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FIs should consider outsourcing payments

June 28, 2013 by Dan Kramer — Senior Vice President, Marketing & Merchant Servic, SHAZAM

To compete on product innovation and customer service, rather than simply on cost, financial institutions should seriously consider outsourcing their payments operations. Many already do, and do it successfully.

However, a recent Celent report found that some payments professionals working on staff at FIs fear a loss of control from outsourcing or adopting cloud computing.

The report cited a 2004 European Central Bank study that found 72 percent of FIs consider payments operations too important to relinquish control. Delegates at the International Payments Summit in London this year were saying much the same thing, citing a vendor partner "doing it badly" or "separating service responsibility and accountability" as objections to outsourcing payments infrastructures.

All of which, according to the report, seems odd, as the concept of outsourcing is currently well accepted in the rest of the banking system. For example, with regard to cards, it's considered odd not to outsource.

According to another study presented to the ECB, outsourcing in the United States is prevalent in every payment type and every stage of making a payment. In fact, there are more than 100 entities regulated to do so.

The outsourcing debate is further obscured by ongoing misunderstandings and fears regarding the adoption of cloud computing by FIs. This also seems odd, as many forms of cloud technology already exist in payments.

Overcoming these reservations would address one of the main issues cited by those working in this area: cost of payments. According to the report, a quarter of FI revenues come from payments, even though they account for one-third of costs. Thus, any savings here would yield significant results.

More importantly, by not concentrating so heavily on costs and margins, FIs would be able to address other areas that may yield competitive advantage.

The report cited a study of international businesses that concluded the most successful FIs only succeeded in one of three areas: operational efficiency, product innovation, or customer service. The report argues that outsourcing would allow FIs to excel in all three areas. By finding a qualified partner to deliver the operational efficiency improvement that many FIs struggle to deliver on their own, they can concentrate more fully on product innovation and customer service.

Finally, the report concludes that recognizing the wide acceptance of cloud computing should go a long way toward overcoming some FIs' current concerns.

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