Why Wholesale Lockbox Belongs in the Headlines

The American Banker published an unlikely article this morning. In its article written by Jackie Stuart, Maryland Bank to Use Wausau Lockbox Service, the article waxed eloquent about the benefits Sandy Spring Bank will realize with its outsourced wholesale lockbox solution. Really – wholesale lockbox making headlines? A 50 year-old product? I was encouraged to see the article for two reasons. Wholesale lockbox (WLBX) is traditionally associated with the largest banks. Sandy Spring Bank is a $3.7 billion asset financial institution. Not long ago, wholesale lockbox would be a rarity among banks of that size. Image workflow and check truncation changed all that. Now, a number of solution providers offer flexibly outsourced solutions making a wholesale lockbox product offering viable for small banks. Observing this opportunity, all leading remittance processing software platform vendors now offer outsourcing services. After all these years, the market opportunity for wholesale lockbox services remains significant. While the majority of large corporations already use bank WLBX services, WLBX adoption falls markedly with the size of business – particularly among businesses with annual revenues below US$250 million. wlbx-oppty Processing efficiencies from image workflows and hub and spoke processing models enable lower price points than a short while ago. Moreover, since extraction and image capture can be geographically separated from lockbox processing, competition among outsource processors knows no geographic bounds either. This is good news for banks and fits well with the idea of WLBX adoption moving down market. With checks likely to dominate business-to-business payments for the medium term and WLBX is here to stay.

Growth Trend in Outsourced Payment Processing: Is this a Good Thing?

In April 2009, JPMorgan Chase announced an agreement to outsource its retail lockbox business to Regulus Group, a unit of 3i Infotech. More recently, Citibank announced it sold its retail and wholesale lockbox business to RemitCo, a subsidiary of First Data Corporation. Is declining consumer check writing at the root of both moves? Sure, but I think there’s more to it than that. These two moves are a reflection of a more strategic evolution in financial services. Financial institutions are revisiting all aspects of their operations with an eye toward efficiency and long-term competitive advantage. Celent observes accelerating outsourcing trends elsewhere. For example: • More than half of US financial institutions outsource their core banking systems. • Three quarters of financial institutions have RDC solutions using SaaS/ASP models. • More banks are outsourcing the operation of their ATM channel. • A growing number of banks are outsourcing loan origination and other back-office business processes to BPM firms. And the list goes on. Is this a good thing? It can be, particularly when the processing entity demonstrates a true core competency in the relevant business process. BPM firms are increasingly pricing services based on a share of cost savings realized. And deals are won not based on old notions of labor arbitrage alone, but demonstrable expertise in delivering world class performance in select business processes. Where the work gets done may be becoming less important. FIs considering further investment in back-office processing should ask themselves four questions: 1. Is this (e.g., item or remittance processing) a core competency? 2. Will maintaining an in-house operation be a source of sustainable competitive advantage? 3. Will the requisite investment generate an adequate ROI both short and long-term? 4. Will this be the best use of available capital? I suspect that for most financial institutions, the answers would be an easy “no”.


I was at the SunGard analyst conference and heard their CEO Chris Conde talking about Software as a Service (SaaS). What he said told me that SunGard is serious about SaaS not just as a vendor but as a customer. He said that if a vendor offered SaaS to SunGard he would prefer that SunGard use this even if there is greater vendor risk and poorer features and functionality. He believes that the SaaS vendor will likely catch up on the latter, and clearly thinks so highly of SaaS that he believes the former is not such a big issue. Celent has written about this subject and the other hot buzz word cloud in the Celent report Cloud Computing, SaaS, and Technology Outsourcing for Banks http://www.celent.com/124_2513.htm You can also hear the author of this report, Jeff Goldberg speak on this issue tomorrow December 3. http://www.celent.com/124_2401.htm SaaS has been available to banks for decades. We call it a service bureau. It isn’t the next big thing, but an already huge thing in banking. I am not yet a believer in cloud computing for banks due to security issues, but SaaS is clearly a winner.

Diebold Integrated Services Quest

I was one of many attending Diebold’s Integrated Services Day held on April 15 at its’ headquarters in Canton, Ohio. After 150 years of business primarily as a hardware manufacturer, Diebold last week announced that its business model is shifting away from products toward integrated services. Over the next five years, Diebold will strive to have 75 percent of its business coming from the servicing side of the business, up from roughly 50% in the current year. While not entirely unique among ATM manufacturers, Celent finds this move significant on two levels. For Diebold, the move is a smart one, with hardware sales growth increasingly challenged across the globe. NCR and Wincor Nixdorf are seeing similar dynamics. The larger attraction lies in a new business model for ATM deploying financial institutions. In today’s capital starved environment, Diebold’s move replaces significant capital expenditures with more easily obtained ongoing operating funds. Its move comes when envelope free ATMs are being deployed by a growing number of banks. Deposit automation ATMs are becoming more attractive as banks truncate checks at points of first presentment across the enterprise. In that environment, traditional envelope deposit taking ATMs – particularly remote ones – incur disproportionate servicing costs. Diebold’s move strengthens its position versus independent service operators that have comparatively little experience with the new machines. Collectively, Diebold, NCR and Wincor Nixdorf are making it easier for financial institutions to replace aging “cash dispenser” ATMs with more capable self-service devices.