The Federal Home Loan Bank of Des Moines announced plans to sell its item-processing unit to M&I Data Services Inc., further consolidating the check-processing industry.
George A. Kattermann, chief financial officer of the Home Loan bank, said the cost of keeping pace technologically had grown too high for it to continue in the business.
Terms of the deal were not disclosed, but it should bring M&I Data 155 new bank customers and about $8 million in annual revenue.
The deal is part of a trend in which the largest item processors are gaining share as small players - unable or unwilling to support the low- margin business - are selling off their check units.
To be a successful check processor takes "intense dedication," said John D. Carreker 3d, senior principal at Dallas-based J.D. Carreker & Associates. "It is not something you can do as a side business."
M&I Data, a unit of Milwaukee-based Marshall & Ilsley Corp., said it processes about 2.4 million items per day at 11 processing centers.
The Home Loan bank deal includes four processing sites: in Des Moines; Kansas City, Mo.; Minneapolis; and St. Louis. The combined centers process about 750,000 items per day.
Observers said M&I Data's moves in recent months show it is committed to staying in the check-processing business.
The company last year acquired Mutual Services Inc., an account and item processor, to service New England financial institutions.
Like larger item processors, M&I Data will have "to be able to leverage core competencies and derive scale" to succeed in the thin-margin business, Mr. Carreker said.
This suggests that the company will be making more item-processing acquisitions.
"It certainly seems to be a natural fit for M&I to be, once again, trying to develop greater volumes and greater economies of scale in their processing in the Midwest," said Stanley E. Miltko, director of product sales at Exton, Pa.-based AFS/LSC.
M&I Data is best known as the largest bank-owned data processing company. It ranks among the top five companies providing banks with core processing services.
M&I Data executives plan to use their company's core processing relationships to their advantage in the check-processing business.
"We're expanding our check business where we already have account- processing customers," said Patrick C. Foy, president of M&I Data's outsourcing business group.
Nonetheless, the company faces tough competition in the item-processing business. Its cross-town rival, Fiserv Inc., is the leading check processor in the United States.
For the Home Loan bank, the deal means it can focus on its core business: lending money to member institutions to support housing and economic development programs.
Mr. Kattermann said the bank's item-processing customer should see "virtually no changes" in the service they receive. The current staff would remain in place at the four centers to be acquired by M&I Data.
The Home Loan bank would also continue in its role as settlement agent for its members.
As M&I Data pushes deeper into check processing, most Federal Home Loan banks are fleeing the business, Mr. Kattermann said.
Only the three Federal Home Loan banks in Topeka, Pittsburgh, and Indianapolis still provide item-processing services directly to their member banks.
The Des Moines Home Loan Bank's plan to get out of item processing was fueled in part by the realization that "we were only one piece of the solution that banks are looking for," Mr. Kattermann said.
The federally chartered bank has 760 member institutions in Iowa, Minnesota, Missouri, and North and South Dakota.