Growth Trend in Outsourced Payment Processing: Is this a Good Thing?

In April 2009, JPMorgan Chase announced an agreement to outsource its retail lockbox business to Regulus Group, a unit of 3i Infotech. More recently, Citibank announced it sold its retail and wholesale lockbox business to RemitCo, a subsidiary of First Data Corporation. Is declining consumer check writing at the root of both moves? Sure, but I think there’s more to it than that. These two moves are a reflection of a more strategic evolution in financial services. Financial institutions are revisiting all aspects of their operations with an eye toward efficiency and long-term competitive advantage. Celent observes accelerating outsourcing trends elsewhere. For example: • More than half of US financial institutions outsource their core banking systems. • Three quarters of financial institutions have RDC solutions using SaaS/ASP models. • More banks are outsourcing the operation of their ATM channel. • A growing number of banks are outsourcing loan origination and other back-office business processes to BPM firms. And the list goes on. Is this a good thing? It can be, particularly when the processing entity demonstrates a true core competency in the relevant business process. BPM firms are increasingly pricing services based on a share of cost savings realized. And deals are won not based on old notions of labor arbitrage alone, but demonstrable expertise in delivering world class performance in select business processes. Where the work gets done may be becoming less important. FIs considering further investment in back-office processing should ask themselves four questions: 1. Is this (e.g., item or remittance processing) a core competency? 2. Will maintaining an in-house operation be a source of sustainable competitive advantage? 3. Will the requisite investment generate an adequate ROI both short and long-term? 4. Will this be the best use of available capital? I suspect that for most financial institutions, the answers would be an easy “no”.