Outsourcing certain private banking services has become a popular strategy among banks in recent years. It allows them to focus on their core business activities while benefiting from the expertise and efficiency of specialized third-party providers. However, it is not without challenges, and banks must be careful regarding the risks and benefits of outsourcing these services.
How is outsourcing beneficial for private banks?
One of the most important benefits of outsourcing is the ability to access specialized expertise. Many external organizations have significant experience and expertise in different areas, and are able to provide a high quality service than the bank itself. By outsourcing functions like compliance or risk management, banks can benefit from a highly skilled team who can offer a range of services, including monitoring of regulatory requirements, development and implementation of compliance and risk management policies, and ongoing compliance training for staff. Similarly, it applies to other areas of expertise.
Another significant advantage of outsourcing is cost savings. Banks are chasing cost reduction all the time. By outsourcing certain services, they increase their efficiency in the implementation of their financial strategy. While working with external providers, banks can avoid the costs of hiring and training specialized staff, as well as investing in the technology and infrastructure needed.
However, these great advantages are coupled with several challenges and this lead to another question, what will private banks face if they outsource certain services?
One of the main challenges is the risk of losing control over critical functions. For example, Compliance is an essential function that is directly integrated with the overall business strategy of private banks. By outsourcing this function, banks risk losing control over important decision-making processes, which can lead to strategical and operational risks.
Another challenge of outsourcing is the risk of data security breaches. While externalizing services, the bank exposes its clientele data (Transaction details, customer information, etc) to an additional risk. Interception of information or data theft is more likely to happen when the data is constantly moving.
Not to mention that an external provider may not meet their contractual obligations and this can lead directly to a conflictual situation between the private bank and the provider.
It’s necessary to consider that outsourcing is not as simple as it seems, each private bank takes as much time as needed to study the decision and chooses wisely whether it’s going to outsource its services or not, as well as the selection of the right third-party providers which are suitable and in accordance with the private bank’s vision and strategy.