Banks could soon be paying more to have vendors handle such basic data chores as clearing checks and processing loan payments.
To remain competitive with deep-pocketed technology giants such as Electronic Data Systems Inc. and Fiserv Inc., experts say, rival vendors will have to make large expenditures to upgrade their systems.
Some players will quit the business rather than pony up, these experts say, and the companies that remain will become increasingly willing to pass along costs to their bank clients.
Already, the ranks of bank service bureaus are shrinking, according to a study by Computer Based Solutions Inc., New Orleans. Leading service bureaus - those with at least 100 bank clients - numbered 24 in 1987. By 1995, mergers and exits had cut the field to 14.
With the business becoming concentrated in fewer hands, Carl Faulkner, managing director of technology services at M One Inc., Phoenix, is predicting a 10% to 20% increase in banks' outsourcing expenditures within four years.
"We're seeing some real discounting now because they're jockeying for market share," Mr. Faulkner said. "But this wonderful party will be over in a couple of years."
Community banks stand to be the hardest-hit. According to Computer Based Solutions, 4,701 of the 5,074 commercial banks and thrifts that outsource their data processing to service bureaus have assets of $500 million or less.
"It's a horrible threat," said Joseph Williams, chief executive at $50 million-asset Marine National Bank, Jacksonville, Fla. "When you get down to fewer servicers, they control the prices, and community bankers have fewer choices."
The study showed that EDS and Fiserv dominate the service bureau business, with market share of 27% and 18%, respectively. They were followed by M&I Data Services, a unit of Marshall and Ilsley Corp., with a 7% share; Alltel, 5%; and Bisys, 3%.
Fiserv boosted its share from 10% in 1994, thanks largely to acquisitions of two top service bureaus: FFMC-Basis and Mellon Information Services.
To be sure, banks stand to get some extra services for their money. "The remaining companies in this industry will raise their prices," Mr. Faulkner said, "but they will add client-server technology or data warehousing services that give them value."
Some bankers say that although the choices are shrinking it's still possible to shop around.
"Rising costs are always a concern, but we feel like there's still enough competition to keep us in there," said Waymon L. Hickman, president and chief executive of $450 million-asset First Farmers and Merchants National Bank, Columbia, Tenn.
One observer said rising costs are an inevitable result of the pressures that banks themselves put on service bureaus.
"You have to keep up with the technology, and you have to offer the level of service that the banks are demanding," said Paul S. Shain, a stock analyst at Robert W. Baird & Co. in Milwaukee. "If you're not in the top tier" of outsourcing firms, he said, "it's hard to stay competitive."
Indeed, banks, which once aggressively peddled outsourcing services to other banks, have been exiting the field in droves. Bank companies that bailed out of this business include Norwest Corp., Citicorp, Mellon Bank Corp., and BayBanks Inc.
In 1995, 43% of the major outsourcing firms were affiliated with a bank, compared with 58% in 1987. Only M&I Data Services ranks among the five largest.
"Banks discovered that they weren't service companies," said M. Arthur Gillis, who runs Computer Based Solutions and wrote the study. "They couldn't take the heat, and they were losing money."