As an unprecedented wave of mergers reduces the population of U.S. banks, the number of large players in the service bureau business is shrinking as well.

As an unprecedented wave of mergers reduces the population of U.S. banks, the number of large players in the service bureau business is shrinking as well.

According to a report by New Orleans consultant M. Arthur Gillis, only 16 major providers of core processing services remain, down from 24 in 1987.

The drop in the number of major players - defined as those with 100 or more clients - does not signal a shift away from outsourcing services. On the contrary, outsourcing continues to be popular at institutions of all sizes.

Instead, the dwindling number of major providers reflects a concentration of the business in the hands of fewer companies. In short, the big are getting bigger and the small are getting acquired or driven out of business.

"The message is that consolidation eventually is going to rule this business," said Mr. Gillis, whose one-man consulting firm is called Computer Based Solutions Inc. "It's a big-company business, and it looks like it's going to stay that way."

According to Mr. Gillis' report, titled "Automation in Banking 1995," the group of major outsourcers is garnering a larger market share, even as membership in this group wanes.

In 1987, the 24 large outsourcers held 74% of the core processing service bureau business. Last year, 16 of these companies owned a combined 89% share.

Experts said this consolidation is similar to the merger mania among banks, in that acquirers in both instances hope to obtain larger economies of scale and the wherewithal to invest in new technologies.

Also, the banking consolidation is having a direct impact on the outsourcers, as it reduces the number of potential service bureau clients.

"The pool of target customers is shrinking," said William Bradway, a technology analyst at the Tower Group in Wellesley, Mass.

"The mom-and-pops and regional shops are being faced with the erosion of customers, and that puts pressure on their revenue and forces them to rationalize the R&D investments required to stay competitive. Often, this leads to the conclusion that it's time to sell."

As important as the cause is the effect the consolidation is having on banks using outsourcing services.

The concentration of service providers allows larger banks that can give big contracts to negotiate for the best services and contact terms.

Financial institutions with less than $500 million of assets are increasingly forced to accept older core processing products with less flashy features and functions, experts said.

But the news is not all bad for smaller institutions.

The rise of client/server computing, in which groups of personal computers and servers handle processing, has allowed many smaller institutions to get functionality more cheaply than they could on larger host systems.

This is particularly true for institutions that choose to do their own processing.

"Innovation in delivering to small banks is facilitated by the advancement and relatively low cost of client/server alternatives," said Mr. Bradway.

Client/server gives service providers and small banks that do their own processing "the ability to offer much more complete customer-relationship- oriented services," he said.

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