Heard any good jokes about bankers' hours lately? Probably not. The days when customers were forced to conduct their banking business before the lobbies closed at 3:30 in the afternoon are gone. In an age when technology delivers everything from fast food to instant information, consumers expect 24/7 service. And banking is no exception.
The demands that accompany around-the-clock availability have made outsourcing an appealing alternative for institutions that want to strategically focus their resident resources on the business of banking and leave technology to the experts. Outsourcing can strengthen the competitive position of community banks by allowing them to offer 24/7 service without the payroll cost of 24/7 employees.
The approximately 45 percent of U.S. banks that outsource have traditionally contracted with outside vendors to perform data and item processing. In recent years, outsourced product lines have expanded to include check imaging, Internet banking, and EFT payment processing solutions. And remote document imaging, Check 21, remote capture, and enhanced report writing capabilities are among the latest outsourced offerings. So what can banks expect in the future as technology and outsourcing capabilities continue to evolve?
Banks can expect the following to shape near- and long-term outsourcing trends:
New Outsourcing Contracts. Because most outsourcing agreements are 60 months in tenure, 20 percent of those contracts are up for renewal every year. That means 20 percent of outsourced banks are forced to make a decision annually. The market is in a constant state of turnover as banks evaluate whether or not their current vendor is positioned to carry them forward.
The growing number of de novo banks also could actually impact the number of outsourced banks. In his March 17, 2004 satellite address before the Independent Community Bankers of America Convention, Alan Greenspan stated, "Over the past five years, for every four bank mergers that have been approved, three de novo bank charters have been granted." Add to that statistic the fact that 90 percent of start-up banks choose to outsource, and there is a high likelihood that the overall number of outsourced banks will increase over the long-term.
Focus on Customer Service. As banks evaluate outsourcing vendors, customer service is becoming increasingly important. Banks expect a vendor to deliver on a service commitment that the bank has already promised its customers. When a bank trusts an outsourcer to handle its operations needs, it can't all be about feature/function. Strength and stability, both financially and from a customer service standpoint, are critical.
To accurately evaluate the customer service levels of a vendor, customer satisfaction must be measured. Banks will look for quantifiable results relating to system availability, response time, uptime of the switch, and accurate statement production. It comes down to the ability of an outsourcing vendor's customer relationship manager to solve problems.
Single Source Provider. Solving those problems under one roof is becoming yet another requirement for more and more banks. Five years ago, banks looked for best-of-breed solutions and ended up with item processing from one vendor, data processing from another, and EFT from yet a third. That trend is going the way of the eight-track tape as banks come to recognize the convenience of a single source provider.
Vendor Controlled Software. While many vendors may have an extensive and mature product offering, banks of the future will find it in their best interest to contract with an outsourcing provider that has control of the software running the application. Bankers will no longer accept service vendors that are at the mercy of an outside software provider. Quality outsourcing vendors will write their own software and develop strong partner relationships. An outsourcer that controls the main core software will, in turn, be able to control the quality of delivery.
In-House and Outsourced Offerings. Not only should an outsourcing vendor write its own software, but banks also want the flexibility of application software that is offered to support in-house or outsourced operating environments. An advanced vendor that provides the same software for in-house and outsourced solutions gives banks the flexibility to migrate from one solution to another without a conversion.
Outsourcing Non-Data Processing Functions. While the traditional outsourcing methods of core and check processing are still intact, they have become more of a commodity. The focus now is on new ways to generate revenue and contain costs for the financial institution.
Banks will increasingly turn to outsourcing for non-core data processing needs such as bank insurance, disaster recovery, biometric security, cash management, and accounts receivable financing.
Bank insurance, for example, creates a new pipeline of income for the bank, while expanding a bank's offering to effectively compete as a one-stop financial services provider. Strategic outsourcing will allow a financial institution to have a wholly owned insurance agency without the investment in an agency infrastructure.
Outsourcing disaster recovery, a service which should include business continuity, involves cost containment as well as an institution's survival in the event of a major business interruption. The most successful recoveries are performed by vendors that specialize in the financial industry and are familiar with a bank's software.
Banks of the future will outsource emerging biometric security solutions as a means to contain costs and meet regulatory compliance issues. Fingerprint technology is gaining popularity as an accurate and convenient identification option for banks concerned with security, convenience, and productivity.
An outsourcing vendor that provides accounts receivable financing allows a bank to provide a lending stream to potential customers without maintaining the necessary software and expertise in-house providing another revenue generator for banks.
As banks make outsourcing decisions, they need to think long-term. Whether a bank realizes it or not, a renewal is a decision. It is critical that due diligence be performed to ensure that the current outsourcing vendor best meets a bank's strategic business needs today and will continue to do so five to 10 years down the road.
