Banks traditionally have been major enthusiast of IT related services outsourcing. However, recently, banks are increasingly considering outsourcing if the function is not mission critical. Meanwhile, the development of outsourcing in the banking industry has recently received the attention of the industry regulators in a number of countries. This step has led to the publication of policies and guidelines that have to be followed by financial instructions when outsourcing their tasks. Banks’ business functions typically introduces new risks that must be managed sensibly also it has become a challenging experience for an entrepreneur as there are many factors to be managed.
Piyasena (2006) explains that on top of basic support services and IT related services, the trend is now towards outsourcing of entire financial business processes. These include payment transactions, credit application processing and securities transaction processing. Customer care, basic credit cards related services – sales, billing and collections, encoding of bank transactions and data processing, transaction statement printing and delivery, cheque clearing and replenishment of ATMs and also human resource related functions such as recruitment, payroll and HR administration processes are among the aspects of the business.
Large financial institutions increasingly set-up their own offshore operations. These are sometimes in partnership with vendors in a different countries. Therefore, apart from operational and regulatory challenges, if off-shored, it requires the regular monitoring of political, social, economical and legal climates of countries from which services are obtained for a successful outcome.
The Asian scenario
Piyasena (2006) explains in his research, one of the industries that aggressively outsource is the banking industry. The list of processes outsourced by Asian banks or Sri Lankan is not too distinctive to that of American and European banks. A survey made by UNI APRO among its bank affiliates in a number of Asian countries revealed that most commonly outsourced function in Asia currently are marketing of banking products – credit cards, loan services etc, credit collection, customer service, statement renditions and payroll.
Why regulators fear?
The research paper explains, outsourcing of banking services can worry regulators on two main aspects:
- A possible threat is particularly maintaining confidentiality of transactions of the banks’ clients;
- Outsourcing of certain services has the potential to transfer risk to third-parties who may not have been regulated.
Regulators around the world have recognised the potential problems and risks introduced by outsourcing and some have already proposed regulatory standards or controls on outsourcing. The Basel committee on banking supervision is based in Switzerland continues to monitor looming practices in the outsourcing platform and their responses to these developments to ease the identified risks are considerable.
Finding the right partner
The biggest challenge for financial institutions is to identify the right vendor and manage the service relationship. Aspects such as competency, knowledge or expertise of the supplier, culture, processes, regulatory compliance, financial stability and references must be considered when selecting a supplier. While cost effectiveness is certainly one of the strongest motives and the cheapest service provider is not always the right partner.
Outsourcing business processes usually involve routine tasks that are nonetheless of critical importance for financial institutions. The cost effectiveness of an outsourcing arrangement depends on a number of factors – for example, the process selected for outsourcing, vendor selection and how the contract was written.
Outsourcing can benefit organisations largely and there is no doubt about it when hearing the success stories world wide. This will only be true if the right activity is selected for outsourcing, the process is well managed, the right partner is chosen and performance and compliance are continuously monitored.