11:05 AM
Dan Oswald
Dan Oswald

Making Sense of a Lockbox Strategy in a Declining Check Market

Why outsourcing or co-sourcing your lockbox operations could be the answer to maintaining profitability.

To many of us, it feels natural that when uncertainty is certain, instinctual action and critical decisions often result in deferment. We hope that clarity arrives and bestows wisdom. But too often, prudent courses of action are bogged down with hesitancy, indecisiveness, and organizational consensus to review again later. In other words, let’s park the car until we have a better view of the best route.

The problem is you’re racing against time. The longer you wait, the more likely you will be dissatisfied with your finish. Many of today’s payment operations executives are facing the same dilemma, no matter the size or complexity of the problem at hand.

Treasury executives facing array of challenges
Treasury executives know all too well the challenges of building an acceptable business case for modernizing the in-house lockbox operations, given their capital preservation needs and financial return requirements. With an array of competing priorities and the realities of finite capital resources at their disposal, it’s understandable that many institutions park the car waiting for a better route to appear.

Consider the facts: The 2013 Federal Reserve Payments Study reflects a -9.2 percent compound annual growth rate (CAGR) in B2B paper-based payments, while C2B paper-based payments continue to decline at around -7.9 percent CAGR.

If you’re operating in-house, it can be difficult and expensive to continually remain current with the most desirable capabilities your customers want and need, even under optimum conditions. Given the ongoing volume declines, which help justify in-house systems upgrades, the ongoing efforts in managing technology refresh cycles and leading the way (or even being a fast follower) in your market has become extremely difficult and economically questionable.

Consider the future
We have all heard in recent months that it’s likely the US payments system is headed for a major modernization overhaul, which will significantly accelerate the movement away from paper-based payments and into the 21st century of electronic issuance. With this upcoming change and the continued movement to ACH, it’s conceivable that we will experience an accelerated decline in paper-based B2B payments well beyond what we’re already seeing.

How to ensure you stay in the race
Taking action and moving in the right direction -- even if it means making strategic decisions with only 80 percent of the required data -- is more valuable than waiting for the perfect answer, particularly in light of today’s declining check market and the move to electronic payments. It’s simple: Short of your ability to grow check volumes 20 percent a year or more, in-house operations will lose their financial operating leverage, which in turn will damage your operating margins.

Don’t get caught flat-footed. For many, maintaining an economically viable lockbox offering will require that you embrace a strategic partnership and pursue a path of intelligent co-sourcing or outsourcing. Doing so allows you to reverse the trends with margin compression in your product offerings and offset the ongoing and painful impact of declining check volume on your fixed operating expenses.

Acting now allows you and your organization to:

  • Improve return on invested capital and convert fixed costs of traditional in-house lockbox operations to a fully variable expense that scales with volume.
  • Maintain “best of breed” lockbox capabilities without capital infusion and lost time.
  • Preserve and improve your long-term operating margins and product financial performance.
  • Obtain an economically viable path to the most current and desired treasury and lockbox capabilities without the burden and financial pain of the continual reinvestments that upgrade cycles require.

Other benefits include improving the viability and executable capabilities with your disaster recovery and business continuity planning requirements, expanding your footprint into new geographies and vertical markets, increasing fee revenues with value-added services (e.g., integrated receivables), and more.

Now is the time for action. Waiting will only prolong the inevitable and increase the effort required down the road as you try to catch up in a race that may already be over.

Dan Oswald is vice president of Business Development at WAUSAU Financial Systems. With nearly 30 years of experience in the financial services industry, Dan is skilled in awide range of key disciplines including operations leadership, strategy formulation, product ... View Full Bio

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User Rank: Apprentice
11/23/2014 | 6:51:51 PM
Finance 301 Extra Credit
I am a student at the University of Tennessee taking Finance 301. I just wanted to let you know that I really enjoyed your article. Chapter 9 in our textbook discusses Lockboxes in detail. Oftentimes my professor will show articles from outside sources during his lecture. For extra credit, we were asked to write an executive summary of an article relating to our class as well as a recommendation convincing him why he should use this article in future classes. I am an accounting major and enjoyed the section in our finance book about speeding up receipts and slowing payments. You had a great article in general and for my purposes. Thank-you for sharing.
User Rank: Author
11/23/2014 | 8:30:19 PM
Re: Finance 301 Extra Credit
Thanks for your comment. Glad the article was useful for you. A lto of companies are working hard to modernize our payments systems. But until that happens, traditional solutions like check lockboxes are going to be used, and will need to be optimized for demand.
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