Americans are facing what many describe as the most severe economic downturn since the Great Depression. Falling housing prices, rising mortgage rates and the tightening of worldwide credit markets have swiftly and acutely impacted nearly every consumer. As a result, many Americans are prioritizing their bill payments to make ends meet, and delinquency and default levels are rising.
Payment delinquencies have extended well beyond those consumers holding subprime mortgages. According to an October 2008 study by Experian, delinquencies among adjustable rate prime first mortgages have risen 491% from the third quarter of 2006, and bankcard delinquencies for these prime adjustable rate mortgage holders have risen 286% in the same time period. The same study indicates that more than one percent of all mortgages taken out by prime borrowers during or after 2005 had entered foreclosure by June 2008. That means that scores of billers, not just mortgage holders, are competing for a share of a diminished consumer wallet. According to a September 2008 survey by CareerBuilder.com, 47% of all workers and 21% of workers with annual salaries of at least $100,000 say that they always or usually live paycheck to paycheck. In a November 2008 Wall Street Journal article, Rebecca Smith reports that "utilities are becoming more aggressive about collecting money from delinquent customers, leading to a surge in service shutdowns just as economic woes are pushing up the number of households falling behind on bills."
Billers are coming to realize the importance of having remittance operations that can leverage technology to optimize visibility and flexibility and accelerate revenue collection. In an October 2008 report released by Celent, "Bad News on the Street: Insurance IT Strategy and the Financial Crisis," the authors comment on the challenges currently facing the insurance industry: "Carriers will need to reexamine their IT projects against a combination of strategic goals, including getting bigger by growing revenue, getting leaner by reducing expenses and increasing productivity and getting smarter by making better use of their data." Achieving these same goals is necessary to operate a successful billing group during this economic downturn, and organizations need to apply an equal degree of scrutiny and focus on their existing remittance processes.
Under pressure in the economic downturn, many billers are scrutinizing their remittance operations in an attempt to reduce head count, improve productivity and accelerate the cash cycle. Some back office inefficiencies that affect a company's bottom line go unnoticed, however, because they manifest themselves in other parts of the organization, including accounting and customer service. One of these inefficiencies is the failure to integrate data from multiple payment channels into a unified database accessible by multiple functional groups.
Most of today's billers are managing a complex hybrid payment environment that includes paper, electronic bill presentment and payment (EBPP), recurring debit and credit, third-party consolidators, interactive voice response (IVR) and expedited one-time debit and credit payments. In addition, with the increase in M&A activity, many billers undergoing a merger or acquisition are finding that their payment mix has changed, particularly if the acquired company has a different blend of consumer and business customers than the acquiring company.
Although many billers are actively encouraging their customers to move to some form of electronic payment, a 2007 estimate, prepared by Celent Communications and Crone Consulting, indicated that 44% of American consumers still pay most of their bills via paper check. Increasingly, billers are converting some portion of these paper checks to electronic images via ARC, Image Cash Letter (ICL) or other imaged transaction processes, since check images clear more quickly than paper checks. Clearing checks quickly not only accelerates revenue collection but also often reduces returns for insufficient funds, since electronic payments will usually clear before paper payments, increasing the likelihood that funds are still available in the consumer's account. However, this mix of check images, electronic payments and paper check files often introduces problems when multiple vendors or systems are involved.
While the argument for back office consolidation is compelling, deployment of a proprietary system for data integration is no trivial initiative. Since remittance processing is not a core competency for most billers, a major investment in both time and R&D will be required to acquire the necessary payment imaging and software integration technologies. According to a March 2008 report from Dove Consulting, "in-house operations will require additional investment in systems to capture the ARC and Check 21 benefits, but this may lead to higher per item costs as [paper check] volume falls."
Without prior experience and an in-depth understanding of payment regulations, it can take months or even years for a biller to build, test and broadly implement a consolidated remittance platform. Many billers are understandably skittish about committing significant capex during uncertain economic times, while others worry about the potential financial consequences of disrupting their existing back office operations, particularly if they are reducing head count. In the previously mentioned Celent report on the insurance industry, the authors comment, "The world has changed but not ended. Insurers, their technology groups and technology vendors need to recognize this change and adapt to it." They add, "Adapting includes an examination of implementation plans and budgets with an eye toward short-term, tactical payback."
For billers who realize that they should not delay the consolidation of their back office operations, outsourcing presents a very attractive solution. At the Gartner Symposium/ITxpo 2008 conference in Orlando this past October, Gartner's global head of research emphasized that "the next big thing in IT is not a technology - it is cost reduction, risk management and compliance." Best-of-breed remittance providers are able to deliver all three without major IT investment or head count additions. Costs are predictable, and billers can take advantage of a vendor's economies of scale while maintaining the flexibility to accommodate changes in the payment mix. Having many implementations under their belts, deployment is typically faster and more seamless with top-tier remittance providers than with in-house initiatives. And since outsourcers usually deal with many different types of clients, they have a broad range of regulations to which they must adhere and usually have a diligent process in place to stay compliant with the latest rules and changes across all payment channels.
Some remittance providers now offer web-based transaction automation tools that can consolidate data from a myriad of paper and electronic sources to provide a single archive and integrated AR file, eliminating costly manual intervention. Benefits include faster dispute resolution, accelerated account reconciliation, improved visibility and lower customer service costs. The best automation tools incorporate dynamic business rules, which give billers the flexibility to create self-service business rules that help handle nonstandard payments that automatically and repeatedly become costly exceptions and delay collection. By predetermining rules for nonstandard payments, billers can choose to accommodate consumers that are attempting to avoid default by making partial payments. Dynamic rules can be a particularly powerful tool in today's unusual payment environment as billers face mounting delinquencies and collection challenges.
Some forward-looking billers are taking remittance consolidation to the next step, integrating their billing and remittance operations onto a unified platform. These billers enjoy significantly enhanced visibility across the entire revenue collection cycle, particularly useful if a biller wants to predict consumer behavior, such as how quickly a consumer may mail his or her remittance after receiving the bill. Billers with a consolidated billing and remittance system can dynamically incorporate messaging on a customer's invoice to help collections and avoid rolling delinquencies and defaults. When combined with a deliberate postal optimization strategy for paper documents and a combined electronic delivery strategy, a unified billing/remittance platform can help to more accurately predict the timing of revenue collection to minimize float and DSOs.
In an October 2008 survey conducted by the National Association of Business Economists, an overwhelming majority of top economists believed that the US will remain in recession through 2009. If so, billers will be compelled to tighten their belts and run at optimum efficiency, and they will need to understand their customers' payment behavior at the most granular level so they may affect that behavior to accelerate cash collection. That means that billers will be called upon to manage their multiple remittance channels to reduce clearing costs and float. Consolidating the back office will be key to realizing efficiencies in a complicated hybrid payment environment, enabling billers to make smart decisions while grappling with one of the most difficult economies of modern times.
Tracy Dalton [tracy.dalton@regulusgroup.com] is manager of product development and management for Regulus Group, a transaction processing solution outsourcer provider.
Greg Adelson is the chief revenue officer for Regulus Group. |
