Chase Manhattan Bank's announcement last week that it will outsource its check processing operations to Fiserv Inc. has some industry observers speculating as to whether other big banks will soon follow suit. TRENDLINE
Chase's $480 million, 12-year contract with Fiserv, whereby the Milwaukee-based outsourcing firm will take over management of the bank's four New York check-sorting centers and hire its 700 workers, is being seen by some as a bellwether event in the financial-technology business.
Check processing, once considered a key part of big banks' operational infrastructure and a big source of correspondent fee income, is now increasingly viewed as a commodity business, said Lawrence A. Willis, executive vice president at First Manhattan Consulting Group.
Mr. Willis added that while outsourcing check processing can significantly reduce banks' operating costs, it also gives them easier access to new technologies, such as imaging systems. This technology converts paper checks into digitized pictures that can be more efficiently processed.
The problem with check imaging is the technology is relatively expensive and requires large transaction volumes to make it cost-effective, he said.
"Banks are having a tough time cost-justifying check imaging for proof- of-deposit operations," Mr. Willis said. More banks will consider farming out check processing if outsourcers "are prepared to offer imaging services. Because, with their scale, outsourcers can process at a lower unit cost."
Mr. Willis said he expected other big banks to farm out their check processing in the near future, but he added that other financial institutions might choose to band together in joint ventures, such as Bankers Trust New York Corp. and First Fidelity Bancorp. did in 1993.