Transaction banks to outsource back-office operations
Large global transaction banks could start offloading some of their back-office operations in a bid to cut costs and sharpen their competitive advantage, according to the chief operating officer of Fundtech.
In an interview with Euromoney, Ed Ho, president and COO of Fundtech – a payments and cash-management technology provider to financial institutions and corporates – says he expects this to happen in the next couple of years.
“When this cycle of operating efficiencies has been maxed out, I actually think large, top-tier banking institutions will want to offload their back-office operations into a business-processing outsourcer or into a cloud environment,” says Ho. “Many large banks still maintain in-house control of mission-critical applications.
“It will eventually get to a point within the next couple of years where they’re going to realize that they cannot differentiate their services through back-office operations. It hasn't happened yet, at least not for mission-critical applications. On non-mission-critical applications, such as ERMs, we’re starting to see it more and more.”
Ed Ho, president and COO of Fundtech
Ho says information technology outsourcing companies Infosys and Tata Consultancy Services, among others, would be in a prime position to take on the back-office operations, as they are embedded among financial institutions. Accenture, ISS and HCL Technologies would be well-positioned to secure some of this business too.
Such a move is not isolated to corporate or transaction banking either, as the investment banking back-office operations related to securities servicing and securities trading could be outsourced too, and to some extent is happening already.
In January, UBS said it was outsourcing most of its fixed-income trading platform to two French software companies, Murex and Ion Trading, to cut costs and simplify complexities in its trading infrastructure.
Driving this development in the banking sector is a combination of tighter regulatory capital requirements, lower leverage and falling revenues, together with rising costs in banks’ back-office functions around risk management and information technology.
Indeed, in March, Bank of America Merrill Lynch, Citi, Commerzbank, JPMorgan, Société Générale and Standard Chartered were among a group of banks to join forces with Swift to develop and use a centralized due-diligence system designed to reduce the burden of compliance and the rising regulatory costs associated with it.
By doing this, the banks effectively mutualize the cost of compliance, where in offloading back-office operations the bank doing so is the main beneficiary.
For Ho, he says many of the large global transaction banks remain committed to “mission-critical” or core businesses – such as payments, cash management, supply-chain financing and retail banking – but that this is already changing.
“Swift messaging is an example of something that was core, but now we are seeing many banks and corporates going to third-party service bureaux instead of owning a licence and maintaining/supporting systems in-house,” he says.
“Processing is becoming more standardized and less of a differentiator for banks. They may decide in the future to outsource the processing aspects. There is activity going on now.”