ACH Outsourcing: Profitability Enhancement for Mid-tier and Large Financial Institutions
The credit crisis has exacerbated the need for financial institutions to reduce operating costs, safeguard customer relationships and maximise revenue potential. Until recently, most financial institutions counted on their payments business to generate between 15% and 30% of total revenue. However, with a decline in credit products, payments now represent an even larger share of overall revenue. The implication is clear: protecting that income is critical to survival during these tumultuous times. To make the payments business more profitable, financial institutions must first consider ways to reduce or eliminate costs. Automated clearing house (ACH) outsourcing is one such way financial institutions can reduce costs while improving customer service and payments product delivery.
Technology and staffing have always accounted for a significant portion of the expenses associated with running a payments business. With cheque volumes declining and ACH transactions becoming more prevalent, it is increasingly complicated for financial institutions to control per-item processing costs. Keeping up with regulatory compliance also requires extensive resources and institutional focus. One way for financial institutions to reduce payments-related expenses is to migrate from the primarily fixed cost model of ACH processing to a variable cost solution.
Mid-tier and larger financial institutions typically process payments in-house on their own mainframes, which incurs significant hardware, software and personnel costs. As the quantity of cheque and ACH transactions continues to change, it is becoming more complicated for financial institutions to allocate these mainframe costs. It is difficult to gauge how changing volumes will impact processing speed (MIPS) and data storage (DASD). This makes it hard for financial institutions to estimate future hardware usage and to forecast related expenses. And, in addition to volume fluctuations, the trend to move mainframe applications on to servers is exerting additional cost pressure on mainframe-dependent ACH processing.
Beyond the costs for MIPS and DASD, financial institutions must pay salaries and benefits for the IT professionals who maintain the mainframe hardware and implement and customise payments processing software. Keeping pace with regulatory changes, like the International ACH Transactions (IAT) rules that go into effect in September, requires dedicated operational as well as technical resources. Those technical resources are becoming harder to come by as today’s IT professionals pursue more flexible career paths by learning HTML, Java and the other Internet-based languages, instead of COBOL, the language used exclusively for mainframe programming.
Outsourcing ACH application processing reduces the requirements for both computing resources and personnel. For many institutions, in-house ACH processing requires investments that might be better spent on customer-facing activities that have the potential to generate revenue.
There are three ACH outsourcing models (hosted, application service provider (ASP) and business processing outsourcing (BPO) ) that financial institutions can select to best support their operational and customer service objectives. The business case for ACH outsourcing can be demonstrated by the immediate operational and IT cost savings that results from the elimination of ACH mainframe expense and software maintenance and upgrade costs. To that end, migrating to a predictable, volume-based cost model makes it easier for financial institutions to estimate how changing volumes will impact per-unit costs.
One such model financial institutions could select is the hosted model that shifts primary fixed in-house costs for data processing and storage to a variable per-unit cost. So, instead of processing ACH transactions on the financial institution’s hardware, the processing is migrated to the technology provider’s data centre – and hosted on its mainframe. In this setup, the financial institution’s staff continues to manage implementation and customisation of the software and is responsible for running all cycles, processing end-of-day, balancing and reconciliation. In the hosted model, management of end-user touch points, including exception/returns and risk management, remains the responsibility of the financial institution.
In addition to shifting costs for hardware use like the hosted model, the ASP model also enables financial institutions to offset software and IT staffing costs. In addition to processing all ACH transactions with software on a mainframe, the technology provider handles running all the cycles, processing end-of-day, balancing and reconciliation. The provider also manages all software implementations and upgrades. Using this model, financial institutions eliminate the need for in-house software implementation projects and application testing. Exceptions and returns handling, as well as risk management, remain the domain of the financial institution.
In the BPO model, the provider acts as a virtual extension of the financial institution – providing complete management of the software as well as day-to-day processing, exceptions/return handling, help desk and risk management. While the hosted model offers the greatest opportunity for financial institutions to customise ACH processes and the ASP model leverages a software version that is common to all users, the BPO option is a hybrid approach. Choosing this model provides the flexibility for the technology provider to evaluate and implement requested customisation on behalf of the financial institution.
The state of the industry requires that financial institutions find more cost-effective ways to manage their operations. ACH outsourcing is a way to free up resources, eliminate costs and do more with less. Outsourcing ACH processing results in a predictable cost model that will help financial institutions navigate these turbulent times by protecting and even growing payments profitability.