In what observers are calling a first for a bank its size, Harris Bankcorp of Chicago has decided to outsource its automated clearing house processing.

Checkfree Corp. of Norcross, Ga., secured a three-year contract to run the back-office ACH systems at Harris Trust and Savings Bank. Harris will continue to manage the client relationships.

Analysts viewed the deal as an important step for both companies and an indication of more to come as the automated clearing house business consolidates. Outsourcing or service bureau arrangements like this are commonplace in credit cards, and could be spreading to some of the larger banks in terms of ACH volume.

Harris, which is owned by Bank of Montreal, said it processes 45 million of the paperless payments annually. An American Banker survey said its 1996 originations-outbound items to other banks-totaled 29 million, more than all but 18 other bank holding companies.

William Nelson, executive vice president of the National Automated Clearing House Association, Herndon, Va., said that two years ago none of the top 100 ACH banks outsourced these operations.

Three or four have now gone the outsourcing route, he said, "and a lot more are considering it-especially if they can outsource the commodity features of ACH processing."

Bill Burnham, senior research analyst at Piper Jaffray Inc., Minneapolis, said Harris is a "big win" for Checkfree and could "signal that there will be more attraction to this business."

Linda Spielman, director of electronic products, North American cash management, at Bank of Montreal/Harris, said it had been looking for alternative processing options since 1996. "We were motivated by year-2000 concerns and were determined to get the right solution," she said.

Harris will be getting access to a year-2000-compliant ACH system, automated file scheduling, extended deadlines for customer file delivery, and automated file confirmation and acknowledgements.

Checkfree already does the processing for Harris' automated bill payment service, and the ACH deal builds on that relationship.

Checkfree, which began as a bill payment company, has been trying to boost its ACH presence since its acquisition of the payment software specialist Servantis Systems Inc. in 1996.

The Harris deal may be the jump-start it was looking for. The Bank of Montreal connection-the bank has agreed to merge with Royal Bank of Canada- could give Checkfree a toehold in the Canadian market, Mr. Burnham pointed out.

Checkfree has been in the ACH business for 20 years, primarily as a software supplier. When it acquired Servantis, it began to offer outsourcing services. One of its first deals was to manage the ACH processing for 200 of Electronic Data Systems Corp.'s community bank clients.

"We began to aggressively look at the remaining market and saw there were a lot of institutions looking for alternatives," said Lynn Busing, executive vice president of business electronic commerce for Checkfree.

"We're now seeing more banks move" toward ACH outsourcing, Mr. Busing said. By the end of this year, he expects Checkfree to sign three to five of the 100 largest ACH originators.

Deluxe Electronic Payment Systems Inc., a Phoenix-based unit of Deluxe Corp., last year also began offering ACH outsourcing services.

Jeanie Morrison, senior sales consultant at the Deluxe group, said it has one top-100 ACH client and two due to go live by the end of the second quarter.

"Deluxe believes banks are ready to revolutionize how they do ACH processing," Ms. Morrison said. "Their core competencies are product and customer relationship management and Deluxe's core competency is technology management, which makes for a good strategic alliance."

Like Checkfree, Deluxe is targeting the top 100 in the ACH market. "Although Checkfree had a head start, we're not intimidated," Ms. Morrison said.

Checkfree's strength is its PEP+ software, a product of the old Servantis that 81 of the 100 largest ACH banks use to process about two- thirds of the direct deposits and other paperless transactions.

ACH outsourcing "could potentially be a big market for Checkfree," said Gary R. Craft, electronic commerce research analyst at BancAmerica Robertson Stephens & Co. "The ACH business is starting to explode, and the options are build versus outsource."

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