Industry Insights for Remittance Processing (continued)

The Value of the Check

After years of little change for the traditional wholesale lockbox, the amount of innovation today is exceptional, providing financial institutions offering wholesale lockbox services many years of revenue. However, it will require they move from their complacent over reliance on lending and invest both in upgrading lockbox platforms and revisiting selling strategies if they hope to remain competitive.₈ Fueled by clients’ quest to reduce days sales outstanding (DSO), lockbox has endured the decades. While banks have long since exited the retail lockbox business as a result of dwindling margins driven by large third party processors, similar dynamics are appearing in wholesale lockbox. As in so many other areas, truncating paper allows work to be performed where it can be done most cost-effectively.₉

Additional risks for bank wholesale lockbox include remote deposit capture (RDC), which banks are combating by providing virtual lockbox solutions in order to maintain the keying fees associated with the lockbox. Also of concern to banks are third party solution providers. Such providers are beginning to play a greater role in exceptions adjudication and cash application, eliminating keying fees associated with the lockbox. A final group of competitors are independent software vendors specializing in A/R processing. A benefit of these third party solutions is that clients are able to realize greater efficiency by automating much of the process while still maintaining their banking relationship.₁₀

Impacting Collections and Improving Profits

While optimizing the A/R process has always been important, today’s economic environment has forced companies to take a close look at their financial supply chain and what they are finding is that the impact of posting the right data as quickly as possible can improve the overall financial health of the company.

In response to the recent credit crisis, CRF surveyed members and found that a company’s approach to collections is more critical than ever. Though not always easy to quantify, an important finding is the potential cost of a misguided credit decision. The implication can be in the hundreds of thousands of dollars in either bad debt loss or lost future revenues. One solution recommended is to automate the remittance and collections process. Evidence shows that these models have become quite successful and are becoming more widely used to create efficiencies in the management of large account portfolios, as long as the expenses related to building the model is manageable.₁₁

In recent paper from Tatum, it is noted that as the credit markets have dried up customers may have more difficulty paying bills, however postponing cash collections is a mistake to avoid. Cash is the most important commodity and it is important to collect receivables in a timely manner; if a customer gets behind today, he may not be able to borrow the money to catch up.₁₂ An excellent summary of the current situation is captured in the November issue of AFP Exchange which points out the imperative need for liquidity in an organization. Without it, a company can quickly vanish. Working capital is the liquidity available to run the operations of the business and also a measure of the operational efficiency for the business by looking at the ratio of cash dedicated to inventory and A/R to total working capital. Killen Associates has estimated that, “a typical U.S. corporation with $1 billion in revenue spends $27 million annually in unnecessary working capital due to a lack of visibility into the financial supply chain processes.” Thus, decreasing costs and cycle times and increasing transaction speed in both A/P and A/R plays a substantial role in improving the profitability of a business.₁₃

Automation is invaluable in optimizing core processes by shedding light on the financial supply chain to minimize manual data-entry errors, integrate and accelerate information flow, improve the velocity of transactions thereby reducing delays in cash application, payment reconciliation and collections float, and finally reduce the overall cost per transaction. These real bottom-line benefits exist in hidden value trapped by inefficient processes and are independent of economic factors and competition. However, in today’s sluggish economy reaping these benefits is something businesses ignore at their own risk.14

• ^1,2,3David Walker, October 2008, “What’s Next for Checks?” Digital Transactions
• ^4,5Lyle P . Wallis, September 2006, “The Evolution of Business to Business Payment Methods” CRF
• ⁶David Walker, October 2008, “What’s Next for Checks?” Digital Transactions
• ^7,8,9,10Bo b Meara, July 2008, “Evolution of Wholesale Lockbox, Let the Good Times Roll!” Celent, pp. 7:9, p. 3, p. 55, p. 56
• ¹¹ Lyle P. Wallis, November 2008, “Managing Receivables in the Midst of Today’s Economic
  Environment” CRF
• ¹²Tatum, 2008, “Five Mistakes CFOs Need to Avoid in a Volatile Economy”
• ^13,14Zahid Khalid, November 2008, “Optimizing the Financial Supply Chain” AFP Exchange