Debating Outsourcing? Don’t Ignore the Middle Ground

Jodi Garvin November 10th, 2017
Treasury Management

Four overlooked options in the great outsourcing debate.

It seems like there isn’t much room for banks to debate outsourcing. Plummeting check volumes continue to hike the unit costs on remaining paper-based transactions, while driving usage of new payment channels.

Banks that are already under considerable pressure to cut costs and grow revenues can no longer afford to maintain large lockbox operations or invest in expanded capabilities to penetrate lucrative new markets. These business justifications are driving many financial institutions to outsource their lockbox networks all together. The business justification for enhanced lockbox operations will likely push more financial institutions towards outsourcing. This is motivating many banks are outsourcing their lockbox networks altogether, asking third party partners to determine the right mix of technology while leveraging greater economies of scale to drive lower operational costs.

But for many other financial institutions, jumping on the outsourcing bandwagon isn’t always a cut and dry decision. Small and mid-sized banks are hungry for compelling new services for their clients, to grow market share and further differentiate them from larger competitors. Combine this culture with billers pushing for reduced overhead, and for many of them, payments processing is a prime target; especially wholesale lockbox services. Wholesale lockbox is a primary receivables service that contributes the most revenue to financial institutions who offer it, so this area will continue to see more growth.

Options overlooked

There are plenty of strategic deployment options available to those banks not yet ready for full outsourcing (due to organizational culture or other reasons) many of which are often overshadowed within the industry dialogue.

“Partial” outsourcing options are quickly becoming popular with banks looking for a happy medium. Partial outsourcing provides a path to success for financial institutions to succeed in a payment processing ecosystem that seems to demand commitment from banks that may not be ready to fully commit to an outsourced environment. This middle-ground approach enables banks to outsource receivables to a third party provider and still maintain control of onboarding new corporate customers to capture acquisition- and fee-based revenue through lockbox offerings.

If you’re not quite ready to jump in with both feet, here are four hybrid outsourcing options to consider:

Leverage Remote Deposit Capture (RDC). Financial institutions can utilize remote deposit capture solutions in an outsourced environment that provides them with access to a unique nationwide capture network for full payment capture and allow a receivables partner to do all of the processing on behalf of the financial institution and end corporate customer(s).

Outsource pieces – not everything. For financial institutions looking to enter into new vertical markets such as property management or healthcare, they can leave current receivables processing in-house and only outsource certain aspects of receivables processing such as transmission to archive solution(s) and still remain in control of capturing the actual payments.

Offload the processing. Often times entry into new geographical markets is costly and time consuming with the expansion of brick and mortar. Financial institutions wanting to expand their footprint no longer have to do full upgrades of their core system and can leave the processing to a partner that can complement in-house solutions already in place.

Feed into an archive system. Financial institutions that offer retail and wholesale lockbox services that want to leave their current processing in-house, now have the option to gain additional recurring revenue from end corporate customers by feeding into a data rich archive solution that can provide them more visibility and transparency into important receivables data, such as daily investible cash and customer correspondence.

Flexibility exists because financial institutions can strategically choose which functions they want to outsource based on needs. It especially appeals to financial institutions that want an off-balance-sheet solution for generating new revenues, and opens the opportunities for small- and medium-sized regional banks to access services that further differentiate themselves from larger competitors.

Additionally, a partial outsourcing arrangement provides financial institutions with the flexibility to outsource traditionally costly pieces of payment processing while maintaining control of mail location, capture, and providing enhance services without the investment needed to stay current in the ever-changing payment landscape.

Taking control of emerging payment channels

Emerging payment channels and the related customer demands for consolidated payments data, are presenting a big challenge for financial institutions accustomed to a check-centric processing environment. Each payment channel brings new costs in terms of systems and support. Complicating matters, the legacy infrastructure at most banks simply can’t support the aggregation of paper-based and electronic payment streams, and limited budgets make comprehensive system replacement unlikely.

Another hybrid solution for adding and aggregating payment channels is to integrate your receivables. Also available as an in-house solution, an integrated receivables solution enables financial institutions to process any form of payment—check, cash, automated clearing house, or card—from any location, via telephone, Internet, mobile device, electronic data interchange, or electronic bill presentment and payment, via a centralized payment portal.

The solution enables banks to target deposit-rich industry segments such as property management, healthcare, insurance and utilities—all of which have considerable receivables challenges.

So, who are the winners of the outsourcing debate?

A middle of the road approach to outsourcing helps financial institutions, big and small, build and revitalize their lockbox franchise at a time when declining check volumes and limited capital budgets have forced some of their competitors out of the lockbox business altogether. Today’s industry dialogue around outsourcing often leaves impressions of an either/or proposition – either keep your processing in house or outsource it entirely. It’s important to remember that there are no winners in this debate. Partial outsourcing lets banks have their cake and eat it, too, while delivering compelling business benefits.

This content is accurate at the time of publication and may not be updated.