Offshore outsourcingWednesday, May 18, 2005
10 CRITICAL FACTIORS TO EXPLORE WHEN CHOOSING AN OUTSOURCING PROVIDER FOR FOREIGN EXCHANGE SERVICES
Outsourcing FX is No New Trend for Banks
While today’s competitive financial market demands that banks respond to market needs quickly and efficiently, there was a time when only the largest money centers could afford to offer foreign exchange (FX) services. Technological advancements have made a foreign exchange product line accessible to banks of all sizes. However, in today’s economy, banks have to consider the feasibility of offering foreign exchange products and services. As a fee-based product offering, foreign exchange services can enhance a bank’s revenue stream while meeting a market need. Yet, the costs for creating a FX processing environment can be enormous. It is for this reason that foreign exchange is an area that numerous banks outsource to correspondent banks or non-bank providers in order to compete in today’s financial market. Outsourcing FX products and services allows banks to offer an advanced technology solution, industry expertise and superior customer service without the cost of back office investments. Art Gillis, principal of Computer Based Solutions, Inc. in Dallas, Texas, reported, “About 43 percent of America’s 9,355 banks and thrifts currently outsource some of their operations.”
When choosing an outsourcing solution, banks should focus on the services that will allow them to keep overhead costs to a minimum yet enable them to focus on business development opportunities.
Top 10 Reasons to Outsource FX:
Increase revenue and profits derived from fee-based services
Improve operational efficiencies and productivity levels by automating administrative tasks
Deliver value to customers to enhance business relationships
Expand service lines to capture more business from existing customers
Achieve more competitive exchange rates through wholesale purchasing
Control costs. If cash is not tied up in capital expense, it can be reinvested in areas offering the greatest return on investment.
Leverage the Internet to streamline and automate products, services and processing of transactions
Acquire industry expertise and expedite market entry
Enhance the ability to manage the rate spread on transactions
Enhance account management through real-time management reports on the purchase and sales of foreign currencies and the income generated from each product.
10 Questions to Ask When Evaluating a Foreign Exchange Online System
1. Is the system networked from the parent bank to branch banks?
2.Does the system provide flexibility for your bank to share revenue with the provider or to mark up rates and still have the ability to remain competitive?
3.Is the system integrated seamlessly with your bank’s other systems?
4.Does the system allow your bank to retain control over profit margins, processes and account management procedures?
5.Can the bank re-brand the system for its bank and subsidiaries?
6.What capabilities are available to store, track, and send your customers information?
7.How are investigations handled?
8.What are the security features?
9.Can your bank create a centralized or decentralized process for managing its foreign exchange transactions?
10.Does the system enable your bank to provide customers real-time market information?
Choosing The Right Financial Institution
The notion of giving an outsider access to highly sensitive information can initially stir reluctance among banks. Banks often evaluate the competitive threat a correspondent bank provider poses when outsourcing because they often have access to a customer’s confidential banking information. Therefore, companies must carefully assess the offerings, experience, credibility and demonstrated capabilities of potential bank and non-bank service providers.
Banks have numerous choices and an effective solution needs to do more than address current business functions. They should evolve as new technology evolves and business objectives develop over time. Here are a few criteria to keep in mind when choosing a provider.
Check the financial strength of the provider.
The financial health of your provider is critical. Established providers with a history of profitability are the safest bet, particularly if the provider is less than two years old.
Check the provider’s record of success. Ask prospective providers to furnish you with a representative sampling of their customer base and speak with customer references.
Establish whether the financial institution has a clearly defined account management plan.
Account management is a critical factor in the outsourcing relationship. Some of the questions you should ask include: 1) Will a single account manager serve as your point of contact on all of the details of your account; 2) Will you be able to meet with that person often, and 3) Will you meet with your future account manager and other support staff before the relationship begins?
What security measures does the financial institution have in place and have they been tested?
You should settle for no less than a detailed outline of the security measures that protect a provider’s facility from outside intrusion. Ask about the types of firewalls and related programs a provider uses and ask if they have experienced security problems. Find out what recovery plans are in place in case there is a security breach. Also pay close attention to the potential threat of internal security violations.
Make sure the financial institution offers a training plan and continued support.
Make sure the service provider offers formal training for systems and technology and how to use it efficiently.
Explore in-depth the quality of the financial institution infrastructure and the personnel charged with managing it.
Find out who its technology component partners and Internet backbone providers are. What are the key metrics, including reliability, availability, and scalability? An on site inspection is mandatory in establishing your confidence in both the provider’s physical infrastructure and its management expertise. Ask about current and planned investments in infrastructure. You want to ensure that you benefit from continued upgrades and new technologies.
How are services priced?
Make sure you know what you are buying. You should also get a clear idea of how pricing will change as your needs scale up or down over time. Ask if the provider’s pricing practices are flexible or rigidly set.
Numerous banks face the following dilemma: 1) Have a critical process whose usage is falling but will never go away. 2) Need significant investment in new technology in order to compete. 3) Faced with making the decision to spend money on technology investments or outsource a core process.
Today, approximately 95% of medium sized and community banks in the US outsource foreign exchange services to financial institutions. And the majority of banks in the US outsource processing for a variety of bank services. Many have learned that it’s best to give the process to someone who specializes in it. After all, it’s the provider not the customer, that’s making the resource investment. The provider is also assuming the responsibility for managing these resources and for much of the business risk inherent in doing it well.
Whether businesses embraced the potential of e-business or not, they found that the new technology in the hands of their suppliers, customers and competitors compressed business cycles. Some companies struggle to keep up with the rapid rate of technological changes. By outsourcing, a company can benefit from technology’s cutting edge without large capital expenditures.
Outsourcing and enabling a provider that specializes in a service to manage resources allows the bank to not only focus on its core competencies but also increase its bottom line. If operating costs are reduced, it’s because of the specialized knowledge and economies of scale of the provider’s resources. If capital costs are reduced, it’s because the provider is making those capital investments, not the bank. Similarly, when speed and flexibility are enhanced, it is because it’s faster and less expensive to leverage another firm’s existing resources than it is to build one’s own from scratch. When outsourcing is credited for focusing the business on its core, it is specifically because the bank will now be able to invest more of its internal resources in those areas where its unique capabilities produce exceptional returns.
It is imperative to choose a service provider that can put all the pieces together, regardless of how complicated the tools and processes become. Ultimately, by developing the necessary tools and processes into a comprehensive, fully integrated solution that fits together seamlessly, the bottom line will benefit and your bank will remain competitive in the 21st century.