Through a joint venture that serves card-accepting merchants, Wells Fargo & Co. and Card Establishment Services Inc. are the latest in the bank card business to embrace the idea of the strategic alliance.

Wells Fargo, the 12th-largest bank credit card issuer and the 10th-largest processor of merchant accounts, had been seeking a processing partner on the merchant side of its business for more than a year.

The joint venture is a shot in the arm for CES, the third-largest merchant processor in the nation, handling 125,000 merchant accounts. CES is the former merchant processing division of Citicorp, which sold it last year to the investment firm Welsh. Carson, Anderson & Stowe.

Economies of Scale

CES, based in Melville, N.Y., has sufficient volume to benefit from the scale economies needed to prosper in the thin-margin transaction-processing arena. If San Francisco-based Wells Fargo were to stay independent, experts say, it would have had to make significant technology investments at a time when it also faces unusual expenses related to the real estate slump in California.

"It's no longer a situation where a financial institution can go it alone," said David Robertson, president of The Nilson Report, an industry newsletter based in Oxnard, Calif.

Mr. Robertson said another example of the joint-venturing trend is Electronic Payment Services Inc., the retail transaction-processing company formed last year by CoreStates Financial Corp., Banc One Corp., PNC Bank Corp., and Society Corp. Several other bank groups and regional automated teller machine networks are also talking about mergers.

Outsourcing Trend

Citicorp took a popular escape route from the increasingly tough merchant credit card business by divesting CES in June 1992 for $175 million and applying the proceeds toward rebuilding its capital.

Mr. Robertson said the CES deal amounts to confirmation of the trend toward outsourcing of the credit card merchant business to nonbank parties. Other major processors of store transactions include Nabanco, a unit of First Financial Management Corp. of Atlanta; First Data Resources Inc. of Omaha, Neb.; and National City Processing Co., a subsidiary of National City Corp., the Cleveland-based banking company.

Debra Rossi, senior vice president and manager of Wells Fargo's merchant card unit in Walnut Creek, Calif., said the bank crafted a novel equity-sharing arrangement that will enable it to maintain relationships with 26,000 valued merchant customers in its home market.

Split Duties

Under the agreement, Wells Fargo will handle the marketing and sales, credit analysis, and customer service, and CES will provide the technology and operations.

While the California bank serves some large retailers, its primary focus is on smaller businesses in the state. Transaction volume runs about $5 billion annually.

Ms. Rossi said the joint venture would provide retailers with a better defense against chargebacks - the lengthy and costly disputes that have to be resolved when the customer questions a credit card payment. Card authorizations are also expected to be speeded up, and the cost of check authorizations will fall, Ms. Rossi said.

Big Boost in Volume

The currently separate credit and debit statements that merchants receive will be combined into one, she added.

For CES, the deal is expected to provide a 12% to 15% boost to its already formidable $38 billion of annual transaction volume, said Thomas McInerney. a general partner in Welsh, Carson, Anderson & Stowe.

The deal is also important, he said, in that it links CES to one of the most experienced players in the growing debit card market. Wells was one of the founding banks of Interlink, the successful California point of sale program now owned by Visa and being marketed nationally.

CES signed a letter of intent with Wells in late August, and details of their final contract are being worked out between Ms. Rossi and CES president and chairman John Elliott.

The negotiators have resolved key, business issues and the responsibilities have been clearly defined, according to Mr. McInerney. All that remains to be ironed out is a specific timetable for the conversion, he said.

Wells Fargo expects to make the changeover "totally transparent to customers," Ms. Rossi said. "We are planning a very careful phase-in of this joint venture, beginning after the holiday season. There should be no disruption of service to customers."

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