Article
Outsourcing: How do you not throw out the baby with the bathwater?
Outsourcing allows banks to free their staff to engage in more complex tasks, stay compliant and compete with larger banks, but it also comes with trade offs.
October 1, 2019 by Amy Castor — Editor, Networld Media Group
Outsourcing operations — such as mobile app development, data tracking and ATM fleet management — can not only allow banks to free their staff to engage in more complex tasks, but also help them compete with larger banks.
But as Donna Embry, SVP of global payments strategy of Tennessee's Evolve Bank & Trust, tells it, outsourcing is nothing new. It really started decades ago when banks began outsourcing their core services.
"That was probably the first area of outsourcing that occurred in the financial services industry. And it was because of the cost of technology, the cost of development," she said in a panel discussion at the Bank Customers Experience Summit last week.
The movement spawned companies like Fiserv Inc., Fidelity National Information Services Inc. (known as FIS) and Jack Henry & Associates. The infrastructure of these three companies now makes up much of the technology foundation of the modern banking system, especially for smaller banks.
These firms — generally not well known outside of the banking industry — provide everything from keeping track of customer deposits to loan and credit-processing. Banks build their platforms on these services, and in the age of digital banking, many turn to these firms for help with websites, mobile apps and other services.
"How many of you have abdicated the ability to build your products and services because you've got your core process handled by somebody else," Embry asked the crowd of bankers in the room. Several raised their hands.
"Do you just follow like a lemming, and you know, if they offer a new service, then I'll offer a new service? How do you differentiate yourselves?"
While her question didn't provoke any immediately responses, there is no denying outsourcing offers several benefits to banks. Often, it makes sense costwise or when banks want to stay compliant or they don't want to hire the skills in-house. Embry pointed to ATM outsourcing as one example.
This year marks the culmination of a Windows migration project in the ATM world, she said. The cost of that is $5.2 billion worldwide. When you translate that to all of the machines that are worldwide, that comes to roughly $1,500 per machine.
"How many of you want to take $1,500 to upgrade an ATM machine just to have a Windows migration — no new projects, no new services?," she asked. "Why would you spend the capital to do that when you can use an outsourcing solution to offset that cost and still be able to get the same service that you have?"
Panelist Shane Stevens, EVP and director of treasury and merchant services at Virginia's Towne Bank, said when it comes to outsourcing, banks have to look at all of their initiatives, not just the ATM. They need to identify areas where outsourcing makes the most sense and find the right partner. It has to makes sense from a tactical and long-term perspective, he said.
"You have a limited amount of capital. How do you leverage that to bring differentiation in payments or across other areas of the organization in technology?," he said. "All of these costs are hitting us across the board. It's not just the ATM."
Outsourcing is more of a strategic tool, said Madhu Reddy, SVP and CEO at Republic Bank of Chicago. "We obviously have to get these benefits, but we also getting in some cases, access to skills and expertise that we don't have.
But while outsourcing offers benefits, there are trade offs, too.
Embry said that whether banks outsource products, merchant services or ATM processing, the big question is, how do you integrate that with your core processes?
"How do you not throw the baby out with the bathwater?" she said. "The biggest trade off to me is integration. If you don't have that integration with your core platform as part of your outsourcing then it is a major tradeoff, it may not be worth your effort in the long run," she said.
About Amy Castor
Amy Castor has more than 20 years of experience in journalism and mass communications. In the last several years, she has gotten particularly interested cryptocurrencies, blockchain technologies and other evolving forms of payment. Her work has appeared in consumer and trade publications throughout the U.S., including CoinDesk, Forbes, and Bitcoin Magazine. She is now the editor of ATMmarketplace.com and WorldofMoney.com
