chemical, the larger of the merging banks but slightly smaller in credit card outstandings, had a seven-year card processing relationship with First Data that gave the Hackensack, N.J., company an inside track. Chemical maintains a processing center in Hicksville, N.Y., and recently said it would keep that facility after the merger.

Chase has processed cards in-house.

By scoring this coup among the card elite, First Data is consolidating its industry leadership even amid stronger competition from the likes of Total System Services Inc. and Electronic Data Systems.

"First Data is getting so large that everyone needs to watch them," said Michael Auriemma, president of Auriemma Consulting Group, Westbury, N.Y.

Together, the merging New York banks will represent some 10% of the more than 100 million credit card accounts that First Data has under contract.

Richard K. Weingarten, an analyst with Montgomery Securities, said the First Data-Chase deal rivals Total System's contract with AT&T Universal Card Services.

Columbus, Ga.-based Total System, a subsidiary of Synovus Financial Corp., is second to First Data in card processing, at just over half the latter's number of accounts, and AT&T is No. 5 among bank card issuers, at 16 million accounts.

"The industry probably would have breathed a sigh of relief if Chase and Chemical decided to keep their processing in-house," said a source who asked to remain anonymous, "because that is probably $30 billion in transactions First Data wouldn't have had access to."

First Data's revenues from card processing come from the number of accounts processed and the number of times the cards are used. The company also owns the biggest provider of card support services to retail merchants, giving it access to so many transactions - and data about those transactions - that some critics have complained that MasterCard and Visa could be cut out of the loop.

Despite First Data's protestations that it has no intention to compete with the two card associations or their bank owners, relations between it and Visa are cool at best. Sources say MasterCard is more cooperative with First Data, though wary of any threat to its rule-setting and standards roles.

Industry observers said the Chase agreement will renew speculation about what First Data could do with its market power and increasingly valuable data bases.

David Robertson, president of The Nilson Report, an Oxnard, Calif.-based newsletter, said First Data's further growth could alienate some smaller customers who might feel that their voices will not be heard.

This latest news, he said, "strengthens the perception that First Data might be too big to handle the small guy, though there is no evidence that smaller accounts are being slighted."

First Data maintains its smaller customers have the benefit of receiving the same services as their larger peers - a standard argument in favor of outsourcing.

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