The banking crisis clearly meant that the banking industry needed to change. However, those changes have not yet been realized. Prior to the crisis banks were focused on selling new products (e.g., structured products) into mature markets. From 2008 to 2013, banks shifted focus to focus on emerging markets to sell existing services to emerging middle classes. Since 2013, banks have been consolidating operations to offer different services (transactional services with less credit risk) to customers

Banks are undertaking a long term adaptation process to new business conditions. Rather than offering services customized to each geographic market, the banks will now offer standardized services across multiple markets and customers from very high scale delivery centers. This will increase scale economies while reducing risks from service design errors.

The standardization imperative is driven by regulatory oversight. Increased breadth and depth of reporting requirements has increased is the primary driver for process reengineering and platform modernization. Key regulatory trends include:

• Key areas of regulation impacting Reference Data Management: Entity data: required transparency to customers, counter-parties
  • Instrument data: required transparency to assets, liabilities, and products sold
  • Institution data: required transparency to portfolio and market aggregation
• Regulatory impact:
  • Global regulatory coordination across regulators
  • Increased reporting and required standardization for multiple stakeholders
  • Reduced reporting windows, increased frequency of reporting
  • Improved data retention and ability to search
  • Requirements to analyze patterns of transactions, not just individual transactions
  • Increased oversight across countries
• Governments reaching across borders to monitor citizens and corporations
• Governments demanding that FIs report activities (own and others) outside the country

Banks’ business models are changing driven by changes in regulation, customer base, and service offerings necessitate changes in the underlying delivery platforms. Capital constraints are requiring  combined technology/BPO changes.

• Business models:
  • Change from product centric operations to customer centric operations
  • Change from custom delivery in each sub-market to globally standard delivery
• Customer base:
  • Lower value customers (due to customer unwillingness to concentrate holdings and lower asset holdings)  require lower cost of delivery from self-service and standardized scale deliver (with self-configuring customization enabled)
  • Lifecycle approach to customers requires ability to service during lower value periods
• Service offerings:
  • Lower risk (lower capital allocation) bank products are lower margin products
  • Exchange traded assets (no longer custom structured products) are lower margin
• Capital constraints:
  • Shares service models where delivery is not a differentiator (e.g., in trade execution)
  • Third party conversion of capex to opex

What’s Next

These changes will drive fast growth in the level of outsourcing by banks. Currently there are many talks going on between banks and BPO vendors for engagements that address these specific operational changes. These talks are in addition to the financial sector having been the strongest contract award sector for BPO over the past year. The next round of contract awards, while perhaps fewer in number than BPO contracts awarded over the past year, will almost certainly be for higher dollar value than the total BPO contracts awarded last year.

Contracts awarded will vary significantly (even for one client) by major geography, due to differing market characteristics. The key differences are:

• Mature markets (North America and Europe): need to retain existing customers, increasing regulatory compliance costs, need to free up regulatory capital and resource limitations make cost-reduction key. Key goals:
  • Consolidation and standardization of delivery. Legacy modernization
  • Creation of single view of customer to drive customer lifecycle management
• Emerging markets (APAC, LATAM, Middle East, Africa, and Eastern Europe): need to acquire new customers. The high cost of entry and variation across markets drives need for low cost third party support. Third party shared services amortize costs of analyzing common regulations. Key goals:
  • Creation and implementation of modern retail banking and wealth management capabilities (new platforms from scratch)
  • Ability to achieve very high scale at very low cost (esp. in Asia and LATAM)

BPO contracts for mature markets will feature higher levels of BPO, consulting, shared services. BPO contracts for emerging markets will feature higher levels of IT services and platform development, support for new market entry, and support for new bank product creation. Ultimately vendors able to fully support both types of very different engagements, will be able to gather client mindshare and ultimately market share from other vendors. The change is just beginning and will accelerate over the next two years, creating a few standout BP vendor winners, much different from the profile of winning banking BPO vendors in the past ten years.