As banks continue to push corporate clients to handle payments electronically, they are showing less interest in processing paper checks and invoices at lockbox facilities.
Bankers say that offering electronic payments services enables them to offer a variety of other for-fee features, while the arduous work of opening envelopes and sorting checks is becoming less viable, particularly as people write fewer of them.
This is especially true for retail lockboxes, which process consumers' payments to billers. And
He noted that lockbox sites typically have complicated machinery and extensive automated systems that need to be maintained, making them more like an industrial plant than a banking service. Citi concluded that lockbox "is a manufacturing business we did not want to be doing ourselves," Gupte said.
Earlier this month
"The retail trend is almost completely played out," Barretta said. "The wholesale piece, you're just seeing that start."
Banks have been more willing to outsource their retail lockbox functions while retaining the wholesale businesses, which handle more complicated transactions and therefore carry a higher fee.
"Owning something is always better than not," Vaream said. "We need to be close to the client and understand how to provide that capability for them."
But retail lockbox is a straightforward job, Vaream said, processing checks for amounts that correspond to payment coupons and posting the payments to customers' accounts. The increasing use of electronic payments and credit cards eventually led JPMorgan Chase to conclude that it was a declining business.
But wholesale lockbox services are more complex and more lucrative, he said, because a single check can cover multiple invoices and include a range of disputed items, partial payments or other adjustments. "We will not be exiting this business," Vaream said.
Still, vendors that offer lockbox service say they are preparing for more wholesale volume.
Regulus, a unit of
Regulus provides clients with a single file of payments information, whether those payments come in over the Internet, by phone or through a lockbox, he said, which gives the company the ability to handle complex, wholesale payments.
"We clear almost all of our payments electronically," he said.
Remitco already does some wholesale business, and expanding its wholesale operations is "definitely a consideration," Etheredge said by e-mail.
Neither First Data nor 3i Infotech disclosed the price of their acquisitions.
The First Data deal, which is scheduled to close in September, would not affect Citi's processing of its own mortgage, credit card or auto loan accounts or its public-sector business that provides purchasing and travel cards to government agencies.
Rather than focusing on the physical processing of paper payments, Citi plans to concentrate on electronic services, including information reporting and financial management services for clients, Gupte said. "We're building out a whole strategy to help our clients manage their receivables."
He said the fundamental issue in lockbox is scale with fewer people writing checks, there is less need for lockbox services.
"On the one hand, this is a critically important piece of the overall treasury services business that we provide," Gupte said. "On the other hand, it's a business that is very difficult to get scale in."
And in lockbox, where efficiency is measured by slicing fractions of a penny off processing costs, scale is critical.
Citi is not the first to get out of wholesale lockbox.
Barretta said that while processing retail lockbox payments can be worth just pennies per item to a bank, a B-to-B payment can net up to $1 per check, largely because of the value of the imaging and data capture to the corporate client. As a result, wholesale lockbox remains an attractive business for big cash-management banks.
However, many of these banks have developed electronic payments services that are starting to take off. These enable banks to offer new types of automated cash management services, but the trade-off is that they also cut into their wholesale lockbox volume.
"There's a threat to the big players" that offer wholesale services, Barretta said. They are "seeing that revenue go away."