New Back-Office Exodus?

Mergers Seen Spurring Flight from Biggest Cities

The recent spate of bank mergers has observers predicting a renewed migration of back-office operations away from the nation's largest cities.

Enticed by the promise of dramatic reductions in overhead and operating costs, Citicorp, CoreStates Financial Corp., and Chase Manhattan Corp. in past years have set up processing operations far from home, in Nevada, South Dakota, and Delaware.

The migration from large cities slowed substantially this year. These days, few banks can spare the capital necessary to start up a new operations center.

But the back-office consolidations that follow large bank mergers usually require back-office construction and juggling of personnel. For this reason, many observers said, recent merger activity will give rise to a new wave of interest in moving operations to the remote areas.

"We've seen fewer and fewer of these moves in recent years, but the mergers are creating a mass of banks who are looking to change their strategic plan," said John M. Stein, a senior analyst at Mac Group/Gemini, a banking consulting group based in Cambridge, Mass.

"As the guard changes, a lot of banks will find out they don't need to do it in New York or Boston."

Nevada's Allure

Many consider southern Nevada, which lured Citicorp to build a credit card processing facility in 1985, a likely destination for some of the new moves.

According to Boyd Co. a Princeton, N.J., consulting firm specializing in corporate location analysis, southern Nevada is one of the cheapest areas of the country to establish a back-office presence.

Such a facility in the Las Vegas area would be less costly in almost every expense category than a similar installation in New York, Chicago, Dallas, Los Angeles, or Atlanta.

For example, building and equipping a processing facility with 750 workers would cost cost hundreds of thousands of dollars less near Las Vegas than near the headquarters cities of most big banks. And corporate and state income taxes are non-existent.

In addition, base payroll costs would be at least $1.5 million a year less, and turnover rates among employees are substantially lower than in other urban locations. In total, annual operating costs for the hypothetical back-office facility would average $795,000 to $5.4 million less in Nevada than in 10 of the largest U.S. financial centers.

Boyd cites similar advantages for number of other states, including Nebraska, South Dakota, Delaware, and Kansas.

"The costs are much lower, and we can obviously accommodate enormous growth with little trouble or expense," said Dennis Stein, president and chief executive of the Nevada Development Authority. "So for many banks, including Citibank, the choice is an obvious one."

Sweetening the Pot

Since the banks often contribute heavily to local economies, many states are offering tremendous advantages to the first companies to set up shop. For example, the Citibank facility in The Lakes, Nevada has its own post office on site to accommodate the tremendous volume of mail it generates with its credit card statements.

The Citibank shop opened six years ago with about 500 employees. The facility -- which handles payment processing, statement mailings, and customer service for over 10 million cardholders -- has almost tripled in size to 1,300 employees today.

The Most Likely

According to experts including the Mac Group's Mr. Stein, credit card processing is the most likely bank function to be moved to a remote location.

Student loan operations and mortgage processing are next most likely. These businesses often operate as free-standing concerns within the bank, and will not suffer from decentralization.

Other lines of business with more local concerns, such as check processing and ATM services, are more likely to be placed near the home offices, experts said.

PHOTO : FORERUNNER? Citicorp's card processing facility in southern Nevada. Many consider the area a likely destination for some new moves.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.