Outsourcing is very much a watchword of the Nineties. At a time when many organizations, banks in particular, are adopting a strategy of focusing on their core businesses, it only makes sense to examine carefully whether a given operating function adds value to that core business -- or serves merely to divert time and resources from activities more deserving of management's attention. Increasingly, bankcard acquirers are asking this question of the processing function. Bank consolidations, rapid advancements in processing technology, changing merchant demands, and service expectations are driving many acquirer banks to re-examine whether their merchants' interests and their own bottom lines wouldn't be better served by outsourcing the processing function.
Of course, the decision to out-source processing involves a number of threshold considerations. These considerations are particularly critical when applied to the processing function because the function interfaces directly with the bank's merchant customers, who, in many cases, have other relationships with the bank.
When a bank seeks an out-sourcing partner to accommodate its processing function, the bank is in essence saying, "I want a processor to manage a profitable portfolio of merchants and responsively handle the associated problems and demands."
It's one thing to outsource the mail room or the graphics function, areas for the most part removed from the bank's customers. But when the outsourced capability has a direct impact on the bank's customer relationships, the margins for error drop very quickly to zero.
What are the major considerations in evaluating whether to outsource the processing function? Are there specific performance criteria that should be applied to the selection of a third party processing provider? While circumstances will differ from bank to bank and by market, there are a number of guidelines banks can apply to improve the probability of success of a processing outsourcing strategy.
The first question -- that of deciding whether to outsource in the first place -- can be influenced by numerous factors. Yet there is one consideration that in our experience is especially critical. And that is whether the increasing demands of the processing function are outpacing the bank's ability to respond in a timely, technologically appropriate manner. In other words, are the bank's processing capabilities perceived by merchants as adding any real value? Or, are the bank's capabilities viewed merely in a "business-as-usual context?"
Today, merchants look to their bankcard processors as true consultants on payment processing technology issues. They expect processing products to focus on cost reduction and inventory movement. Unless a bank is prepared to commit to providing this service dimension, it might well be .advised to evaluate outsourcing as a cost-effective, alternative processing strategy.
Once the decision has been made to outsource, the next series of considerations has to do with identifying and evaluating prospective outsourcing partners. The word partner, incidentally, is used deliberately here to connote a relationship characterized by a shared sense of commitment and mutuality.
The first test of a prospective outsourcing partner's suitability is knowledge and understanding of your business. Most important, is the prospective processor truly committed to the acquirer business? Do their existing products and services and their development plans reflect that commitment? Are their products innovative enough to recognize that the role of supporting payment processing is being redefined?
A second key consideration is the processor's sensitivity to the bank's relationship with its merchants. Here, it is important that a processor be able to satisfy a bank's processing needs while still enabling the bank to retain a proprietary relationship with its merchants. In other words, the processor's role is not to take the bank's place in the processing relationship. Rather, it is to extend the effectiveness of the bank's services, thus adding value to the bank-merchant relationship. Therefore, your processing partner should offer flexibility in prescribing a spectrum of outsourcing alternatives to support the growth and maintenance of these relationships.
The technology demands of processing are one of the major factors driving banks to consider outsourcing. It is imperative, therefore, that any processing partner have the technological depth to not only keep pace with current needs, but to anticipate and accommodate evolving requirements.
Key technology-related considerations include the processor's networking capabilities; its ability to provide industry-specific solutions, as opposed to "one-size-fits-all"; and the ability and resources to deal with new and emerging products and markets, such as POS debit, health care, and electronic purse cards.
Another significant technology consideration is association compliance. That is, the processor must have the ability to cost-effectively respond to almost constant technology changes and upgrade requirements. This has always been a challenge in our business, but the demands of PS 2000 and Programme Global will continue to exacerbate this situation. Only processors who have made significant technology investments will be in a position to comply with the associations and deliver to the bank's merchants the lowest possible interchange and discount rates.
The latter, of course, is an essential part of ensuring that a bank will be a low-cost provider, and thereby improve its competitive position in the process.
Yet technology is only one aspect of the service equation. Another is the processor's commitment to delivering that technology in a manner that enhances the bank's reputation and supports the cross-selling of other services.
A processor that is committed to service will measure its performance against established standards. A review of how they have performed in recent history is appropriate. At CES, for example, we measure our performance daily against many accuracy and timeline indices. And, we solicit constant feedback from our bank clients and their merchant customers via periodic process audits, surveys, and focus groups.
There are also a number of incremental services that can add value to the processor's offering. Here, a bank should explore whether a processor has the ability 16 add value beyond the bank's own capabilities, For example, if a processor is technologically able to address emerging markets such as health care and business-to-business purchasing card programs, they can create new relationship opportunities for their bank partners, while allowing the bank's existing customers access to these new and cost-saving technologies.
Lastly, you should consider a processor's ability to manage fraud and risk exposure. How low are their credit and fraud writeoffs? A prospective processors disaster recovery plan and back-up system capabilities are other important factors to consider. At a minimum, these capabilities often provide a good indication of the processor's overall technological competence, to say nothing of its commitment to total service.
In the final analysis, the decision to outsource the processing function only makes strategic sense if the outsourcing partner has the ability to enhance a bank's merchant relationships and leverage its competitiveness. In today's market, the increasing technology and service demands of the processing function can make outsourcing an attractive option for many banks. But the successful implementation of that option requires that banks pay careful attention to the capabilities and reputation of any prospective processing partner.