Seeking to lower its costs, Chase Manhattan Bank is moving its automated clearing house operation, the industry's largest, from New York City to Tampa, Fla.
The move is expected to be completed in August and to cut Chase's automated clearing house operating expenses by about $1 million a year. The business generated about $10 million in revenue last year, said James J. Hopes, president of Chase Automated Clearing House Inc.
The cost savings will help the unit of the $96 billion-asset Chase Manhattan Corp. to meet aggressive price competition in a business plagued by dwindling profit margins.
Focus on Cutting Costs
"Basically, you need to do anything you can to save money in [this] market," said a consultant with close ties to Chase, who requested anonymity.
Mr. Hopes concurred, saying, "Very few people are making money in the ACH."
Mr. Hopes said that Chase expects to spend a few million dollars this year on the move. But he expects to recoup the expenses over the next couple of years by reducing labor costs and office overhead.
About a third of the bank's 100 ACH operations staff members will relocate to Tampa. Chase expects to move most of the other employees into other departments in the New York area. The Tampa operation will have to hire about 70 new employees.
Chase's cost reductions will help pad the natural cost advantage that comes from being the No. 1 bank originator of ACH transactions. Its volume of 117 million payments last year was more than twice that of its closest rival, Norwest Bank Minnesota. Unit costs fall as volume rises, enabling Chase to make a profit despite tight margins.
Pressure on Profits
Mr. Hopes acknowledged that Chase ACH profits are not meeting corporate expectations.
Chase also has learned a hard lesson about the current level of competition. In 1990 it lost its largest customer to Citibank in 1990, when Chase was not willing to match its rival's very attractive pricing.
That customer was Milico, a unit of Primerica Financial Services, which generated about 20 million insurance-premium debits a year.
Despite losing that business, Mr. Hopes said Chase had a net increase of 11%, or 12 million, clearing house transactions last year. More than 80% of Chase's ACH volume comes from insurance companies, which use Chase ACH services to electronically collect premiums and to make annuity payments.
Mr. Hopes said the relocation to Tampa was related to Chase's decision to move its primary computer and operations center from lower Manhattan to a lower-cost industrial site in Brooklyn.
While planning that move, Chase decided to seek an ACH location outside the New York area, where personnel and real estate expenses would be lower.
In Tampa, Chase's will use a facility that currently houses about 1,400 operations staff members that handle such back-office functions as home mortgage and student loan processing.
"Basically, the ACH is all electronic, so it doesn't matter where we put it," Mr. Hopes said.
Chase will transmit ACH transactions from its Tandem Computers Inc. computer in Tampa back to the ACH processing facilities of the New York Federal Reserve Bank and New York Clearing House Association.
Mr. Hopes added that Chase will use the change in venue as an opportunity to improve the backup capability of its ACH technology.
For example, the bank is installing a new telecommunications system in the Tampa facility that will automatically route data over alternative long-distance networks in the event the bank's primary carrier is knocked out of service.
That will solve a problem suffered last year when an AT&T outage forced Chase to tell its customers to find alternate transmission routes.
Mr. Hopes said Chase's ACH operations manager, Larry Stirling, chose to stay in the New York area, so Len Heckwolf, currently a vice president in charge of controlled disbursements, will replace Mr. Stirling.
ACH marketing employees, including Mr. Hopes in New York, will be unaffected by the move to Tampa.
The move also will not affect the ACH operations of Chase Lincoln First Bank, Chase's Rochester-based affiliate, which will continue to run its own ACH system. The Rochester bank generated about 4 million ACH transactions last year.