How to Save Bank One’s Retail Lockbox Services?

Case Type: operations strategy; business turnaround.
Consulting Firm: PricewaterhouseCoopers (PwC) 2nd round job interview.
Industry Coverage: Banking.

Case Interview Questions #00050: Mr. Check is the Director of Retail Lock Box Services for Bank One, a medium sized Midwestern bank. The Retail Lock Box Department consists of 100 clerks and 8 managers and supervisors. Each year, in addition to their handling of retail lock box transactions, the Department generated $1.5 million of fee revenue processing retail credit card and mortgage payments (“items”) for 75 commercial accounts. The bank has many other commercial accounts that use other companies of’ their item processing. In fact, the Bank recently lost the item processing business for one of its largest accounts to Visa Inc., the largest item processor in the US.

The item processing industry has undergone dramatic changes in recent years. Types of items processed include credit card, mortgage, and utility payments (checks), airline tickets, and coupons. In the past, these items were usually processed by the issuing company (e.g., airlines would process their own tickets) or by bank item processing departments like Bank One’s. At banks, the processing of payment items was done more as a service to bank customers rather than as a profit making endeavor. Hence, it received little focus from management. Historically, processing was accomplished by verifying the correctness of incoming paperwork and manually sorting, filing, and totaling the items: only the largest banks were highly automated.

Companies specializing in item processing have emerged in the past ten years. Visa, Inc., the largest such company, is a subsidiary of a small bank in Georgia. Each year Visa processes millions of airline tickets and retail payments for hundreds of companies, most of whom are not customers of its hundreds of competitors most of whom are not, customers or its parent bank. Visa uses high speed processing equipment and is highly automated. Processing time is rapid and processing costs are low. In fact, because of this speed advantage, the parent bank is beginning to profit from the float of checks processed. Although industry wide a majority of items are still processed by the issuing company or by small processors, it is expected that large processors. Within five years, it is expected that most of the business will continue to migrate to Visa and other large processors, such as MasterCard, American Express and Discover. Within five years, it is expected that Visa and other large processors will dominate this market.

Visa had a significant cost advantage over smaller operations, such as Bank One, because of the great economies of scale they gain from processing such volumes of items. In addition, Visa benefits from a more constant workload by processing both airline tickets and retail lock box receipts: airline tickets have few peaks and valleys, whereas mortgage payments always peak early in the month with very low volumes the rest of the month. Mr. Check believes that Visa quotes prices of 20 cents per item to large prospective customers while Bank One processes items for 40 cents per item.

The President of Bank One Mr. McCoy, has asked Mr. Check to evaluate how the retail lock box service can be made profitable; the service lost $100,000 last year. Mr. Check believes that the bank must offer retail lock box services, and it must price the service to be competitive with companies such as Visa. Recognizing that outside expertise will be needed, the President has given Mr. Check a budget to be used to hire a consulting firm. Mr. Check has asked you to visit his office to discuss the proposed engagement. While walking to his office, you observe that Bank One’s retail lock box operations remains primarily a manual system, with limited use of modern, high speed equipment and methods. Once in Mr. Check’s office, you note a picture showing the Department’s staff in 1965; Mr. Check was a supervising clerks at that time. After reviewing some background information with you, Mr. Check asks you the following questions:

Question #1: What do you see as your (the consultant’s) role at Bank One?

Question #2: What steps would you take and what information would you gather to diagnose the problems facing the Retail Lock Box Department and to develop solutions to those problems?

Question #3: From what you now know, what are the problems facing the item processing service and what recommendations would have the greatest impact on the performance of Bank One and the item processing service?

Possible Answers:

In this case, we want to test the candidate’s ability to handle a case in which the events appear hopeless until the end, when an apparently easy solution (automation) is made available. The candidates should challenge the general premise of the case, and not simply believe that the business is necessary just because Mr. Check says so. We also want to test creativity with this case. We purposely leave the case rather vague, not suggesting any particular actions and offering little data. The candidate should be given time to think about this case and propose solutions which are not readily apparent:

• Why not sell the business of these customers?
• Why not offer increased services to justify higher fees?
• What is the strategic plan for the bank, and how does this unit fit into it?
• What does Mr. Check feel his unit should be generating? (after all, $15,000 per employee is pretty low!)
• Has he considered acquiring other banks’ customers to increase the economies of scale in his own operation?

This case can also be used to discuss cost cutting. Again, creativity and sensitivity to the real issues should be the goals of your probe; cutting 25% of the staff is too obvious and too easy.