With word that Bank of America Corp. may be close to scaling back its bill-payment relationship with CheckFree Corp., many in the industry are wondering if the Charlotte company is adopting a technology stance similar to that of JPMorgan Chase & Co., where do-it-yourself is usually the preferred choice.
CheckFree announced Wednesday that it has had "discussions with a large customer," which it did not name, "regarding the possibility of pursuing an in-house approach for portions of our services."
The Atlanta vendor made the announcement after a research note from David M. Scharf, an analyst with JMP Securities, who wrote that B of A plans to "transition the payment warehouse portion of its online bill-pay processing in-house." CheckFree currently handles that work.
If any company fits the definition of "a large customer" for CheckFree, it is B of A. Mr. Scharf estimated in his note that it accounted for $170 million, or 20%, of CheckFree's revenue in its last fiscal year, which ended June 30. "We estimate that about $150 million was for bill-pay services."
A spokeswoman for B of A would not discuss her company's plans. (It once owned more than 10% of CheckFree, but a spokeswoman for the vendor said Thursday that, as of 2005, B of A's stake had dropped below 5%, and that CheckFree has stopped keeping track of it; the B of A spokeswoman said her company still has a position in the vendor.)
B of A began processing some of its own credit card transactions in October, and analysts said that the company could take other technology functions in-house.
Jennifer Roth, a senior analyst with the global payments practice at TowerGroup Inc., a Needham, Mass., independent research firm owned by MasterCard Inc., agreed that B of A is "very likely" to move some of its bill-payment work in-house.
The payment warehouse contains data about billers and payers, including where they have their bank accounts; moving it in-house would let B of A spot "on-us" payments, those in which both parties have B of A accounts. Ms. Roth said processing these transactions internally would be faster and less expensive than what typically happens now: routing them through CheckFree and settling them through the automated clearing house network.
Taking over the warehouse would be "all about control" of the data, she said.
Mr. Scharf wrote that B of A's extensive reach — its retail bank is the largest in the United States — means that it has "thousands of business banking customers that are being paid by B of A depositors."
If B of A operated its own warehouse, it could be connected to other payments systems, such as the ACH network, check imaging systems, and lockbox operations, he wrote, and having multiple connections could ensure that the company is using the least expensive payment mechanism available, he wrote.
"CheckFree currently does not have a way to flag when a B of A payer is making a payment to a B of A payee, and the bank is probably not achieving least-cost routing for all of these transactions."
Mr. Scharf wrote that he has spoken with vendors, including CheckFree rivals, that say B of A is talking to them about taking more of its processing in-house. One vendor told him that B of A has hired people with experience in bill payment warehouses, and outside consultants confirmed that assertion, he wrote.
By taking a more active role in its technology operations, B of A would be taking the same path as JPMorgan Chase. The New York company has been very vocal about the benefits of handling work in-house, a strategy long advocated by James Dimon, its chief executive.
In 2004, shortly after Mr. Dimon joined the company as its president and chief operating officer (through the acquisition of Bank One Corp., where he had been the CEO), JPMorgan Chase cancelled a $5 billion, seven-year IT outsourcing agreement with International Business Machines Corp.
Citigroup Inc. also handles much of its own technology work. In 1997 the New York company developed its own online banking Web site, and in 1984 it introduced an early, dial-up electronic banking system that included bill payment.
Before B of A started processing its own consumer credit card transactions, the task that had been handled for years by Total System Services Inc., a Columbus, Ga., payment processor majority-owned by Synovus Financial Corp.
Ms. Roth said that the shift was largely a result of B of A's January 2006 acquisition of MBNA Corp., a card issuer that had its own processing capabilities.
Gwenn Bezard, a research director at Aite Group LLC of Boston, speculated that B of A might consider taking over more of its technology work, including other "e-commerce" functions.
He also said that B of A could revisit both its card processing and bill-payment strategies; TSYS still processes its corporate credit card portfolio, and there are other bill-payment functions beyond the warehouse.
"Banks of that size review their options every year," he said. "It's not like B of A has never thought about it."
