Opportunities for Payment Processors: Industry Trends

In the latest issue of TODAY Magazine Ed Bachedler Director of Research from Dove Consulting looking at TAWPI studies as well as other’s clearly points out that the remittance processing industry is entering an era where the dominance of paper checks as the most popular bill payment instrument will be over. Paper checks are being replaced by an expanding array of electronic payment methods ranging from ACH eChecks to prepaid cards. Studies have documented what many billers are already experiencing, that electronic payments are rapidly displacing paper-based bill payment methods for U.S. households.

Graph: Paper-Based Bill Payments as Percent Total

If trends continue, paper-based bill payment methods may fall to a 44% share in 2007, down sharply from a 78% share in 2001. As a result the key implication for managers in Remittance Processing operations need to take a bigger role in the payments puzzle and help develop a strategy for electronic payments and this is why.

The rapid changes in the payments landscape and proliferation of payment methods are putting pressure on remittance processors to manage their increasingly complex operations with limited resources. ARC check conversion, Check 21 and Image Exchange initiatives are fueling a shift from paper to electronic processing and require system upgrades and investments for processors to realize the benefits. Consumers and businesses are writing fewer checks each year as financial institutions continue to expand “free” electronic bill payment. Importantly, the rate of change for electronic bill payment is accelerating and suggests that paper-based bill payment will reach an economic “tipping” point versus electronic payments in the next two to three years. Consequently, the key success factors–service offerings and economic equations for billers–are also shifting, which in turn will drive remittance processors to adapt their systems and processes to simultaneously capture the inherent economies of scale of electronic payments with compounding complexity of managing an ever-increasing and diverse payments mix. For many billers, the business case for investing in new systems will be difficult to develop unless they can articulate a broader enterprise perspective that crosses traditional organizational silos.

Lockbox Volume Trends Suggest Growth in Outsourcing

TAWPI members involved in remittance processing have been divided about the direction in their remittance processing volumes. Over half of the respondents who only process in-house remittances have seen volumes trending down in the prior year. On the flip side, however, over half of the processors who conduct only external remittance processing operations have seen volumes going up. This may be due to consolidation in the business—as more external clients are added, gross volumes go up. The volume trend is mixed for those processors who perform both in-house and external operations, with 51% seeing an upward trend and 43% seeing a downward trend.

Graph: What Volume trends have your seen in your
remittance processing operations over the past year?

The Postal Diary Study shows that the total number of bills paid
increases each year, however, the growth has been captured by
electronic bill methods and the number paid by a mailed check is
declining.

Graph: Monthly Average Household Bill Payment Method

Dove Consulting’s bi-annual consumer payments preference study has shown that the adopting of automatic and online bill payment using credit cards and ACH methods has steadily substituted for paper-check payments.
These trends have been validated by other recent research studies.

Graph: Recurring Bill Payment Mix

Anecdotal data from discussions with billers reveals that electronic
payments now represent the majority of their payments received, and this does not include ARC or Remote Deposit Capture activity.

Lockbox Operator Adoption of Web-based

Payment Services The remittance processing environment has changed dramatically since TAWPI’s 2001 Study – now the majority of participants do provide a Web-based payment alternative.
By 2007, three-fourths of the participants expected to offer Web-based payment capabilities.

Graph: 2001-2006 Study Comparison: Web Based Payment Alternatives

Implications

Billers and payment processors wanting to take advantage of the
growth in electronic bills and payments need to recognize distinct
behaviors by households concerning both aspects of transacting. The
Household Diary Studies offer insights that can help billers and payment processors better manage costs. While there is potential for considerable growth in both electronic bill presentment and electronic bill payment in the years ahead, there are signals that households prefer mailed bills to electronically delivered bills. Remittance Processors must determine a migration strategy to take advantage of the growth in electronic bill payments volume and address complexity.

• Bill payment economics will shift rapidly as paper check unit
costs rise over several years.
• ACH check conversion can’t occur if there is no check (source
documents) combined with increasing customer churn out of
ARC as they stop writing checks.

• Outsourcing will accelerate as processors seek to capture remaining
volume for over which to spread their costs.
• Lockbox operations will be squeezed to keep paper payment
costs falling per unit.
• Exceptions will become increasingly painful and expensive.
• Workflow and volume growth will be critical to success.
• IT systems must be tied together to support customers payment
data. The increasing adoption of corporate ERP systems (e.g.,
SAP, Oracle) increases the need for live links to customer files to
achieve efficiency in AP and AR posting.

Good News

• Remittance Processors are processing payments on a very cost
effective basis vs. card-based payments.
• Speed is the key to productivity in Remittance Processing.
– Throughput (items per paid hour) rates have increased through
the adoption of image based systems and work-flow management.
– Faster extraction, fewer errors, fewer passes/key strokes and
more image-based automation, better OCR/ICR accuracy.
– Read-rates and process quality continue to improve.
• Best Practices operations have adopted image processing and
use Six Sigma methods to meet customer needs.

Ed Bachelder is the Director of Research at Dove Consulting.
He can be reached at 617-753-9223 or ebachelder@doveconsulting. com.

Is Google entering the OCR space?

Announcing the OCRopus Open Source OCR System

Posted by Thomas Breuel, OCRopus Project Leader:

We're happy to announce the OCRopus OCR Project, a Google-sponsored project to develop advanced OCR technologies in the IUPR research group, headed by Prof. Thomas Breuel at the DFKI (German Research Center for Artificial Intelligence, Kaiserslautern, Germany).

The goal of the project is to advance the state of the art in optical character recognition and related technologies, and to deliver a high quality OCR system suitable for document conversions, electronic libraries, vision impaired users, historical document analysis, and general desktop use. In addition, we are structuring the system in such a way that it will be easy to reuse by other researchers in the field.

The OCRopus engine is based on two research projects: a high-performance handwriting recognizer developed in the mid-90's and deployed by the US Census bureau, and novel high-performance layout analysis methods.

The project is expected to run for three years and support three Ph.D. students or postdocs. We are announcing a technology preview release of the software under the Apache license (English-only, combining the Tesseract character recognizer with IUPR layout analysis and language modeling tools), with additional recognizers and functionality in future releases.

The IUPR research group has extensive experience in OCR and related technologies, and will be basing the work on previous research and existing software in the area. Existing software components include high-performance handwriting recognition software that has received top evaluations by NIST and was deployed by the US Census Bureau, the recently open sourced Tesseract OCR system, a separate Google project for probabilistic natural language modeling, and software for layout analysis and character recognition. The IUPR research group gratefully acknowledges funding by the German BMBF, the state of Rhineland Palatinate, and other public and private partners (please see http://www.iupr.org/doku.php for more details).

We are hoping for contributions by the open source community in areas such as adapting the system to additional languages, creating a Gnome desktop application, integration with Gnome desktop search, web-based tools for proofing and training, language modeling, additional character recognition engines, and other useful tools and add-ons.The project web page can be found at ocropus.org.

US Mobile Banking Trends: Beyond the Buzz

Mobile banking will be a significant financial services channel that will be used by 35% of online banking households by 2010. The relevance of mobile banking and the likelihood of its success have been in question. But mobile banking is here to stay and will grow significantly faster than online banking, according to a new report from Celent, US Mobile Banking: Beyond the Buzz. By 2010, 35 percent of online banking households will be using mobile banking, up from less than 1 percent today.

New functionalities will make mobile banking distinct from online banking and attract users. For instance, mobile banking will eventually allow users to make payments at the physical point of sale. These “mobile contactless payments” will make up 10 percent of the contactless market by 2010.

Mobile banking initiatives are of particular interest to 18- to 25-year-olds, also known as Generation Y. They will gravitate to mobile banking faster than the general population. According to the report, 40 percent of Generation Y indicates that mobile financial services will be a factor in their choice of bank. Five years from now, a significant percentage of this demographic will be in cell-phone only households, retrieving information and conductions transactions from their handheld devices frequently.

Celent estimates that by 2010, upwards of 70 percent of bank center call volume will come from mobile phones. Half of those calls will be related to basic balance inquiry information. This information will be readily available on a phone and will take less time than a phone call. A customer service inquiry via mobile banking (as opposed to a call center) will cost less and be an impetus for banks to embrace this new channel. Mobile subscribers of data services will cut across income levels, age, and ethnicity and are very good leading indicators of mobile content usage, including mobile financial services.

"The mobile banking end game will not be about checking balances and paying bills. It will evolve into a mobile wallet, allowing banks to generate greater electronic payment volume through the combination of electronic loyalty programs, mobile marketing, and contactless payments," says Dan Schatt, author of the report and senior analyst at Celent. “While loyalty and marketing applications are still largely confined to product roadmaps, they will make their debut in late 2008, and by 2010 we will see the fusion of mobile banking and mobile contactless payments.”