Outsourced Functions Move In-House

J.P. Morgan Chase & Co. is positioned to join the ranks of major credit card processors that have moved their operations in-house to drive down costs and exercise greater control over customer relationships. The bank, with a portfolio of 87 million credit cards, is one of the largest, and almost the last, of the top 10 U.S. issuers to plot the move.

The bank said on July 7 that it would standardize on the credit-card-processing platform run by TSYS Inc., a subsidiary of Synovus Financial Corp., which provides the service to Bank One, which Chase merged with earlier this month. The deal gives Chase the option of licensing TSYS's TS2 software and bringing it in-house. Jamie Dimon, president and chief operating officer of J.P. Morgan Chase, had set Bank One on a course for in-house processing by 2006 before the merger was revealed, and analysts say the combined entity will adhere to Bank One's strategy on this point. "Bank One is driving the retail side," TowerGroup analyst John Gould says. J.P. Morgan Chase declined to comment.

The deal is emblematic of the consolidation that has taken place in the credit card industry, where the bulk of the business is concentrated among a handful of banks. The major players now have economies of scale that make outsourcing less compelling. Eight of the 10 largest U.S. card issuers already insource all or most functions such as credit card application processing and issuing, transaction authorization, fraud detection and statement rendering. If J.P. Morgan Chase makes its move to insourcing, the majority of U.S. credit card accounts (55 percent) will, for the first time, be processed on in-house systems, Financial Insights analyst Aaron McPherson says.

Citigroup, which relinquishes the top spot in card receivables to J.P. Morgan Chase, has been handling credit card processing in-house for years. Citigroup believes it can run its card operations more cheaply, efficiently and reliably than any third-party processor. "We've designed our systems to be flexible, industrial strength and robust," says Steve Garofalo, director of transaction services at Citigroup.

By running systems in-house, banks retain more control over information that they can use to develop marketing and fraud-detection techniques. Immediate access to such data also makes it easier for banks to empower frontline personnel to make spot decisions, such as extending a payment deadline.

"Control of their destiny is why they're doing it," says Craig Page, managing director of First Data Corp., which lost a huge slice of its card processing business to TSYS when J. P. Morgan Chase chose TSYS. First Data still outsources for some 1,400 banks.

But in-house processing isn't a slam-dunk decision. "It's very situational, depending on things like whether it fits in with your core competencies, systems and infrastructure," Garofalo says. The Royal Bank of Scotland, which bought People's Bank's credit card portfolio in March, uses TSYS's credit card outsourcing services and will convert its acquisition's portfolio to that platform in September. "To keep an in-house platform current would be too costly," says Dennis Jones, head of card operations at Royal Bank.

What likely won't go in-house anytime soon are more complex merchant-processing operations. Bank of America last week said it would acquire National Processing Inc., which will give Bank of America $250 billion in merchant-processing volume, second only to Chase Merchant Services, a venture of J.P. Morgan Chase and First Data. Says First Data's Page, "The merchant business has lots of end points, whereas the issuing business is more streamlined."

This article originally appeared in InformationWeek, July 19, 2004.