Finnova: The next step: community banking - Christoph Erb
The fallout from the financial crisis has seen more banks look to outsource certain processes in a bid to drive down costs. Switzerland is one such market where the rewards of industrialisation are becoming more manifest. Christoph Erb of Finnova talks to Future Banking about the potential benefits of business service provision across the retail and private banking communities.
While a host of other sectors have long embraced root-and-branch industrialisation, the banking industry, on the whole, is still found to be wanting.
Unlike the manufacturing industry, for instance, which deploys a complete outsourcing method - in which standardised components are manufactured through highly automated processes - banks have simply not pressed ahead at the same rate.
The reason can be traced back to the simple fact that for a long period of time, the strong economic position of many financial institutions provided little incentive to do so. However, that was before the global downturn; in 2014, things are markedly different.
Add to the mix the number of cost pressures and increasing levels of regulation found across the financial services industry, and never has there been a more appropriate time to outsource certain business processes.
In Switzerland, the banking approach to industrialisation has long been predicated on sourcing modes such as BPO (business process outsourcing) and ITO (information technology outsourcing) - the latter guided by the modern mantra that IT constitutes the heart and brain of any organisation.
BPO offers several advantages. Providers can standardise the process steps they perform, while employees are able to better operate due to the bundling of volumes. Furthermore, investments in subject-specific expertise are proven to pay off at a faster rate.
From a technical viewpoint, industrialisation is represented through the outsourcing of IT infrastructure, and the operation and maintenance of the systems licensed by the bank.
These sourcing models enable - generally speaking - better scalability. There are presently several specialised providers and networks, which Finnova provides its banking software to, on the corresponding outsourcing market in Switzerland.
These existing sourcing models are underpinned by the respective financial institution having clearly defined business cuts, which break down the value chain commercially and technically.
The provider then combines the customers' volumes into a bundle and automates the part of the value chain over which they have control to the greatest extent possible. The banks benefit from lower and more variable costs, while at the same time enabling more capacity to focus on the likes of sales and consulting activities.
According to Christoph Erb, chief of customer care at Finnova, the next stage of the development path indicates that we will see further industrialisation in the shape of business service provision (BSP), which can be defined as a combination of banking and technical outsourcing.
"In addition to banks and software providers, several BSP providers have become established in Switzerland in the past few years," he says. "For this, the Finnova environment provides a real market, in which our customers have freedom of choice. We are convinced that the competition between the service providers only has positive aspects regarding industrialisation, such as higher quality at competitive prices.
"As a software provider, we have already built in all prerequisites for industrialisation in our product's DNA, whether it is the multitenant capability with regard to ITO, or the BPO functionalities, which allow processing centre staff to work efficiently and effectively, regardless of where the customer banking software is installed."
Business service provision
BSP can be defined as the implementation of standardised management processes by a provider on a standardised business platform, operated by the provider. As they have control over the processes and the IT systems, BSP allows providers to profit from the economies of scale and scope.
The potential upshot for banks using BSP is lower production and unit costs, as well as the opportunity to harness greater cost transparency and flexibility in the back office.
To guarantee the success of a BSP, providers must take a number of factors into account. Firstly, banks must be differentiated at the front office, while a high degree of standardisation in the back office must be achieved and maintained.
Also, sustainable cost reductions must be achieved with the savings passed onto the banks in the form of lower processing costs. Financial institutions should also be able to contribute towards the structure of their services.
Put simply, each bank needs to choose the specific way in which BSP is implemented, in order to satisfy their individual needs. This will also ensure that the intermediate BPO step - a kind of technical halfway house - is as worthwhile as an application service provider (ASP). However, a direct switch from in-house production to BSP is also feasible.
"We make a distinction here between two main types of business outsourcing," adds Erb. "On the one hand, there is BPO, in which the outsourcing provider works directly on the bank's system; on the other, there is BSP, in which the outsourcing provider works with a dedicated system and the processes are linked to the bank's system. Finnova allows for both types of outsourcing."
All of the above mentioned sourcing models are already in use in the Swiss banking sector. However, the concentration and frequency of their use varies considerably between the different banking groups.
Captain of industry
Currently, retail banking possesses the highest degree of industrialisation, with private institutions still lagging behind.
"Industrialisation always begins in the mass production and retail business, in which greater economies of scale are achieved," explains Erb. "For this reason, retail banks are predestined for it. Furthermore, the pressure on margins in the retail business started earlier and was more intense.
"So, in the retail banking sector, the industrialisation of IT is already very advanced, whereas in the area of BSP/BPO, the trend towards industrialisation has just begun. However, in the past two or three years, we have been seeing more and more movement towards BSP/BPO. Usually, banks start by outsourcing one or two processes. As soon as these have been successfully outsourced, further processes follow."
When it comes to data security, private banks are also more sensitive and are more liable to make specific demands. This means that demand for sourcing models is lower and is still led predominantly by smaller institutes.
And, with the ongoing changes in regulatory conditions - defined by a need for greater transparency and less banking secrecy - offerings from outsourcing providers are also a point of debate.
"The regulations with regard to outsourcing in Switzerland are well advanced and do not prevent outsourcing within Switzerland," says Erb. "There are also greater hurdles involved, such as banking secrecy - and political stability - when it comes to transnational processing centres or outsourcing in a foreign country. Here, we see a trend that 'Swissness' is of great importance for many customers again."
As a result, banks are increasingly looking to expand their sourcing models and develop new sourcing partnerships. Looking ahead, Erb is confident that industrialisation will gather greater momentum in the private banking sector; BSP in particular, he states, will play a major role in this.
"We are convinced that BSP will continue to forge ahead and that standardised processes will increasingly gain influence," he says. "This also enables processing with software in the dedicated centre, regardless of the banks' solutions. Large processing centres - which can offer very cost-effective services due to the high STP rates and volumes - can also come into being. Therefore, I think that Switzerland can continue to occupy its leading role in banking."