DOCUMENT Magazine - June 2008 - (Page 33) An ACH transaction costs approximately $.05 versus $.25 for paper checks, so the motivation for electronic clearing is obvious. Advances in imaging hardware and software have made electronic payments available to remittance processors of all sizes, and these technologies are improving every day. Additionally, ARC payments are usually available about one day sooner than paper checks. With billers becoming more comfortable leveraging electronic payments and realizing the benefits, they are now looking for additional ways to increase their paper check conversion rates, speed availability and reduce transaction costs, just like the banks. The additional incentive that billers have which financial institutions do not is the ability to optimize not just the clearing vehicle (such as ARC, Image Cash Letter (ICL), etc.) but to choose the “best” bank in which to have the cash deposited. Because billers have the option of working with multiple financial institutions at the same time, they can send each payment to the institution offering the best rate or availability for that particular payment type. This allows the biller to pick and choose not only how the payment is cleared but also where. That is the promise of LCBR. Overcoming the Missteps The biggest hurdle is a company’s ability to manage multiple banking relationships. It’s common for larger organizations to manage multiple banking relationships, even if just to gain access to additional credit lines. For these billers, instituting LCBR may be simpler because the internal processes for managing multiple financial institutions are already established. However, for companies that are used to managing a single bank, moving to multiples banks can be a headache and the management requirements may outweigh the benefits. Some companies will not even entertain the idea of working with multiple banks because of the difficulty in tracking settlements and maintaining those relationships. Any company attempting LCBR should also be concerned with image quality. LCBR only works if the electronic payment vehicles have very high rates of success. If a biller is converting payments to ARC and ICL, but these payments are being rejected due to poor image quality, the electronic clearing costs are going to be much higher than normal paper clearing. That means billers have to have ongoing quality checks with each of their banks. These quality checks involve testing the image quality of transfers to ensure that the banks are able to read and accept the images. Ongoing rejection rates then need to be carefully monitored so that any deviation from “acceptable,” as defined by the financial institution, is detected early and imaging equipment or software can be recalibrated and tested again. Even with regular image quality testing, there will always be returns, whether due to poor image quality, non-sufficient funds or for a host of other reasons. When a biller embarks on a LCBR approach, they are depending on multiple clearing mechanisms. As a result, they have to be prepared to handle the different types of rejects as they occur, from paper rejects to ARC returns and everything in between. Often, companies are able to manage the payment process but get bogged down quickly in dealing with returns of multiple payment types through multiple depository relationships. Optimizing the LCBR Relationships At its core, LCBR involves loading parameters into a master clearing table to be used by a company’s remittance processing software. These parameters encapsulate the multiple banking relationships a company may have, such as the cost for clearing each payment method and the availability limits with each institution. This table essentially acts as a complete detailed listing of the various transactions that may occur between the biller’s remittance operation and the bank during the act of clearing payments. Billers are also able to customize their individual preferences within the clearing table so that the LCBR process is uniquely suited to their needs. For example, a biller may specify preferences that place an emphasis on availability over lower transaction fees, depending on their individual business needs. To demonstrate, let’s assume that XYZ Insurance company has a relationship with two different banks, Top Dollar Bank and BusinessPro Bank. XYZ Insurance wants to balance availability and transaction costs, so they load specific preferences into the clearing table. These preferences specify that payments received before 9 AM are to clear via ICL because it offers same-day availability for images received before 9 AM. Also, XYZ Insurance specifies that ICLs should be sent to Top Dollar Bank because it has a much lower rate of image quality returns for ICL than BusinessPro Bank. XYZ Insurance also specifies that images received after 9 AM are to be converted to ARC because after 9 AM the checks can’t be cleared on the same day anyway, so ARC is the cheapest clearing method. XYZ further instructs these ARC payments be sent to BusinessPro Bank since they offer the lowest cost for ARC clearing. In this example, XYZ Insurance is using LCBR to strike a balance between cost and availability and leveraging their relationships with each bank to do that. These preferences can then be updated as banking relationships grow and change and the routing updated to meet current state conditions. Ultimately, LCBR is about optimizing each individual payment. As such, LCBR does away with a one-size-fits-all approach to remittance processing. Instead of having blanket policies on clearing, LCBR offers tremendous flexibility and shifts control over clearing from the banks to the billers so that billers now reap the rewards of intelligent routing. However, as mentioned previously, the LCBR approach does require a degree of sophistication and is not without pitfalls. Balancing the Option of LCBR Ultimately, ensuring quicker, more reliable cash at a lower cost is the name of the game. As the payment evolution progresses from ARC to Check 21 and now to LCBR, there are even more opportunities to optimize your payment processing. Leveraging multiple payment and clearing methods with multiple depository institutions can allow companies a great deal of control over the payment process and help these companies personalize their payment stream to best suit their individual business needs. However, this approach is not for everyone and requires clear payment goals, focused process management and the ability to stay on top of the latest electronic payment regulations. But for companies that have the scale and foresight to dedicate themselves to this type of payment optimization, there is a clear competitive advantage to adopting LCBR and reaping the advantages that come with it — one that looks to remain intact for the foreseeable future. Tracy Dalton is manager of product development for Regulus Group, the leading US outsourcer and integrated provider of bill presentment and payment processing. Ms. Dalton has been with Regulus for over 15 years. Josh Wendroff is the manager of marketing analysis responsible for market analysis and marketing strategy for Regulus Group. Mr. Wendroff has a broad range of experience in marketing, market and data analytics, technology, financial services and public relations. For more information, email tracy.dalton@regulusgroup.com or visit www.regulusgroup.com. ■ www.DOCUMENTmedia.com june.08 document 33 http://www.regulusgroup.com http://www.DOCUMENTmedia.com
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