Home Banking The Future of Banking—Can Back-Office Outsourcing Improve Regulatory Compliance?

The Future of Banking—Can Back-Office Outsourcing Improve Regulatory Compliance?

by internationalbanker

By Emily Frost – International Banker

The financial sector is ruthlessly competitive, and failing to fully meet regulations can mean the difference between success and failure in any given year of business. Banks have learnt from past errors and are changing how they are structured to solve operational and technical challenges whilst enhancing value. Part of this change is to involve specialised outsourcing firms in various parts of bank business operations. The banking sector infrastructure in its entirety has had to adapt to changes in regulations whilst competing on ever harder terms for customers and has been undergoing a major overhaul over the past decade. Regulation has become tighter than ever as regulators seek to minimise risks to both customer and stakeholder funds and assets. At the same time, banks have been trying to find creative, more cost-effective ways to undertake day-to-day business operations. Profits have been significantly reduced by the combination of the recession and the major tightening of regulation. The economic crisis concurrently led to a number of outsourcing firms starting up to meet the demand for various more specialised, cost-effective processes in the banking sector—one of the most significantly successful being back-office services.

Regulatory compliance is being enforced more strictly than ever before, and part of the benefit of taking on back-office services from an outsourcing vendor is that it is easier for banks to prove that that department and its relevant processes have been separated as required by new regulation. The tougher regulatory environment being applied in banking has called for more ring-fencing of individual departments and strict separation of certain processes and services. Back-office outsourcing businesses can offer banks improved robustness and resilience in this area of operational exposure. Ring-fencing has been a headline-grabbing concern when it comes to regulatory change. As such, many banks have been undergoing significant restructuring of back-office operations to help them comply with new rules put into place that force banks to ring-fence retail-business operations from riskier business departments—such as those carried out in the investment-banking divisions. In many cases, banks have had to set up new standalone-unit companies entirely so that they can isolate support services from main profit-generating businesses. This is occurring based on the aim of isolating risk so that critical support functions continue to run smoothly when other departments hit major hurdles. Part of setting up these new support-service departments most effectively and whilst meeting regulatory standards is enlisting the services of a back-office outsourcing company that is skilled in developing the most efficient tools and solutions and that knows the regulatory environment of the department to a precise degree.  

In addition, the burden of data security, integrity and transparency can be shared with expert back-office outsourcing companies that are specialised in handling these matters. This leaves banks free to maintain focus on profit-generation whilst providing peace of mind that the dynamic and tightening regulatory changes are being incorporated into back-office processes by specialist expertise in this area. Standardisation is becoming a paramount focus for regulators across numerous industry segments, and the outsourcing of middle- and back-office functions helps banks meet the standards required and adapt promptly if and when the standards are changed. 

There have been sceptics in the industry who believe back-office outsourcing teams can create worsened regulatory risk factors for banks—placing exposure to information, technology or security breaches into the banking-process pipeline. However, as more and more banks have taken on outsourced business services over the past five years, the reality has been found to be more the opposite. We have seen that back-office outsourcing has enhanced regulatory compliance and has in fact become more of a driving reason for adopting outsourced services, rather than the contrary. Back-office outsourcing teams can provide more effective administration processes and direct these processes in a way that is best to meet tightening and frequently changing regulations. There are also internal and industry standards to consider as well as external regulations. Back-office outsourcing firms can concurrently offer improved compliance with a variety of quality and security standards on an individual brand as well as industry basis—depending on the needs of the bank—whilst maintaining regulatory compliance overall. 

A further key factor to consider when it comes to back-office outsourcing is that these businesses are constantly seeking to enhance their tools, solutions and services. These firms apply continual updates to technology and frequently re-train their skilled labour to meet both changing regulation and the needs of each bank they service. This ability to act fast and respond to industry dynamics can help banks to meet their goals more effectively whilst providing peace of mind that they are compliant with regulation as required. Overall, outsourcing gives banks more options when it comes to meeting market and regulatory requirements and necessary standards effectively. By taking on outsourced services, banks can also enhance the confidence clients have in their services and enhance brand value. This can help drive the bottom line whilst keeping pace with competitors and maintaining regulatory compliance.


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