Bluepoint Solutions

In-House versus Outsourcing

Outsourcing is the most common solution for item processing, but moving in-house offers a unique set of benefits such as cost savings, increased control, greater flexibility and streamlined operations. As their existing outsourcing contracts come due for renewal, it is the combination of these factors that has prompted credit unions to evaluate in-house solutions and compare them with outsourcing options.

Outsourced Item Processing: The process of forwarding checks—either paper or images—to a third-party that will process items, transmit them for exchange, act as an intermediary for settlement and maintain an image archive of all items.

In-House Item Processing: The process of capturing a visual image of a check and digitally transmitting it for settlement directly to a clearing bank, another financial institution or a third-party image exchange provider. A full image archive is maintained by the responsible financial institution.

Between March and May, 2010, Bluepoint Solutions conducted an in-depth study of item processing solutions in use by credit unions. The results show that 87 percent of surveyed institutions currently outsource item processing. However, 70 percent of those surveyed are considering moving item processing in-house by the end of next year.  This data indicates that a significant shift from outsourcing to in-house item processing is imminent. This paper explores the context for this shift and the reasons why credit unions are making this switch.

The Changing Costs of Paper Processing

The Check 21 Act revolutionized item processing by enabling the use of electronic items and cashletters, which has led to the declining use of paper checks. The Federal Reserve Bank (FRB) has increased the cost of paper check processing by 543% since 2006. In contrast, the cost of image check processing has remained relatively unchanged. This trend has forced institutions to adopt image-based item processing in order to stay competitive and cost efficient. The financial institutions that have switched to electronic item capture and presentment have experienced significant operational cost reductions.

Check 21 as an Enabler of In-House Solutions

Paper check processing is labor intensive. Transporting and sorting paper checks are activities well-suited for outsourcing to providers that can handle enormous volumes and benefit from economies of scale. Once the paper is eliminated, however, so is the need for an outsourcer that handles the physical aspects of paper processing. Distributed capture and workflow automation have shifted most of the labor of check processing onto the institution where checks are captured in the back-office, the branch or at the teller window. Whereas the labor-intensive aspects of item processing were the primary reasons to outsource, the elimination of these activities has now become a major reason to move it in-house. Simply put, outsourcing has become a costly and obsolete methodology.