WHITE PAPER THE CASE FOR WHOLESALE OUTSOURCING BUSINESS MODEL DETAILS WHY MOST BANKS SHOULD LOOK FOR ALTERNATIVES TO IN-HOUSE LOCKBOX 2014 WAUSAU FINANCIAL SYSTEMS, INC. All Rights Reserved. All other copyrights cited herein are the property of their respective owners.
TABLE OF CONTENTS 3 Executive Summary 4 The Case for Wholesale Outsourcing 5 Treasury Executives are Facing an Array of Challenges 5 Declining Check Volumes Point to an Unprofitable Future for In-House Lockbox. 6 Now is the Time to Consider Outsourcing 7 Case in Point Achieving a Competitive Advantage 8 Let Us Help You with Your Business Case 8 About WAUSAU COMPANY CONFIDENTIAL Wausau Financial Systems, Inc. Proprietary This document contains confidential and proprietary information of WAUSAU, and is not to be copied, disclosed or distributed, except to employees of the recipient with a job-related need to review this document. By accepting this document, the recipient agrees to take all reasonable steps to ensure that this confidential and proprietary information will not be disclosed to any third parties, in whole or in part, without the prior written permission of WAUSAU. PAGE 2
EXECUTIVE SUMMARY Whether you call a tipping point, a perfect storm, or a crossroads, the wholesale lockbox processing market is fundamentally changing as a result of emerging payment channels, heightened customer requirements, and new technologies. Against this backdrop, banks are caught in a tug of war between rising customer demands for more receivables services and the hard economics of tight capital budgets, declining check volumes, and antiquated legacy systems. The pull of revenues and potential profits from new and existing customers must eventually win out. The question is how banks can serve these customers while meeting corporate demands for more efficient operations. Relying on antiquated in-house systems and tired business models won t work in the emerging lockbox environment. Bank lockbox providers must consider alternative business models: fully outsourced lockbox processing, and co-sourced outsourced models. These models enable banks to modernize their payments systems to meet ever-increasing customer demands, improve the economics of delivering lockbox services, and improve operations outcomes. This white paper delves into the challenges bank lockbox providers will face between now and 2020, the different outsourcing models available to address these challenges, and the benefits of each outsourcing model. Importantly, the information in this white paper provides bank lockbox providers with a blueprint for building a case for wholesale outsourcing. PAGE 3
THE CASE FOR WHOLESALE OUTSOURCING The future of lockbox is murky, Andy Schmidt, research director at CEB TowerGroup. The wholesale lockbox processing market is changing rapidly. Wholesale lockbox providers must manage heightened expectations for quality growth, mounting regulatory requirements, evolving customer needs, expanded alternative channels, and increasing competition. Short of significant year over year volume growth, Treasury organizations that provide wholesale lockbox processing services likely will experience profit challenges within the next few years. Just as the decline in paper checks has reached a crescendo with Business-to-Business payments joining the rapid decline of Consumer-to-Business in recent years business customers have started to demand more services and features from their lockbox providers, and even the Federal Reserve has joined the fray with a call for same-day processing. All of this is putting banks in a financial bind. With all of these trends, banks have started to seriously look at their processing situation, realizing that without significant infrastructure changes many will find their in-house lockbox operations no longer financially viable. Treasury executives know that it can be difficult to build an acceptable business case for modernizing their lockbox operation, given their capital preservation needs and financial return requirements. With competing projects and the realities of finite capital resources, many institutions have put off modernizing their lockbox infrastructure. It is with this need in mind that WAUSAU has pioneered a lockbox outsourcing solution that enables an institution to preserve its capital and achieve its modernization goals while helping the Treasury executive in their pursuit of salient financial returns in the immediate period and over the long term. When it comes to modernizing payment systems, organizations cannot afford to get it wrong, and rarely, if ever get the latitude for a do-over. To help in the pursuit of finding the right strategic modernization answer, WAUSAU has created a forward looking financial Pro Forma which helps Treasury executives to visualize their organizations future operating costs under existing operating metrics and structure. The use of this tool, while involved and customized; allows Treasury executives to obtain a view of their future financials today while helping them make the right moves to insure the future viability of their operations. PAGE 4
TREASURY EXECUTIVES ARE FACING AN ARRAY OF CHALLENGES Improving Returns on Invested Capital [ROIC] Capital preservation and utilization Prioritized and intelligent resource allocation Cost containment and operational efficiency achievement Maintaining fresh software and up-to-date infrastructure Supporting growth while optimizing capacity utilization Managing Compliance and adapting to security needs Improving Disaster recovery preparedness DECLINING CHECK VOLUMES POINT TO AN UNPROFITABLE FUTURE FOR IN-HOUSE LOCKBOX. More importantly for wholesale processing centers, the 2013 Fed Study reflects a -9.2% CAGR (Compound Annual Growth Rate) in business to business check-based payments from 2009-2013. Business payments historically have been the holdout in the migration to electronic channels; however in recent years the growth trends have mirrored the consumer trend line. The trend is clear businesses are increasingly using ACH and other electronic means to pay suppliers. The continued decline of B2B check based payments will likely create a difficult financial situation for many lockbox operations as operating scale is lost, and investment returns with traditional in-house infrastructure modernization efforts almost impossible to realistically justify. THE DOWNWARD-TREND OF CHECK-BASED PAYMENTS EXTRAPOLATED USING CAGRS PAGE 5
CHECK VOLUMES AS CHECK VOLUMES DECLINE, THE COST TO PROCESS EACH CHECK INCREASES, IMPACTING BANK PROFITABILITY As check volumes decline, in-house operations lose operating leverage given their fixed expense, infrastructure reinvestment needs and on-going annual labor and semi variable expense adjustments. The loss of operating leverage results in higher per payment operating costs and strained operating margins. Illustrating this point in the chart above is a representation of a typical mixed volume operation whose volume is declining at industry rates net of annual growth. Using WAUSAU s model to illustrate a typical Treasury operation, one can see the impact of declining volume on operating costs. Note that as volume declines, fixed expense increases on a per payment basis at a substantially faster rate than variable costs. The result is an unprofitable operation within just a few years. NOW IS THE TIME TO CONSIDER OUTSOURCING Wholesale lockbox processing has long been a cornerstone of bank treasury management. Complex market pressures, technology reinvestments, and operational delivery challenges combined with the compounded annual decline in check volumes threaten to turn a once economically viable business into a very difficult financial challenge in the immediate future. For providers who have resisted moving their lockbox to outsourcing, it may be time to reconsider. Strategic deployment of outsourcing can help your financial institution overcome the trend of declining check volumes and reorient treasury services towards growth. Key benefits of lockbox outsourcing include: Converting the fixed costs of traditional in-house lockbox to variable costs that scale with demand PAGE 6
Getting and staying current on software and gaining freedom from periodic upgrade costs Achieving feature parity with competitors for treasury services Ability to retain as many, or as few, customer touch points as desired Opportunity for revenue growth in profitable vertical markets such as property management or healthcare payments Increasing fee revenue with value-added services such as integrated receivables Ability to expand into new geographic areas CASE IN POINT ACHIEVING A COMPETITIVE ADVANTAGE Strategic deployment of outsourcing has enabled FirstBank to address the lockbox market pressures while delivering a significant competitive advantage for the growth-minded financial institution. Headquartered in Lexington, TN, FirstBank is Tennessee s third-largest financial institution with more than $2 billion in total assets and 44 banking locations across the state. Before deploying outsourcing, FirstBank processed a lower volume of payments using two full-time equivalents and an archaic and uncompetitive in-house lockbox solution. The issue cumulated when FirstBank won the business of a large behavioral sciences healthcare client that represented an additional 25,000 payments per month. Recognizing that its legacy lockbox processing system could not meet the client s requirements, and that the bank s lockbox volumes were not large enough to attract lockbox providers in the region, FirstBank began to investigate alternative processing options. That s when it discovered Remote Lockbox, a co-sourced outsourcing option using Remote Deposit Capture technology for capture of payments. A co-sourced solution provided FirstBank with the best of both worlds: it made FirstBank competitive with its competitors, without requiring large upfront capital or ongoing reinvestment expenses. The approach also offered a path for FirstBank to dramatically improve time-to-market a key consideration with a customer waiting to go live. Deploying a Co-Sourced solution model provided FirstBank with immediate tangible benefits: Cost savings: FirstBank lost about $70,000 a year with its old lockbox operation. By the end of its migration to a co-sourced outsourcing model, FirstBank was already breaking even. New revenues: Co-Sourced solution has provided FirstBank with a more competitive product, resulting in $150,000 in additional treasury fees and $20 million a year in deposits. Expanded geographic footprint: When one of FirstBank s customers acquired a company in another state, the bank was able to provide them with a scanner for remotely capturing lockbox transactions and transmitting them for processing. In the past, FirstBank likely would have lost this revenue since its old lockbox system did not support remote capture. New market opportunities: A co-sourced operating model has provided FirstBank with a competitive solution for processing explanation of benefits (EOB) documents. With many healthcare firms in Nashville, FirstBank sees a great path for growth and opportunity. PAGE 7
LET US HELP YOU WITH YOUR BUSINESS CASE Now is the time to examine your lockbox operations and plan for the future. Meet with us for an in-depth consultation to insure the future viability of your treasury revenue. Before you meet with us, consider the following questions: What is your current paper check processing volume? How much are you making in profit per transaction? Do you see a point where your profit margins may be erased by increasing costs or decreasing check volumes? What rate of growth in lockbox business is sustainable for your financial institution? Is your bank feeling pressured to upgrade infrastructure or software to provide new features for your customers? Are you prepared to meet new challenges, such as the Federal Reserve Bank s call for same day delivery for all payment types? Arrange a private consultation by contacting your sales representative at (800) 937-0017 or info@wausaufs.com. ABOUT WAUSAU FINANCIAL SYSTEMS WAUSAU, a Deluxe Corporation company, is a catalyst for results. Partnering with industry-leading financial institutions and corporations to reduce cost and strengthen their competitive market position, WAUSAU is recognized for consistently delivering best-of-breed financial technology, services and solutions that integrate receivables, accelerate deposits and payments, and eliminate paper. To meet clients needs, WAUSAU offers flexible delivery options whether installed in-house, outsourced, co-sourced or in the cloud. Because of WAUSAU s deep domain knowledge and experience, the company understands customers challenges and tailors its solutions and services to ensure they have a competitive edge. That s why thousands of companies, including 20 of the 25 largest U.S. banks and more than 50 Fortune 500 organizations depend on WAUSAU solutions. Because results matter. For more information, visit, www.linkedin.com/company/wausau-financial-systems or www.twitter.com/wausau_fs.