To tackle these challenges, lockbox providers are seekingnew approaches to their business models that bothincrease the efficiency of their payments networks whilereducing expensive manual work. They’re also sorting outwhich technologies will drive new fee-based revenues,while developing the business case to pay for them.

In this paper, we identify three vitally important trendsthat will shape the future of lockbox in coming monthsand years.

loCaTion, loCaTion, loCaTionThe U.S. Postal Service announced that it plans toaccelerate closure of 71 mail processing plants from2014 to 2013. In addition, depending on the distancebetween the origin and destination, first class mail

transit times may be delayed by a day or more. AlthoughSaturday mail delivery has been retained for now, itselimination could still be a component of a major overhaul toovercome USPS budget woes. This means that billers need toplan for the possibility of a 5-day mail delivery and theassociated cash flow and receivables implications. The delaywill affect billers’ customer service, treasury, and collectionsoperations. For banks and other lockbox providers, themessage is clear: get closer to where the payments originate.As the post office’s network contracts, billers’ days salesoutstanding (DSO) and working capital requirements willsuffer without an adjusted and optimized lockbox footprint.

At the same time, banks are compelled to fund initiatives in e-payments, enterprise risk management, security, andcompliance, and they are opting to invest in high-growthproduct lines rather than flat or declining legacy businesseslike lockbox, despite their current revenue contribution. So formost banks, adding a new site to a lockbox network isn’t so

easy. It’s difficult to justify an investment in additional sitesover other investment opportunities, given that wholesalelockbox revenues were slightly down year-over-year in 2011and retail lockbox revenues were down 2.5% for the sameperiod (Ernst & Young 2012 Cash Management Survey), andtrends show continued declines in paper volumes into theforeseeable future.

Yet while lockbox volumes may be attenuating, they certainlywon’t vanish overnight. Some 70% of business-to-businesspayments are still made by check and, despite the broadadoption of electronic payment methods, a substantialportion of consumer payments will continue to be check-based for years to come. The challenge of needing to expandthe reach of a shrinking business calls for creative thinking andnontraditional approaches to providing infrastructure and ahigh-quality work product.

in-house or ouTsourCe? YesThe broad adoption of automated and onlinepayments has had the interesting effect ofcausing a spike in the percentage of paperlockbox exceptions. The majority of the first

consumer payments to migrate to electronic payment methodswere very clean, single check/single coupon work. As a result,the remaining work has become dirtier and more manual, witha higher level of exceptions as a percentage of overall volume.

The future of lockbox: Three key Trends in the evolving Payments environment

The loCkbox business is in a sTaTe of TransiTion.

123Change has been driven as much by necessity as by opportunity. Banks began exiting the internal provision of retaillockbox in the late 1990s and, more recently, wholesale lockbox. Now they’re facing increasing competition fromthird party lockbox providers. The legacy business isn’t growing, and margins aren’t either; nevertheless, lockboxstill remains an important revenue enabler for treasury management providers. Vertical markets, such as propertymanagement or healthcare processing, offer profitable new prospects—if lockbox providers are able to offertechnology-based and customized solutions that adequately address market requirements.

— by Paul Diegelman and Jim Bann

©2013 TransCentra, Inc. www.TransCentra.com I page 1 of 3

1The challenge calls for creativethinking and nontraditionalapproaches to providinginfrastructure and a high-qualitywork product

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Handling and resolving these exceptions is expensive, since itrequires time and manual intervention.

For banks offering both wholesale and retail lockbox, a hybridwholetail lockbox is emerging as an essential capability. Thirdparty payment processors that support wholetail lockbox—ina single platform that also supports retail and wholesale—enable banks to capitalize on existing operations in multiplestrategic locations, regardless of whether the payments areB2B or C2B. Some in the industry are predicting the eventualconsolidation of retail and wholesale workflows. Thinkingwholetail is a logical first step in that direction. Synthesizingwholesale and retail operations will better utilize existinginvestments and personnel while improving efficiencies overall.Banks that are able to change their mindsets and take thisapproach to lockbox processing may be able to emerge as thereal winners.

Problems arise when a lack of investment meets existinginfrastructure issues, preventing a transition to a more flexiblewholetail environment or the consolidation of separatewholesale and retail operations. Legacy lockbox environmentswere generally not built for adaptability. However, experiencehas shown that leveraging modern adaptable lockbox solutionscan deliver tremendous operational efficiencies, particularly theblending of in-house and outsourced operations. A hub andspoke payments configuration can make optimal utilization ofmultiple facilities. In some cases, it may make sense for a bankto operate satellite facilities outfitted with RDC and utilize apayment processor’s payment hub; in others, the bank canmaintain its hub and use one or more third party locations assatellite facilities. Even in-house facilities utilizing hostedprocessing platforms are gaining favor and proving their value.

Factors that will impact the decision on how best to evaluateindividual network structure include in-house staffing levels,cost structures, equipment utilization, changing workflows, andgeographical distribution of retail and wholesale customers.

For banks that rely on their in-house operations to providecustomer service and maintain customer touchpoints, thehybrid in-house/outsourced model is an ideal solution. RDCmakes it possible to seamlessly integrate a third party paymentprocessor into the workflow without major modifications to theexisting payment platform, especially with hosted RDC options.

The hybrid in-house/outsourced approach can help regionaland super-regional banks that want to expand their footprintwithout committing to permanent new facilities. Strategic useof RDC can enable these banks to combine wholetail andhybrid sourcing to their best advantage.

CuTTing big DaTa Down To sizeBig Data - is it a fad or a trend? Deciding whichtechnologies are most practicable andmeaningful to lockbox operations is key toplanning for the future. For automation to be

relevant to the lockbox business, it must address issuesrelated to complicated transactions, well beyond just checksand invoices in wholesale, or coupons and checks in retail.Ultimately, many of the answers lie in data management, fromindividual transactions to the “big picture”.

Customers consider consolidation of data and automation ofworkflows to be a priority for better AR transparency, sointegrated receivables are top of mind for lockbox providersas they prepare for what’s next. According to TreasuryStrategies, clients that utilize an integrated receivablessolution spend 2.5 to 6 times the fees as comparably sizedcompanies that don’t utilize such a solution, because clientsusing integrated receivables rely on a number of fee-generating tools in an attempt to reduce the cost of theirinternal receivables management, including automated cashapplication, online decisioning, exceptions management, anddeductions management. As part of an integrated platform,some commercial customers will require integration of wiretransfer, ACH and SWIFT data, as well as e-invoicing, supplychain and other business processes. All of these are avenuesto additional revenue for providers.

On a broader level, integration of multiple payment channelswill be especially important to companies that want to better

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Source of Lockbox Processingfor Top 50 US Banks

Source: TransCentra Industry AnalysisNote: Totals do not equal 50 as some of the Top 50 Banks based on asset size do not o!er lockbox services

InternalProcessing

OutsourcedProcessing

Both Internal and Outsourced Processing

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Synthesizing wholesale and retail operations will better utilize existing investments and personnel while improvingefficiencies overall

Experience has shown thatleveraging modern adaptablelockbox solutions can delivertremendous operational efficiencies,particularly the blending of in-houseand outsourced operations

understand their payments data through data mining andpredictive analytics. Three quarters of C-Suite executivesin a 2012 Harris Interactive/SAP survey believe that BigData presents opportunities for their companies, and banksare no exception. Data gleaned from payment transactionscould potentially help banks better manage exceptions andcustomer risk. The problem is that applying predictiveanalytics to massive sets of structured and unstructureddata requires a major investment.

Rodney Nelsestuen, senior research director at CEBTowergroup, warns that “the big issue with Big Data is youdon’t try to boil the ocean.” Celent believes that, rather thanfocusing on Big Data, banks should be looking at what theycall “enterprise intelligence,” which includes customerintelligence, business intelligence, and transactionalintelligence to create “a three-dimensional view of the datathat gives the bank a sense of who is doing what, and why.”While Big Data is destined to be a consideration in thefuture of lockbox, it’s not yet clear which implementationsof Big Data will best optimize risk and reward. For now,smart lockbox operators are consolidating data feeds andlooking holistically at data management opportunities in an attempt to create a centralized transactional datastructure and data store that can be leveraged now andinto the future.

loCkbox in The fuTure: anChor or aCCeleraTor?For banks, lockbox continues to be a veryvaluable treasury service that facilitatescustomer relationships and cross selling of other

core services. The question going forward is whether lockboxcan present a strong business case on its own. We believethat many opportunities remain for the lockbox industry, butthey require a new way of thinking about payment networks.Wholetail processing and strategic outsourcing areimportant first steps. With more efficient and flexiblepayment networks, banks will be better positioned toleverage new technologies to serve important customersnow and in the future. n

Paul Diegelman, senior Vice President and Practice Manager,TransCentra – With over 20 years of BPO, finance and accountingexpertise, Mr. Diegelman is responsible for the vision, execution,growth and profitability of TransCentra’s Private Label financialservices division. Prior to joining TransCentra, Mr. Diegelman wasVice President and Practice Manager at BancTec, Inc., responsiblefor the vision and execution of the company’s successful newbusiness launch in the Accounts Payable outsourcing andautomation market.

Mr. Diegelman is a nationally recognized speaker at outsourcingand treasury management conferences, including over 10 years asa faculty member of UNC/Kenan-Flagler’s Fundamentals of CashManagement Series, and is an inactive certified public accountant(CPA) in the State of Maryland.

Jim bann, first Vice President, TransCentra – Prior to joining TransCentra, Mr. Bann was Senior Vice President/Senior Bankerat KeyBank in Cleveland, Ohio. As the Team Leader for theTreasury Services Correspondent Banking Team, he wasresponsible for the sales of KeyBank’s cash management servicesto banks throughout KeyBank’s multi-state footprint.

Previously, Mr. Bann was First Vice President and EnterpriseSales Manager with Mellon Bank, providing private label treasurymanagement services to financial institutions, including some ofthe largest U.S. banks. Mr. Bann is a former member of the AFPand has held both the CCM and CTP credentials.

abouT TransCenTra:

as america’s largest outsourced remittance processor,one of the largest outsourced billers, and a top providerof imaging and payment processing platforms andsoftware, TransCentra is an industry leader in innovativemultichannel billing and payment solutions.

for decades, we have delivered transaction software andservices under the regulus and J&b software names.now, those companies are unified as TransCentra. ourcustomers include many of the largest and most trustednames in both the consumer and business-to-businessmarkets across a variety of industries, including financialservices, telecommunications, utilities, and beyond.

TransCentra helps you transform your critical treasuryoperations through innovation, automation, a deepunderstanding of financial processes, and a single-minded commitment to delivering improved outcomes.we achieve treasury impact by intelligently applyingsoftware and services that improve visibility into yourcorporate cash cycle, increase the efficiency of yourbilling and payment processes, and reduce the costs ofyour treasury activities.

TransCentra is an independent, privately owned companyheadquartered in norcross, ga, with more than 1,300employees in 11 locations across the united states. Thecompany’s executive team includes financial services andpayments processing industry veterans and the companyis backed by world-class investors. for more information,call us today at 1-866-747-2877.

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Rather than focusing on Big Data, banks should be lookingat “enterprise intelligence”