The Tipping Point

The Evolution of Alternative Payments

Announcing
Hitachi Consulting's National Financial Services Practice

Introducing New Financial Services Team Members

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Home > On Payments > Q2 - 2008   Issue #23

The payments landscape continues to evolve: the emergence of new technologies is changing the economics of payments processing, and the introduction of new payment products is shaping consumers’ needs and influencing their relationships with their financial institution.

In this issue of On Payments, we look at the evolution of alternative payment methods and the example history provides. We also share a white paper on remittance processing that we authored for First Data earlier this year.

The Tipping Point
Outsourcing of Remittance Processing

In-house remittance processing has reached a ‘Tipping Point’ where most organizations will achieve lower cost per item through outsourcing than can be realized with in-house operations. Currently, thousands of organizations still operate in-house lockbox operations and have benefited from the innovative technology and RP system that were developed during the 1990’s. However, significant changes in the payments landscape and operating economics are leading financial managers to conclude that it is better to outsource their organization’s remittance processing function in order to focus their energy and capital on strategic areas in their core business where they can grow sales and margins.

Over the past four decades, large consumer billers have operated in-house remittance processing (RP) facilities to process and deposit paper check payments that are received at their lockbox. During this period, retail lockbox processing underwent a dramatic evolution as new methods were employed to improve efficiency. Innovative use of the US Postal Service led to the development of remittance mail handling that sped up mail delivery to special PO boxes set-up to serve high volume billers. Enhanced delivery and presorting services reduced mail float and expedited processing of incoming mail received at lockboxes. The adoption of standardized envelopes and remittance stubs with scan lines enabled high-speed extraction, and CAR/LAR matching revolutionized bill payment processing by automating tedious manual activities. Together, these techniques allowed billers to prepare deposits with encoded checks faster, reduce float, and save money on bank fees while also efficiently posting customer payment to AR files.

As a result of these many innovations, remittance processing has become a highly sophisticated and IT-intensive operation, which is expensive to manage, staff, and maintain. Furthermore, recent declines in check usage and ‘disruptive’ innovation in check processing are leading more billers to evaluate whether they should outsource their remittance processing to a highly specialized third-party provider, who has already invested in new systems, provides national coverage through sites distributed across the country, and can share economies of scale by aggregating volumes from multiple lockbox customers.

The proliferation of bill payment options for consumers and fundamental changes in the US check clearing infrastructure are fueling an accelerating migration from paper check to electronic bill payments. For an increasing number of billers, acceptance of recurring card payments, ACH check conversion (e.g., ARC, WEB) and rapidly maturing Check 21-based image clearing systems have pushed many paper-based remittance processing toward an economic ‘Tipping Point’ where outsourcing is more attractive than updating their in-house operations. As consumer bill payment behaviors change, most in-house retail lockbox operations have experienced declining check volumes and rising costs per item. In this environment of declining volumes, it has become increasingly difficult for in-house lockboxes to obtain the capital investment funding needed to purchase newer and more robust RP equipment and software.

* * *

This is an excerpt from a 20-page white paper commissioned by First Data that explores market trends in remittance processing, the rationale for outsourcing vs. in-house, and different options available to remittance processors. To download the full white paper, click here.


The Evolution of Alternative Payments
A Look Back, A Look Forward

At one point, the need for a payment mechanism that would allow one person to pay another person for a Hello Kitty tote bag ($7) or a pre-Columbian portrait burial mask ($105,000) via the Internet would have seemed unnecessary—and yet PayPal processed $48 billion in total payments value in 2007. Similarly, the ability to pay for a can of soda by waving your cell phone in front of a vending machine or to receive checking account status alerts while waiting in line at the grocery store would have seemed superfluous—but today, leading banks, networks, phone companies, service providers, and vendors are working around the clock to develop these solutions.

Alternative payments are a hot topic: companies like BillMeLater, Obopay, Firethorn, Tempo, and Pay by Touch are headline news fixtures, and projections about the growth of alternative payments and the impact they will have on the payments industry abound.

The future is never certain, but lessons learned from the evolution of payments to date can provide some valuable insights into the future of alternative payments and the impact they will have—and will not have—on the established payments landscape.

Although today’s alternative payment methods, which range from Internet payment services to decoupled debit and from deferred payment solutions to mobile commerce, account for just a small piece of the overall payments pie, they represent the next big opportunity. Some of these ‘emerging’ payment methods will eventually establish a foothold in the market, and as they gain traction, volumes will increase and providers will compete aggressively for scale and capital funding. The question is which ones.

The only thing that is guaranteed is that innovation in payments will continue—and as some of today’s alternative payments become established payment methods, new alternative payment methods will emerge.

To read the full article, click here.

Announcing Hitachi Consulting’s National Financial Services Practice

In March 2008, Hitachi Consulting announced the acquisition of JMN Associates, and with it, the formation of a new National Financial Services Practice.

The financial services industry is an important growth market for Hitachi Consulting, and our national Financial Services team is the result of significant investments the firm has made in this space over the past few years. Led by Jim Neckopulos, founder of JMN Associates, the new team combines Dove’s expertise in payments strategy and research with JMN’s strength in retail banking, real estate and insurance. Together, we bring valuable experience and practical, proven solutions to clients in the areas of business and technology strategy, process improvement, market research, project management, and industry and regulatory compliance.

To read Hitachi Consulting’s March 10 press release, click here.

To read a letter from Jim Neckopulos regarding the new organization, click here.

Introducing New Financial Services Team Members

With the acquisition of JMN Associates, we gained several talented consultants with a breadth of expertise and experience in financial services strategy and technology consulting. We would like to take this opportunity to introduce the newest members of Hitachi Consulting’s National Financial Services Practice:

Jim Neckopulos joins us as the Managing Vice President of the National Financial Services Practice. Jim has over 25 years of experience in the financial services industry and was the founder and CEO of JMN Associates. Prior to JMN Associates, he was the partner in charge of the financial services industry consulting practice in the Western U.S. for Arthur Andersen. His expertise has focused on business banking, retail banking, mortgage and consumer lending and asset management and his experience includes strategy, process and technology consulting projects with leading financial services organizations. He can be reached at jneckopulos@hitachiconsulting.com or (415) 848-4655.

Also joining us are Kim Allin, Karl Augenstein, John Quinn, George Simotas, Scott von Ploennies, and Marshall Wang. To view their bios, please click here.