Though the trend has been to invest in technology enablers, it’s not unusual for organizations to find surprises in their total cost of ownership, realizing only slim bottom-line gains from their investments. Moreover, many banks invested over the past few years in mBanking applications, which were touted as customer acquisition strategies but proved to be a channel not widely adopted by consumers.
Nonetheless, spending on IT and the operations side of the business is necessary for increased shareholder value. The result is more banks turning to the competitive strategy embraced by the powerhouses in the banking arena–they outsource their critical, but non-core processes to experts.
“About 45 percent of America’s banks currently outsource some of their operations,” reports Art Gillis, principal of Computer Based Solutions, Inc. in Dallas, Texas, and an independent bank technology expert who tracks the financial institutions industry.
Business process outsourcing (BPO) initiatives are clearly gaining steam in banks seeking to leverage a provider’s economies of scale to reduce bank operational costs for such important back-office functions as credit card processing, check imaging, data management, ATM management and processing, call centers, loan and mortgage application processing, and online bill payment.
By outsourcing, a bank achieves high return on investment, with access to scalable resources; the latest technology; best practices; and risk mitigation – with pricing that doesn’t break the bank.
The bulk of banks’ IT budgets still tends to be around maintaining and supporting the core processing and systems. But current spends are shifting toward investment in processes that enhance the value of customer interaction. It begins with analyzing data in a bank’s existing systems, then using that business intelligence on customer behavior by feeding it back into the point of interaction with the customer. This strategy moves the knowledge gained from back-office technology and processes to very strong front-office activities that produce revenue.
Pamela Brewster, a senior analyst at Celent Communications, a research firm based in Boston, Massachusetts, says faster time-to-market is a definite benefit of bank outsourcing. Front-office customer relationship management (CRM) software is currently a hot IT investment item for banks. An outsourcer can reduce a typical multi-year ERP implementation to just months (or even weeks, in the case of application service providers [ASPs]), as well as decrease the implementation costs and risks.
In a recent report (“Customer Attrition in Retail Banking: the US, Canada, the UK, and France”), Celent analyzed strategies banks are deploying to address customer defection. More banks are turning to outsourcing their CRM technology to achieve their customer attraction and retention goals.
“As the economy recovers, we’re likely to see more banks outsource more business processes,” says Celent’s analyst, Brewster, who studies financial outsourcing trends. “It’s an obvious, economical solution to better customer service. Outsourced call centers and CRM are two areas with good growth potential in the banking arena.”
Outsourcing also offers the option to move back-office processing functions, as well as call center operations, offshore to take advantage of lower labor costs.
Digital Check Processing
EDS, a Plano, Texas-based outsourcing service provider, assists banks with a digital imaging solution to integrate the front end, back end and middle piece of digital check processing. Without this outsourced solution, banks physically have to transport paper checks by ground or air transportation from one location (branches or ATMs and retail point-of-sale locations) for processing at the paying bank. Checks that cannot be paid are then transported back to the original location. In some areas, this transportation process can take days.
According to EDS, the average conventional check processing cost in 2002 was around $0.04 per item; in comparison, imaged-based processing costs were $0.055 per item. That cost savings is enormous value that a bank can then invest in improvements to enhance its customer services and increase its revenue.
Seattle, Washington’s Washington Mutual Inc. will soon enter its second year of a seven-year, $400 million partnership with Philadelphia, Pennsylvania’s Unisys Corp. to outsource its digital check processing. Washington Mutual, with a prominent footprint throughout the U.S., now gives its customers faster access to funds through Unisys’ creation of digital copies of paper checks. Unisys’ BPO solution provides staff and equipment that scans copies of paper checks at branch offices.
“The economics are a lot better than running the operation in-house,” says Dyan Beito, Executive Vice President of Deposit Services for Washington Mutual. Though Beito declines to reveal Washington Mutual’s actual savings, he does say that the number is “significant.”
To meet similar needs for a more effective process, EDS now offers a digitized credit union BPO solution that reduces a several-hours-manual process of balancing debit card and ATM transaction totals to just minutes.
New Niche Players
Whether or not to outsource is a question that has clearly been answered. It’s no longer considered a risky proposition. As the use of outsourcing in the banking sector grows, providers develop vertical solutions, and newer niche players enter the marketplace with specialized services.
Plano, Texas’ Aurum Technology, a boutique BPO provider, serves more than 650 financial institutions nationwide, delivering outsourced solutions for data processing, ATM processing, image-based item processing, eBusiness and support resources.
“Our objective is to help our clients be premier banking institutions at an affordable price,” says Mike Hill, president of Aurum’s Bank Management Information System Division. “That includes providing as little or as much of our services as they want.”
But the more processes are outsourced, the more enterprise-wide value banks achieve. Realized benefits are far more than fixed costs becoming variable (or vice versa) and access to technology. The real value proposition is the bank’s ability to proactively pursue new business opportunities, banking on the capital and resources of the provider.
Lessons from the Outsourcing Journal:
- An outsourcing service provider has the rear-view and side-view mirrors of experience and knows the blind spots; so it can orchestrate the best outcome.
- Outsourcing banking back-office processes impacts the bottom line with reduced business risk, more predictable costs and lower cumulative operating expenses–all adding up to bigger margins and increased shareholder value.