Has Remittance Outsourcing Reached a Tipping Point?

Faced with declining paper check volumes, rising systems costs and ever-increasing corporate pressure to reduce operating expense and shed non-core functions, operations managers have faced an uphill battle over the past several years trying to keep their remittance operations in-house.

But data from the 2009-2010 Payments Processing Benchmark Study from TAWPI (www.tawpi.org) suggests that the case for outsourcing remittance processing may have reached a tipping point.

Mounting Cost and Quality Pressures

For years, industry observers have warned about the potential for higher in-house processing costs as paper-based transactions are converted to electronic payments, such as automated clearing house (ACH) and Web transactions. The TAWPI study showed that this scenario has become reality, with more corporate billers reporting that their remittance processing unit costs have increased over the past year. This rise in costs is despite the intense focus at most organizations to drive down expenses during the recent recession.

What’s more, billers who responded to the survey reported seeing some decline in quality over the past year – an untenable situation in our increasingly competitive global business environment. According to the survey, the chief culprits for this decline in quality are old equipment that needs updating and the fact that clean, fast work is now migrating to electronic bill payment. With organizations reluctant to spend money on new equipment and most remittance solutions ill-equipped to handle complex transactions, solutions here are not easy.

According to the TAWPI study, billers anticipate investing an average of $2.6 million in their remittance processing operations over the next three years. This is greater than the amounts of investment anticipated by third-party lockbox processors and bank lockbox providers. One reason for the disparity, the study found, is that billers must catch up to third-parties by investing in advanced remittance processing capabilities. Third-party processors have economies of scale compared to in-house remittance shops.

Another cost challenge for billers is the changing mix of payments as more transactions become electronic. Biller responses indicate that “clean” items (the easiest to process) now account for 79 percent of their incoming paper payment volume – much lower than the 87 percent found in 2005.

Additionally, there were a number of respondents who commented that customers who had previously sent clean items are shifting over to online banking and bill payment. This presents the specter that an increasing portion of incoming payments will be exceptions, which are slower and far more difficult to process in an automated fashion.

The Depositing Disparity

Billers also are lagging behind banks and lockbox providers in the adoption of image cash letters (ICL). Depositing checks electronically can provide significant cost savings for organizations, while improving access to working capital. Many companies that outsource lockbox services have seen dramatic improvements in funds availability, lower bank deposit fees and much faster returns processing as a result of leveraging image cash letters.

Only 37 percent of billers responding to the TAWPI study currently have ICL capabilities, while all non-bank third-party providers and 75 percent of bank lockbox providers who responded handle this type of processing.

Worse, only 18 percent of billers responding to the TAWPI study say they utilize a combination of Check 21 and ACH – so-called best-fit clearing. Again, billers are missing out on significant cost savings in term of bank deposit fees and funds availability by being slow out of the gate in this area.

In order for billers to remain cost competitive, it will be critical that they gain ICL capabilities, either in-house or by outsourcing their remittance processing.

Conclusion

The sky may not be falling for in-house remittance processors, but data from TAWPI’s 2009-2010 Payments Processing Benchmark Study suggests that it will become increasingly challenging for them to remain cost competitive and economically viable compared to outsource providers.