Washington Mutual Inc. has selected M&I Data Services as its online bill payment vendor for retail customers, a move that raises speculation that big banks may begin favoring smaller providers over bill processing giant CheckFree Holdings Corp.

Washington Mutual, a Seattle thrift with $189 billion of assets, has been using Integrion Financial Network for Web bill payment but started looking for a new provider when Integrion announced in March that it would fold. Washington Mutual said it chose M&I, of Milwaukee, over Atlanta-based CheckFree because it wanted the option of outsourcing its customer service telephone operation.

"CheckFree would have supported us if we wanted to use it, but it doesn't really have the infrastructure to support Level 1 customer service," which entails taking calls directly from customers, said Lindy Friedlander, chief information officer of Washington Mutual's consumer banking group. "We were looking for a company that would have broad capabilities in this area."

Washington Mutual plans to handle most calls in-house once it starts the bill payment service - scheduled for mid-September - but wants to be able to send calls to M&I when volumes get high.

Lynn Busing, executive vice president at CheckFree, concurred that direct customer service is not the company's "primary offering." He said CheckFree focuses more on Level 2 service, in which problem-solving is done with its clients rather than directly with consumers. Most of its bank clients do their own direct service, he said.

One exception is Bank of America, which acquired 16% of CheckFree last month. Under a 10-year agreement, CheckFree will handle the Charlotte, N.C., banking company's bill payment and presentment, including direct customer service.

"We are offering it with the BofA deal because they basically outsourced their entire operation to us," Mr. Busing said.

Analysts say other banks may follow Washington Mutual's lead in deciding against CheckFree if they think the billing company is too preoccupied with its much bigger Bank of America work: Washington Mutual has 50,000 online bill payment customers and 300,000 online banking customers, compared with Bank of America's 700,000 and 2.1 million.

Paul Jamieson, a consultant with Gomez Advisors Inc. of Lincoln, Mass., said: "CheckFree is probably focusing on Bank of America because it is fostering access to 30 million households. That is 10 times the amount they currently have." Companies such as Washington Mutual want to feel they are a technology company's key client, not second-tier, he said.

Scott A. Smith, an analyst with Lehman Brothers, said, "If you want to be one of the largest customers, then it makes sense to go with M&I" because the bank "will get a good contract rate and a lot of attention."

An M&I spokesman confirmed that Washington Mutual is one of its largest clients. Since buying Travelers Express' electronic bill payment unit in January 1998, M&I has added 900 bill payment clients for a total of 1,500.

"We are gaining market share," said Nancy Langer, senior vice president of M&I's e-Pathway Solutions group.

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