BPO in Banking: A Review of Strategies and Trends

Despite the significant interest in BPO by banks, the market is still a nascent one. Celent estimates that spending on BPO by North American banks will total US$4.6 billion in 2005, growing to US$7.9 billion by 2007.

Banks are under unrelenting pressure to lower their operational costs in a market plagued by low margins, industry consolidation, and increased global competition. Hard pressed to squeeze more efficiency out of the business, banks are evaluating which processes represent their source of competitive differentiation and which might potentially be outsourced.

In the US, all of the top 50 banks are actively exploring BPO, but only the top tier have made significant moves beyond the exploration stage to actual deployments. A number of banks in Europe, particularly in the UK, have active BPO initiatives underway. However, unlike their US counterparts, European banks have been more aggressive in outsourcing vertical processes such as payments.

In a new report, " ," Celent identifies banks key drivers for outsourcing business processes. The report also highlights the types of processes currently being outsourced by banks. Finally, it examines two examples of innovative models for BPO that have emerged in the market. The first example is a business process utility for the processing of commoditized payment services, which is presented via a case study. A second example focuses on how banks are leveraging existing economies of scale and skill to generate new revenues by becoming outsourcers themselves.

According to Madhavi Mantha, senior analyst and author of the report "There is no one size fits all formula for successful BPO. A bank's chosen approach will differ based on factors such as size, geographical region, competitive environment, and internal culture. If a process and its associated infrastructure are critical to a bank's competitive position, there is risk in outsourcing the process. However, if a process and its associated infrastructure are not a key basis of competition for a bank, then it should consider outsourcing."

Banks are assessing which elements of the banking value chain form their basis of competition in the market and are making outsourcing decisions accordingly. Some banks have determined that sales and marketing are the most critical processes along the value chain for retaining profitable customer relationships and are choosing to outsource product development and transaction processing to third-parties. Other banks, who possess the necessary economies of skill and scale, are instead opting to insource processes, leveraging their excess capacity to provide services to other banks.

A handful of banks are pursuing a co-sourcing strategy, particularly for mission critical yet commoditized processes, collaborating with other banks to generate combined economies of scale via a business process utility. But irrespective of the sourcing strategy chosen, banks are partnering with third-party outsourcing providers, leveraging their technology expertise to drive process improvements and generate sustainable cost savings.

This 34-page report contains 11 figures and 3 tables. A table of contents is available online.

of Celent's Retail Banking and Wholesale Banking research services can download the report electronically by clicking on the icon to the left. Non-members should contact info@celent.com for more information.