After many years of reviewing and thinking through the implications, the Federal Reserve last week issued guidance to banks about the extent of their use of outsourcing. As The Wall Street Journal reported, the Fed raised red flags about state banks and bank holding companies using third-party service providers for information technology and bank operations.
The Fed’s warning stated that “the guidance does not discourage financial institutions from outsourcing activities to service providers, but says firms should be aware of the potential risks.” The warning cited reputational risks as well as legal risks. And it follows on the heels of a similar warning issued to national banks by the Office of the Comptroller of the Currency.
At Everest Group we are already aware of a number of large financial institutions that were already taking steps to reevaluate the degree to which they use third parties, and we believe this new regulatory guidance will push them further down that path.
Where will the work go?
We don’t believe that there will be a mass movement of work from India back to the United States and Europe. However, we believe that much of this work will move into already existing GICs (Global In-house Centers).
Beyond the regulatory pressure, we see a number of reasons for banks moving their work to GICs. Most notably, many banks now feel it’s easier to drive increased productivity when they own the resources rather than third-party providers owning them. They also experienced control issues in outsourcing relationships.
Extent of the impact
With the Fed’s warning about risks coming at a time when banks were taking a step back from outsourcing because of productivity and control issues, we believe it will drive other financial institutions to join the trend of reevaluating their use of outsourcing.
Given that the financial services segment is the largest and most profitable segment for the third-party providers, we believe this Fed warning could become quite significant in importance and impact on the services industry.