Banking and financial services outsourcing is the use of third party providers to deliver services or perform tasks normally undertaken internally by financial institutions. The third party financial services provider may be located locally or offshore. Banking BPO (business process outsourcing) is a strategic tool that supports business growth and account servicing functions.
At the start of the last decade, professional services firm Deloitte estimated that in the United States alone, $356 billion of the financial services industry will be offshored to third party providers within five years after 2004. More recent studies done by consultancy firms KPMG ad HfS show that global spending on finance and accounting business process outsourcing (BPO) services will grow at a rate of 8 percent until 2017.
In an increasingly competitive market, many banks and financial institutions are positioning themselves for growth by turning to offshore providers to take advantage of low cost, high-quality services. Deloitte reported that organizations increasingly leverage banking BPO as a cost reduction tool and a sourcing strategy.
Many investment banks have offshored or outsourced over 50 percent of their finance services and are planning to offshore highly complex responsibilities, according to KPMG. Trends indicate banks and lending institutions are moving from outsourcing transactional functions to specialized core roles like financial and internal management reporting, budgets, capital management/reporting and regulatory returns.
Banking BPO Services
The impact of banking BPO and finance services offshoring extends to several business areas and can be seen throughout the lending lifecycle. Areas include information technology (IT), finance and accounting (FAO), discrete back office functions, and contract services. Industry research shows that finance organizations outsource both regulated and unregulated functions within outsourcing contracts that vary in scope and complexity.
Banks and lending institutions typically offshore transactional functions such as new customer acquisition, account servicing, consumer and commercial lending, and back office process management. Less commonly outsourced are higher-value functions like budgets, forecasts, regulatory returns, and capital management.
Customer Acquisition Services
Customer acquisition services include a set of functions and systems that generate and manage prospective customers, leads, and inquiries in the banking and finance sector. Customer acquisition management is considered a link between advertising and customer relationship management.
Customer acquisition management services provide an organized environment for managing large volumes of leads and inquiries at various stages of the customer lending lifecycle and across local or offshore sales departments. Third parties also provide closed-loop reporting that measures the effectiveness of promotional activities and allows clients to realize improvements.
Offshore providers utilize various marketing techniques to acquire new customers like customer loyalty programs and customer referrals. Customer acquisition management also covers services like telemarketing, credit evaluation, verification and approval, document and application processing, underwriting, and customer support.
Credit Evaluation and Verification
Offshore third party providers allow banks and financial institutions to minimize credit risks and frauds through verification services like risk profiling, telephone re-verification, payback capacity evaluation, and implementation of a credit decision-making model.
Document and Application Processing
Application processing in the banking industry is a time-intensive task that requires a critical and experienced eye. It starts with digitization of physical forms and supporting documents and transmitting the scans to a centralized location. Data is captured, completed, indexed and checked for errors before the validated file is sent back to the original location. Post-processing is then done at the core location.
Third parties provide document and application processing services as well as proprietary application processing software that simplify and improve existing processes. Software can be configured to specific workflows, quality needs and any type of application form.
Telemarketing and Promotions
Customer acquisition management also covers telemarketing and promotions to generate leads and respond to a prospect inquiry. Besides telephone, marketing efforts to heighten the prospect's interest can be done through brochures, letters, e-mails, SMS, and chat.
Account Servicing Processes
Offshore providers offer account servicing processes and software to manage consumer and commercial accounts like debit cards, credit cards, and consumer/commercial loans. Offshore consumer banking services allow organizations to adapt to changing regulations and technology, launch new products quickly, and exceed customer expectations while keeping costs low.
By offshoring account servicing processes, banks and financial institutions also achieve full regulatory and policy compliance, reduction in payment turnaround time, reduction in average cost per transaction, and a four-fold increase in productivity.
Account servicing processes that can be offshored include consumer account management, merchant or commercial account management and capital market services.
Effective management of consumer accounts help foster customer loyalty. Third parties can handle transactional functions like customer service (online, telephone, mail), retail banking, originations, end-to-end consumer lending and mortgage services, account renewals, loans disbursement, and cards services, as well as core operations like wealth management. Third parties also offer fraud and anti-money laundering (AML) and risk analytics.
Offshore commercial account servicing can reduce total cost of ownership, reduce operational risk, and provide a unified solution for several banking products. Third parties provide a wide range of services that include payment processing (fund transfers, liquidity management, fraud analysis, pension and dividend payments, billing, reporting), commercial loan processing (including credit evaluation, underwriting, and collateral evaluation), and trade finance services (analytics, fraud management, origination, customer service, reconciliation).
Offshore account servicing for the capital markets industry improves business performance and standardizes processes at the lowest cost. Capital markets account servicing processes cover front, middle and back-office. Services include research and analytics across industries, valuations, model development, data analysis support, valuations, trade processing, clearing and settlement, data management and reconciliations.
Consumer and Commercial Lending Services
Third parties provide lending solutions for all phases of consumer and commercial lending, from loan origination to asset management. For consumer loans, outsourced services include sales, processing, underwriting and closure, research and analysis, foreclosure and pre-foreclosure, loss mitigation, debt protection services, bankruptcy, loan modification, data management, and risk management.
Offshore commercial lending services include automated processes, analytics and reporting, flexible capacity models, and end-to-end process management. Third parties also provide mortgage services that help banks preserve capital, increase business forecasting, and generate revenue from growth markets.
Research by Everest Group pegged the global lending BPO market at about US$ 21 to 23 billion in 2011, split evenly between third party providers and shared services. The share of BPO-centric service providers are growing nearly three times faster than the utility-based providers, which dominate the market.
Part of the reason is that new and stricter lending regulations are segmenting the demand for loan products. Financial institutions are under pressure to reduce costs and grow revenues in a highly volatile environment, and many are turning to offshore providers to achieve their business goals. Offshore banking BPO services help companies align their operations with dynamic market requirements using automation and flexible capacity models.
Businesses can gain more than 50 percent savings through standardized processes, automation, and lowest industry rates for compliance management. Organizations can do more with data acquired from digital and physical products by combining information with offshore analytics, research, and reporting. Offshoring is also a way to boost IT initiatives (such as online self-service loan origination and collections) that support revenue generation.
With standardized processes across multiple locations, quality improvements and operational flexibility from third parties, companies can speed up loan origination, increase time-to-market for products, and provide topnotch customer service.
Back Office Transaction Process Management
Third parties provide management of back office financial transactions for consumers and merchants and for banking products that range from credit cards to mortgages. Common services that can be offshored include fraud detection, anti-money laundering (ALM) services, regulatory compliance monitoring, custody services, portfolio analytics and reporting, asset/investment management, and IT management.
Custody services refer to safekeeping services that a financial institution provides individuals and merchants. On behalf of the customer and for a fee, the custodian collects dividends, interest and proceeds from the sales of securities and transfers the funds to the client's account. This process reduces the risk of the client's assets being stolen. Unlike banks, custodians cannot use securities for their own ends.
Third party providers can handle these functions for the organization providing custody services, allowing the company to reduce costs significantly, improve process efficiency, and streamline workflows through automation, standardization, and other best practices.
Fraud Risk Management and Anti Money Laundering (ALM)
Banks handle local and foreign accounts that are highly profitable but also high-risk. Fraud risk and AML officers perform customer due diligence (CDD) and ensure that accounts comply with regulations and pass government scrutiny. Back office processes like fraud risk review, AML monitoring, account verification, chargeback, recoveries, regulatory reporting, and risk analysis can be offshored to an experienced third party.
Third parties can help improve a financial institution's risk management efforts through standardization, automation, and process improvements while cutting costs. With their domain expertise, offshore providers can also better track fraud losses and fraud trends across regions and help organizations optimize fund recovery efforts.
Portfolio analytics is the evaluation of the performance of a consumer or merchant's investments and how it affects returns. Third parties offer consulting services and portfolio analytics software to manage portfolios. Typical analytics software may include charting and attribution tools, detailed reporting, weights and variables, and data that drive returns.
Current Trends in Banking BPO Services/Financial Services Offshoring
The Banking, Financial Services and Insurance (BFSI) business process outsourcing (BPO) industry is composed of three verticals: banking and financial services, capital markets and investment banking, and insurance, of which banking and financial services BPO is the largest and most mature. In general, BFSI has always been the sector that is most open to business process outsourcing/offshoring (BPO).
BFSI is unlike no other industry in that the regulatory landscape is the most stringent, and the volume of transactions handled is the highest. The expectation of completing transactions in real time is also very high, and the consumers are the most demanding. In turn, finance organizations also place the greatest demands on local and offshore BPO providers.
Banks and lending institutions have led other industries in technology spending and adoption of new trends, especially outsourcing, mainly because of these drivers: extremely stringent regulations, economic challenges and uncertainties across geographies, changing customer engagement channels, and the importance of technology and digital transformation in improving the bottom line.
According to Everest Group's BFSI BPO Market Report in 2013, the pressure to cut costs and to be more agile, to acquire new customers and exceed customer expectations, and to grow beyond traditional markets drive financial institutions to work with experienced partners. Banking BPO is increasingly seen as a strategic tool to achieve business goals and stay competitive in the marketplace.
Banking BPO Market Forecasts
In 2013, research firm HfS studied the banking and finance services (BFS) outsourcing market and evaluated the top 75 providers of banking and IT services. Its 2013 Market Report in the banking and finance services BPO industry showed that the BFS BPO industry will continue to trend at a 5 percent compound annual growth rate (CAGR) until 2016.
Based on a 5.2 percent CAGR, the BFS BPO market is projected to be worth about $200 billion by 2016. With that market size, BFS remains the most attractive vertical for BPO service providers. While banks and finance organizations focus on cost reduction and business growth, service providers try to create new offerings, improve service delivery models, and increase market share.
NelsonHall's Global BPO Market Forecast for 2014-2018 reports that overall, North America will be the biggest market for banking BPO in the next five years in spite of having the lowest growth rate among major markets. NelsonHall predicts that retail banking BPO will grow more slowly than capital markets BPO, with growth driven by core banking, loan administration, and merchant acceptance processing.
The fastest growing vertical will be capital markets BPO in trade processing services (with reference data BPO services as the fastest growing in capital markets), followed by portfolio services and retail banking BPO. Meanwhile, check processing BPO will continue to shrink.
Banking BPO Trends
The same NelsonHall study confirmed that economic uncertainty and increasingly tighter industry regulations have greatly impacted the banking BPO market. In the past year, activity has increased in the banking BPO industry as new policies were rolled out and clarified. The growth is expected to continue over the next five years, even faster than the growth of the entire BPO industry.
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