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Robert Hunt, Senior Analyst, TowerGroup
Robert Hunt, Senior Analyst, TowerGroup
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Should Large U.S. Banks Outsource Their Check Processing?

Banks should reexamine their transaction processing strategy and consider outsourcing some or all of their back-office check processing functions.

The Outsourcing Argument

Large U.S. banks typically cite the following reasons for not considering outsourcing of the check processing function.

  • The check processing function is critical to the bank.
  • Financial loss would result if the outsourcer failed to clear checks in a timely fashion.
  • The bank has substantial investment in its check processing equipment and facilities.
  • The outsourcing market is fragmented, and the firms lack financial strength.
TowerGroup believes that the objections to outsourcing check processing at large banks are no longer valid. As checks continue to decline in volume, the function becomes less critical to the bank, and service-level agreements are available to protect the bank from financial loss. Additionally, image technology and check electronification are causing the obsolescence of existing equipment and facilities. Finally, the proven check processing capabilities of publicly held companies such as EDS, Fidelity Information Services, Fiserv and Unisys should overcome objections concerning the financial viability and capabilities.

This is not to say that banks should indiscriminately outsource all check-related functions. Although the majority of check processing functions can be viewed as commodity products that need to be offered on a low-price basis, there are check functions that might best remain in-house. Products such as wholesale lockbox provide value-added services and can remain in-house, while the more commodity-like back-office proof and check clearing functions can be outsourced.

Outsourcing Choices

There are several outsourcing models that U.S. banks can use for check processing. Three of these models are direct outsourcing agreements with third-party vendors, forming and operating a check processing consortium with other banks, and forming a consortium with banks and a third-party vendor that manages and operates the consortium.

The direct outsourcing model is used by a number of large U.S., Australian and New Zealand banks. U.S. banks including Citigroup, Washington Mutual, Sovereign Bank and Northern Trust use direct outsourcing agreements for check processing. Citigroup is somewhat unusual in that it processes its New York area check volume in-house but uses outsourcing vendors to process in other regions. Outside the U.S., Unisys has been highly successful in securing direct outsourcing agreements in Australia, and EDS has achieved a dominant market share in the New Zealand market. EDS also has a significant position in the U.K. market, providing outsourcing services to Royal Bank of Scotland/NatWest.

The bank-owned consortium model is used in Canada, where the BMO (Bank of Montreal) Financial Group, Royal Bank Financial Group, and TD (Toronto Dominion) Bank Financial Group formed the Symcor consortium in 1996. The consortium has enabled its member banks to reduce their number of check processing sites from 23 to six.

The bank/vendor-owned consortium model has been successful in the UK. Barclays Bank, Lloyds TSB, and Unisys formed Intelligent Processing Solutions, Ltd. (IPSL) in 1998. Another large bank, HSBC, subsequently joined the consortium. The check volume of the three partner banks and a number of other banks using IPSL on a service bureau basis now represents more than 70 percent of U.K. check volume. A second example of this model can be found in Canada, where INTRIA Items Inc. is owned by CIBC and Fiserv, Inc. Another large Canadian bank, National Bank of Canada, recently announced it would outsource its check processing to INTRIA.

The Logical Outcome

TowerGroup expects a significant increase in check processing outsourcing. It is unlikely, however, that the largest U.S. banks will commit to outsourcing all their check locations in a single agreement. Rather, it makes sense for these banks to outsource their lower-volume regions first while they maintain their high-volume sites in-house. Eventually, they could consider outsourcing the higher-volume sites after evaluating the performance of the direct outsourcer or the success of the consortium.

We believe that large banks' outsourcing will occur primarily in two forms. First, banks will directly employ an outsourcing vendor as in the WAMU-Unisys agreement. Second, we believe that a number of local clearing house organizations will form check outsourcing consortia and then hire an outsourcer to process the checks (with the outsourcer typically becoming a equity owner of the venture). TowerGroup also believes that a number of bank-owned and -operated consortia will be established. However, we think that an outsourcer will eventually be hired to manage and operate these ventures.

Robert Hunt is a senior analyst in the Retail and Wholesale Banking practices at TowerGroup, a leading research and consulting firm focused on the global financial services industry. He is a career banker, with more than 30 years of systems and operations management experience. Mr. Hunt can be reached at

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