Now is the time for banks to venture into the accounts payable outsourcing (APO) and accounts receivable outsourcing (ARO) space, says Bob Meara, senior analyst at Celent (Boston). As a result of the growing acceptance of outsourcing (see New Rules for Bank Outsourcing and Offshoring), corporations increasingly are sending their nonessential business functions out of house, and banks are poised to capitalize on the trend, he relates.
As corporations grow more comfortable with finance and accounting outsourcing, banks also are looking for new sources of revenue to bolster their sagging cash management businesses, explains Meara, who authored the Celent report, "AP and AR Outsourcing: Not for the Faint of Heart." "Banks are hungry for what to do next," he says. While the APO and ARO market is modest from a fee-equivalent income basis -- $300 million annually in the short term, growing to $1.6 billion, according to Celent forecasts -- the added business is sustainable in the face of an otherwise disappointing cash management revenue picture, Meara points out.
Further driving the trend, according to Meara, is the maturing of finance and accounting outsourcing technologies, which facilitate workflows between corporations and banks, Meara says. For example, "Web-based portals facilitate really neat capabilities," he notes.
But while banks have offered basic APO and ARO functions -- such as staple wholesale lockboxes and disbursement products -- for years, to move to the next level of accounting outsourcing, banks should take an incremental approach, Celent recommends. And, Meara says, banks probably would benefit from partnering with a third-party service or technology provider. He notes that the vast majority of the banks with which he collaborated on the study are engaged with third-party providers.
Fifth Third Taps Third Party
According to Patrick Moore, SVP and director of treasury product management for Cincinnati-based Fifth Third Bank ($52 billion in assets), the bank selected API Outsourcing (Eagan, Minn.), an invoice solutions company, in early 2006 to provide accounts payable services for the bank's corporate customers. "Time to market was critical for us," he says. "For us to develop the technology and the subject matter expertise, we were losing vital time."
Celent says many vendors are eager to partner with banks to gain access to the financial institutions' installed customer bases. Vendors in the space include API, BottomLine Technologies (Portsmouth, N.H.) and Payformance (Jacksonville, Fla.), Meara reports. A few financial institutions even have made acquisitions to enter the market, including the former Mellon Financial (now The Bank of New York Mellon), which acquired SourceNet Solutions (College Station, Texas).