“The Debate on BPO at Banks is too Emotional”

Prof. Dr. Dieter Bartmann
Prof. Dr. Dieter Bartmann

Mr. Bartmann, when does BPO make sense for banks, and when is it too risky?

Bartmann: It makes sense to outsource processes that make no difference to a company’s competitiveness – if that can be calculated. In this case, such processes include administrative and back-office processes that are specific to banks. In general, the goal of BPO is to optimize a company’s own value chain. It can be successful only when a clear and straightforward process organization has already been created. It’s risky to outsource disorganized processes and implement a stringent contract that simultaneously takes any option to perform the necessary changes away from the service provider.

Overall, it’s less important to drive all processes yourself. On the contrary – services should be organized with enough intelligence to produce the flexibility to deal with situations strategically. Processes must not impose a straitjacket on companies so that they no longer have any room to move. In the bank of the future, business, processes, and system architectures are optimally tuned to each other. Individual components at the process and system level are not cast in cement; they are coupled flexibly. Once that coupling occurs, it’s easy to reflect on the situation and decide who performs a given process based upon efficiency.

Do outsourcing service providers have to be banks?

Bartmann: Other service providers can handle processes that do not directly affect the banking business. But the service providers should be banks for banking-specific processes like consumer credit, which falls under the jurisdiction of German credit laws.

What competencies do current BPO service providers still have to acquire?

Bartmann: BPO is still relatively young in banking, so only a few service providers have attained professional status in handling banking processes. For payments or commercial paper, for example, companies are still being created – from a European viewpoint, they do not yet have enough comprehensive contracts to process. Because BPO for banks is subject to value-added tax, the cost advantages for which banks hope must be quite large. But for administrative processes, especially those in the IT environment, the number of service providers that operate internationally is sufficient.

What about loan factories? Is there a BPO service provider for banks in this area?

Credit factories are special institutes with a bank license; they specialize in granting credit and handling the related credit processes. They offer this service to other banks. The credit process is extremely complex and requires special knowledge and abilities. That’s why various banks are looking to see if they should outsource this process to a competent service provider – if BPO is appropriate in this area. Examples of these kinds of credit factories include VR Kreditwerk, norisbank, and Eurohypo.

Are the concerns and irritations of bank customers justified in regard to customer service, language, and data protection?

Bartmann: The discussion of this question is too emotional in my view. Of course, the banking business involves confidential transitions and touches the private lives of all customers. But banks can insist on BPO contracts that guarantee the interests of end customers. Other industries have done so for several years.

Are there already international success and disaster stories?

Bartmann: Yes. Citibank and Deutsche Bank were successful. In the Scandinavian market, one service provider, TietoEnator, has bundled the IT infrastructure and several bank-specific tasks in Sweden, Norway, and Finland. But IT tasks and the related service processes have primarily been outsourced so far. I don’t know of any failed BPO projects, but the history of BPO in the banking sector is still very brief.

How can a company get out of a BPO project gone wrong?

Bartmann: Every BPO project must be planned very well and have a sufficient number of milestones and results that are defined exactly. At each milestone, management must determine if the project is to continue or not. The contract must define how to get out of a project if management decides not to continue it. Clients must ensure that they remain responsible for processes until a secure cutover.

What legal requirements must be considered?

Bartmann: In German law, each bank must inform and explain its intentions to the banking oversight authority. The law requires that the bank ensure that it has contractual rights for its own auditing department and the inspection departments of supervisory agencies to audit and inspect records at the service provider at any time.

Do reservations about BPO actually hide an unwillingness to standardize familiar, in-house processes and IT solutions?

Bartmann: You mean that no one wants to get rid of obsolete approaches. This tendency also plays a role in the distribution of power. To understand the situation, you must consider the historical context. Bank processes were digitized very early. The price for doing so was highly proprietary systems. This development proceeded differently than in production industries, for example, where standard products for computer-aided design (CAD) and other tasks quickly entered the market. It’s unfortunate that in the past banks did not take a consistent approach to standardization. They recognized too late that they would now be subject to higher development costs and that the lack of standard processes is a disadvantage. Only recently have a few standard products – like those from SAP – become available in the banking industry. There’s a potential here to standardize business processes.

Is customer trust also a question of mentality?

Bartmann: The different levels of customer trust involve reflect the acceptance of new technologies. In Asia and the English-speaking world, customers and banks deal with IT innovations as a matter of course.

Are there limits to outsourcing? Will the future show many well-known companies to have a strategic superstructure while vital business processing occurs elsewhere?

Bartmann: There’s another way to look at it. A large part of what you call “vital business processing” is routine. And without a strategy, no company can remain competitive – that’s the real life of a company. Of course there are limits to outsourcing, but I don’t see them as the decisive development of the next few years.

In fact, standardization of banking operations will follow the model of production industries, where BPO is a decisive step, and lead to a stricter division of labor and specialization. According to studies by our institute, in the future, banks will specialize as processing, product, or sales and distribution banks. The banking world will change a great deal because of international competition and the demands of customers for all types of financial services.