Let's examine five of the most common reasons banks cite when choosing in-house processing and see if they hold true in light of the fundamental changes in regulatory oversight, technology, competition, and customer expectations that banks face today.
Outsourcing is a more expensive delivery option than in-house.
In actuality, a bank's choice of technology delivery does not materially affect its overall level of technology spending. The single biggest cost factor for an in-house bank is depreciation of hardware and software. However, even when these assets are fully depreciated, banks incur continuing costs for staffing, facility, software maintenance, and hardware and software replacement. The single biggest cost factor for outsourced banks is the monthly "per account" fee, but this cost can be controlled as account volumes grow by incorporating tiered pricing in the outsourcing contract. Regardless of the delivery method, a bank's best bet to control technology costs is sound decision making, budgeting, and project management combined with spending discipline.
My bank is too big for service bureau delivery.
Not true. Surveys conducted at the start of this century indicated that 60% of banks over $5 billion in assets were outsourcing their core processing. Today, banks as large as $30-35 billion in assets are outsourcing all or some of their data processing. Improvements in banking technology and telecommunications, combined with escalating operational risk and regulatory requirements, are causing banks of all sizes to reevaluate the business justification for operating an in-house data processing shop.
In-house processing gives me greater operational control and flexibility.
Contrary to popular belief, a financial institution almost never owns the core processing source code under an in-house arrangement. In fact, an institution has about the same access and ability to change the source code with an outsourced provider as it does in an in-house environment.
I won't have a problem hiring the necessary IT staff for an in-house system.
Running an effective in-house system is a daunting task in today's ever changing regulatory and competitive environment. Couple that with hiring and retaining quality technical professionals and the challenge is intensified. Financial institutions can't offer the type of attractive career path that IT professionals can follow in pure technology companies and, as a result, are at a disadvantage when competing for IT talent. It has been estimated by some industry experts that the average annual turnover in bank IT departments is approximately 25%.
An in-house system gives me greater control over the cost increases associated with acquisitions and de novo branching.
Many banks on the acquisition trail have migrated to outsourced data processing because they are acquiring other banks and opening branches at a rapid pace, and they don't have the internal IT resources to convert their acquisitions cleanly and quickly. Acquisitive banks that are outsourcing their data processing can control costs by planning their acquisition strategy in advance and incorporating set pricing for new business into their outsourcing contract.
