Vendor of Small-Bank Software Eyes Outsourcing

Even as financial and competitive pressures drive an increasing number of technology companies out of the bank outsourcing business, Peerless Systems Inc. has decided it wants in.

The Richardson, Tex.-based company is best known for its community banking software, but it sees opportunity in service bureau and facilities management services - although such businesses are thoroughly dominated by large providers such as Electronic Data Systems Corp., Fiserv Inc., M&I Data Corp., and Alltel Information Systems Inc.

According to M. Arthur Gillis, a Dallas-based consultant, 14 bank outsourcing providers have 93% of the market share for such services.

Peerless executives said many big outsourcing companies have let their technology fall behind, and that spells opportunity for their firm.

Experts said other factors also work in Peerless' favor.

"There are a considerable number of community banks that are currently going through a process of reassessment of their service provider," said Lawrence A. Willis, executive vice president at First Manhattan Consulting Group in New York.

But others said the company, which has about 330 community bank and credit union software clients, faces an uphill battle in landing clients for core-processing and check-processing outsourcing services.

Peerless will compete "with great difficulty," said Mr. Gillis. "The big firms have their customers locked in" with multiyear contracts.

Added Bill Bradway, a technology analyst with Tower Group in Wellesley, Mass.: "It's a very competitive business from a pricing point of view."

In entering the outsourcing business, Peerless is, in some ways, returning to its roots. The company began as a software unit of Electronic Data Systems, which is the largest provider of technology services to banks.

During a managed buyout that gave Peerless independence in 1989, the company agreed not to participate in the outsourcing business for five years.

The expiration of that agreement has given rise to Peerless Data Services, the company's new outsourcing unit.

The unit's services are based on Peerless21 software, which is designed to provide check-image processing and core-processing services on AS/400 midrange computers from International Business Machines Corp.

In the AS/400 outsourcing market, Peerless faces competition from divisions of Fiserv, Alltel, and Jack Henry & Associates. "All of them have already established outsourcing offers, so Peerless would be the fourth of the four," Mr. Bradway said.

Peerless Data already has signed a handful of contracts, including a three-year check-processing deal with Alliance Bank of Sulphur Springs, Tex.

Experts said Peerless has a good chance to expand its business with two types of banks: start-ups, which have no incumbent service provider, and "service bureau customers that have been on a small regional processor whose technology has not been able to keep up with competition and/or may have some difficulty in modifying their application for the year 2000," Mr. Bradway said.

Though the first outsourcing contract is with a community bank in Peerless' home state, the company aims to take its services to the national level.

"We're just starting in Texas, but we intend to move beyond that," said Gary J. Austin, president of Peerless Data Services.

Serving banks with assets of between $50 million and $1 billion in assets, the company has seen its market segment grow slightly in the past few years, said Paige P. Chadwick, vice president of marketing at Peerless.

"You're not seeing a lot of consolidation in that asset-size range as you do in the much smaller and much larger-size banks," she added.

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