By Raymond Michaels – International Banker
The banking sector is undergoing a major phase of change—embracing outsourcing of services more than ever before in a bid to streamline processes and maximise efficiencies. The business-process outsourcing (BPO) sector is growing at an accelerating pace. More and more back-office outsourcing is being applied across numerous industries. Specifically, the recession led to the start-up of many different solution providers as well as significant change in the outsourcing sector. These changes include outsourcing a plethora of services never before considered seriously for outsourcing—including areas such as customer-relationship management, transparency in business processing and the management of end-to-end processes rather than the isolated elements of a process. The financial sector is still dealing with the aftereffects of the economic recession—and as such a number of banks have had to seek out innovative solutions to cut costs and generate profits. These banks have found that there are a number of economic benefits to be captured through the use of back-office outsourcing. Cost-minimisation has been a top priority since the economic crisis, and back-office outsourcing has in many cases helped banks move towards meeting this goal.
Part of the reason banks are taking on back-office outsourcing services is to enhance the bottom line and boost success. The management of massive volumes of daily data can often be handled with more skill by back-office outsourcing companies and can minimise risk. Additionally, back-office outsourcing allows banks to manage transactional processes of a wide-ranging nature on a high-frequency basis. Examples of these transactions include order fulfilment, transaction processing, applications processing, billing and customised collections services and tools that require specific back-office solutions. At the same time, back-office outsourcing firms can refresh their tools and solutions on a more frequent basis, allowing banks to keep pace with technological developments and meet evolving customer demands more effectively. Banks are often entrenched with managing so many different departments and find it difficult to enact systematic change at a fast pace and without facing a wall of bureaucratic red tape. Outsourcing back-office services offers banks some increased agility, and this helps banks keep pace with competitors and also the growing fintech sector that is eating into banking-sector margins.
These types of outsourcing-driven operational improvements are helping to deliver growth for banks. Leading back-office outsourcing firms provide banks with empowerment and enhanced business efficiency and an improved bottom line. Not only is this an essential driver of growth for banks but also a self-fulfilling prophecy. Those banks using these outsourcing firms can enjoy a competitive edge in some cases, compared to those banks applying in-house back-office teams. This means in order to generate growth, back-office outsourcing may indeed have become a foregone conclusion in delivering competitive returns to stakeholders as well as competing products and services to clients. That is not to say that there is not a resonant balance to be found somewhere between full back-office outsourcing and a full in-house team. There are process hurdles that banks are able to identify and outsource in an isolated fashion. By effectively identifying these hurdles and allowing specialist back-office teams to handle the processes, banks are able to focus more effectively on the areas in which they can deliver a more competitive edge. These companies can offer deep industry expertise and tailor-made, customized tools and services to directly match bank business needs.
A further factor banks have had in mind when considering and applying back-office outsourcing services is the risk of regulatory failure. On the one hand, there is the risk that a back-office outsourcing team may have an information, technology or security breach that places the bank at risk. However, on the other hand, regulation has in fact been more of a driver of adopting back-office outsourcing over the past three years. This is because the tougher regulatory environment being applied in the banking and finance sectors has called for more ring–fencing of individual departments and strict separation of certain processes and services. Back-office outsourcing can offer strength and resilience in this area of operational exposure. It can offer more effective back-office administration processed to better meet tightening regulations. In addition back-office outsourcing firms can offer improved compliance with quality as well as security standards on an individual-case and sector-level basis—depending on the needs of the bank. Most outsourcing companies will outline their information security standards at the beginning of the contract to maintain confidentiality and integrity of service.
Furthermore, the risk of data error is extremely expensive in banks. Many banks have lost substantial amounts of money in processing data inaccurately in the past. By applying their specialist expertise, back-office outsourcing teams can provide increased data quality and accuracy. With tailor-made, secure methods designed for piping relevant data in and out of banks’ systems as required, outsourcing can help banks minimise expensive costs that have resulted from past inaccuracies—again driving growth to the bottom line through minimising costs. Transparency and customer control are maintained as key factors for back-office outsourcing solutions. In addition, as is to be expected, a key deliverable from back-office outsourcing firms is regular reporting and the provision of frequent updates. Banks can strive for higher growth in return-generating areas by allowing specialist outsourced talent to maintain these processes—leading to enhanced business productivity with increased peace of mind. A further benefit to banks of applying back-office outsourcing solutions is round-the-clock care. Most of these outsourcing firms offer their services on a 24-hours-a-day, seven-days-a-week basis. Whereas internal back-office teams often work a standard working week, these outsourcing firms can boost productivity directly in terms of the time and volume of work they can devote to their services—a further driver of growth for banks who apply back-office outsourcing.
Not only do back-office outsourcing teams allow for more frequent turnover and evolution of technological solutions but also of manpower. Outsourcing businesses thrive on the fact that they can deliver the most cutting-edge, up-to-date solutions, and as part of this they offer highly skilled labour. This can incorporate expertly trained professionals into the process chain of banking so that assigned tasks are meticulously executed. A key component of back-office outsourcing is that staff undergo regular training across a wide range of skills. This means that the standard of the back-office competencies is being enhanced more frequently than in-house teams and can deliver more efficient work product.
The question for banks is no longer one of whether to outsource back-office services or not. It is more about how to structure the outsourcing arrangement—what type of vendor and other contract-based decisions. In addition, banks are having to consider the equally important issue of identifying the particular processes that a bank should outsource to have maximum positive impact on profits—this can often be constrained by the size of the bank, as large banks have very different back-office needs than their smaller contemporaries. Overall, back-office outsourcing businesses can offer banks many advantages that will help deliver enhanced profitmaking. These services can be an essential driver of growth—in terms of keeping up with dynamic regulatory changes as well as competitors. The key to successfully adopting a back-office outsourcing solution and engagement is the initial set-up of customised services; if this is handled effectively and with precision, the ongoing services will deliver numerous benefits to banks leading to an enhanced bottom line.