For some banks, the decision of whether to outsource key service operations or continue to provide them in-house is a difficult one. There are fears of losing control of quality or of being unable to afford the technology investments needed to meet evolving customer needs.

For other banks, outsourcing seems an obvious choice. Why burden the balance sheet with the cost of running a capital-intensive operation when you can leverage off the efforts of a third-party provider whose business it is to invest in technologies that enhance customer service?

Wells Fargo Bank, San Francisco, is in the latter category. "If we find somebody who can do something better and cheaper than we can, we are never opposed to doing that," said David Kurrasch, senior vice president in the bank's cash management area.

That's why Wells decided in 1991 to look for an outside company that could take over its lockbox operations. Its search ended in 1992 at the front door of Nationwide Remittance Centers, a McLean, Va., firm that earlier this year was acquired by another remittance processor, CashFlex - a Paramus, N.J.-based unit of CoreStates Financial Corp.

Under the arrangement, which Mr. Kurrasch speaks of as an "organizational partnership," Wells transferred ownership of its two lockbox processing sites - in San Francisco and El Monte, Calif. - to the processing company, while retaining for itself responsibility for the lockbox sales and customer service apparatus. The decision to outsource lockbox operations made sense, explained Mr. Kurrasch, because Wells found the business case for continuing to invest in the technological changes necessary to revitalize the product more and more challenging.

"When you take the fully loaded cost structure of a bank and all the attendant features, it's hard to reinvigorate a product (like lockbox), particularly when you compare it with that of an organization with a much lower cost structure," said Mr. Kurrasch.

One of primary tools in the cash management calling officer's box of tricks, lockbox processing is a labor-intensive operation for banks. There are envelopes to be opened, remittance stubs and checks to be removed and reconciled, checks to be encoded and deposited, customer account files to be updated, and reports to be generated. And because lockbox is a fairly generic service, it is often difficult for banks offering the service to differentiate themselves from competitors.

The advent of new technologies, such as image processing, have made it easier to adorn lockbox offerings with bells and whistles that enhance customer service without the need for additional staff resources. But these technologies are costly - running into millions of dollars - and difficult to justify unless a bank can amass a significant volume of lockbox work.

"A single financial institution can only aggregate so much volume," noted Joseph Proto, CashFlex senior vice president. "As a shared resource, we can aggregate more volume and make it cost effective."

Banks offer lockbox services to help cement cash management relationships "but many banks can't justify the scope of investment needed to ensure quality and profitability," observed Richard Poje, a principal with the Chicago consulting firm Treasury Strategies Inc. "The result is that buyers don't get the quality they are looking for."

This has been borne out by market revenue trends. In 1993, the most recent year for which statistics are available, banks saw a 2% drop in retail lockbox revenues, while overall cash management revenues grew by 7%, according to Lawrence Forman, a manager with Ernst & Young's cash management practice, in New York. Revenues from wholesale lockbox services grew by 8%, he said - slightly better than overall cash management revenues.

Nonbank providers of lockbox services, on the other hand, are experiencing significant growth - the volume of retail remittances processed by nonbanks grew by 24% in 1993, according to the 1994 Ernst & Young Cash Management Services Survey. "That's where all the volume is going," explained Mr. Forman.

Retail lockbox is characterized by a large-volume of small- dollar consumer remittances; wholesale lockbox, on the other hand, focuses on the processing of small volumes of high-dollar corporate-to-corporate remittances.

Because of the large volume of remittances involved, the capital commitment is much greater for retail lockbox than it is for wholesale, though, experts agree, the cost of providing wholesale lockbox can climb significantly when image technology is added to the equation.

Historically, Wells focused on wholesale lockbox, said Mr. Kurrasch. But one of the benefits of moving its lockbox operation to an outside firm, he said, was that it gave the bank an opportunity to pursue the retail lockbox business.

"We could never make a good business case for retail lockbox ourselves," said Mr. Kurrasch. But by piggy-backing on what is now the CashFlex operation, the opportunities were immense. "Now Wells Fargo can sell retail lockbox in one of the most expensive real estate marketplaces in America, and we thrive on it."

Indeed, said Mr. Kurrasch, turning over the operation to an outsider has allowed Wells to expand the full scope of services offered its lockbox customers. In addition to moving into retail lockbox, Wells also has expanded its lockbox network beyond California's borders. A new lockbox site in Dallas, he noted, has increased by 10% the bank's total lockbox remittance volume. "We can now better serve our customer needs," said Mr. Kurrasch.

And since the CashFlex corporate reach extends to 16 processing sites, Wells can expand its customer service reach into new markets without incurring additional up-front costs.

In addition, the relationship with CashFlex is helping Wells to better meet customers' burgeoning needs for information.

"The customer service equation is changing immensely," explained Mr. Kurrasch. Customers are looking for instantaneous or near instantaneous access to lockbox information. The current generation of lockbox hardware is adequate for meeting basic information needs, noted Mr. Kurrasch, but it still focuses on moving batches of digital or photocopy images that must be mailed or faxed to customers. What customers want today, said Mr. Kurrasch, are daily CD-ROM reports or direct transmissions of lockbox receipt images. But the conversion to these new technologies and reporting techniques is a difficult one to support, he added. "CashFlex will take on that conversion and make it real for our customers," explained Mr. Kurrasch.

And that should help enhance Wells Fargo's revenue stream from lockbox services, because, as Mr. Kurrasch put it, "customers will pay for speed, accuracy, and timeliness" of information.

As for the affiliation between CashFlex and CoreStates, Mr. Kurrasch sees little to be concerned about. The firewalls that have been established between CoreStates' banking units and CashFlex, he said, are sufficient enough to put his mind at ease over the confidentiality and privacy of Wells Fargo's customer relationships. Besides, he notes, CoreStates' dedication to the business adds value to the relationship. "They will invest a lot of money in the technology necessary to make lockbox contain value and make the pricing of lockbox appropriate for customers," predicted Mr. Kurrasch.

Mr. Proto, one of the founders of CashFlex, said he and his colleagues have made it a point to ensure their bank customers are comfortable with the company's ownership situation. CashFlex has had firm assurances from CoreStates since the Philadelphia-based bank holding company purchased the firm in 1992, he noted, that CoreStates would provide the capital necessary to build the business and install state-of-the art technology, and that CashFlex would be run completely independent of Corestates' banking units.

"Even if one time someone were to lose a corporate relationship because of CashFlex's relationship with CoreStates, it would ruin the franchise we've built," said Mr. Proto.

Clearly, outsourcing lockbox operations is not a panacea for the banking industry, but it's a value option for some.

"It's not a formula that works for everybody," said Mr. Kurrasch. "But, if we can provide a product that has consistent, reliable and uniform features at reasonable prices and with local check availability all across the country, we have a very valuable formula.

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