Outsourcing in banking: At a crossroads

Outsourcing is not new to European banks, but it has the potential to help them address some of the most pressing challenges in the sector today: cost and technological change. At its best, outsourcing can make banks more efficient and drive innovation in an increasingly competitive environment.

To understand the current dynamics and challenges in the financial services outsourcing market, we have conducted a survey across a broad range of European banks as well as established outsourcing providers working in the sector. The survey found that IT outsourcing is firmly established in parts of the business that are not differentiating and where scale effects are sizable, such as IT operations or infrastructure. Meanwhile, business process outsourcing (BPO) is less developed than in other industries, mainly due to lack of standardization or adequate service offerings from providers.

Going forward, our survey found that both IT and business process outsourcing will become more widespread and help banks deal with a combination of low interest rates, increased competition from both Big Tech and fintech players, and more regulation. The greatest potential for BPO is in areas where standardization is already high: payments, cards, security processing or consumer loans, according to the survey. Banks are increasingly turning to cloud-based as-a-Service models for both BPO and IT, although they are more hesitant in BPO. We expect that further standardization combined with digitization will further drive the level of use, as well as the variety of use cases, of outsourcing.

The key findings of our survey are

• 30% of banks plan to switch their current outsourcing provider in the next five years
• 75% of IT providers are building or plan to build an ecosystem by bundling services from different providers on one platform
• 20% of banks plan to expand their use of as-a-service models in outsourcing

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Bank customers are becoming more digital, given in part the entry of new challengers offering online and app-based banking services. Outsourcing partners can help their clients develop new digital products and services with a faster time to market. Process automation has also accelerated the demand for outsourcing, as banks do not have the know-how or specialized resources offered by providers.

At the same time, low interest rates have depressed profitability and increased the pressure on banks to become more efficient. Outsourcing has therefore gained in relevance as an important cost-cutting tool. Banks and providers must also ensure they comply with the increasing number of regulatory requirements.

Meanwhile, fintech and Big Tech companies are competition for both banks and for outsourcing providers, as they develop innovative financial services. Finally, banks are tightening the ESG standards they require from all their suppliers, including outsourcing partners. Products and services need to be adapted accordingly.

Conclusion

Strategic partnerships between banks and providers will help increase the benefits from outsourcing and give banks and providers alike a competitive edge over rivals. This is especially the case in the growing market for ecosystems and as-a-Service models.

To remain relevant in the long term, established providers need to be able to deliver innovative solutions in strategic partnerships that allow banks to focus on their core business. They must also consider how to deal with the increasing regulatory requirements for both banks and providers.

We recommend banks have a focused group of providers to rely on for their outsourcing needs. For that purpose, banks need a clear outsourcing strategy and to evaluate existing and new outsourcing relationships accordingly. Providers must ensure they have the right offering to meet banks’ demands and do their homework on the fulfillment of regulatory requirements and ESG considerations.