Magazine article American Banker

Outsourcing Mergers Seen Spawning Price Hikes

Magazine article American Banker

Outsourcing Mergers Seen Spawning Price Hikes

Article excerpt

Banks could soon be paying more to have vendors handle such basic data chores as clearing checks and processing loan payments.

To remain competitive with deep-pocketed technology giants such as Electronic Data Systems Inc. and Fiserv Inc., experts say, rival vendors will have to make large expenditures to upgrade their systems.

Some players will quit the business rather than pony up, these experts say, and the companies that remain will become increasingly willing to pass along costs to their bank clients.

Already, the ranks of bank service bureaus are shrinking, according to a study by Computer Based Solutions Inc., New Orleans. Leading service bureaus - those with at least 100 bank clients - numbered 24 in 1987. By 1995, mergers and exits had cut the field to 14.

With the business becoming concentrated in fewer hands, Carl Faulkner, managing director of technology services at M One Inc., Phoenix, is predicting a 10% to 20% increase in banks' outsourcing expenditures within four years.

"We're seeing some real discounting now because they're jockeying for market share," Mr. Faulkner said. "But this wonderful party will be over in a couple of years."

Community banks stand to be the hardest-hit. According to Computer Based Solutions, 4,701 of the 5,074 commercial banks and thrifts that outsource their data processing to service bureaus have assets of $500 million or less.

"It's a horrible threat," said Joseph Williams, chief executive at $50 million-asset Marine National Bank, Jacksonville, Fla. "When you get down to fewer servicers, they control the prices, and community bankers have fewer choices."

The study showed that EDS and Fiserv dominate the service bureau business, with market share of 27% and 18%, respectively. They were followed by M&I Data Services, a unit of Marshall and Ilsley Corp. …

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