Operations outsourcing is evolving across major industries as rapid technological advancements and changing customer expectations reshape traditional models. What once focused on cost arbitrage is now transformation-centric, driving agility, enhanced efficiency, and improved customer experience. A 2024 key issues survey by Everest Group highlighted that beyond cost optimization, the top three key areas where enterprises seek direction include technology integration, advanced analytics, and process engineering. The BFS industry is at the forefront of this shift toward transforming operations.

Cost-arbitrage led transformations are now becoming a thing of the past, whereas enterprises are now increasingly focusing on process efficiency through reengineering, technology-driven operations, and analytics integration. Future-looking enterprises are already taking this a step further, viewing these advancements as enablers of additional business value and enhanced customer experience, rather than just cost savings.

In this blog, we explore this growing trend toward operational transformation and how financial institutions with varied enterprise maturity levels are all striving to align with this shift.

What is the operational transformation approach and why are enterprises adopting it?

While a few banks were ahead of the curve in making operations more integrated with technology, the number of banks accelerating the efforts has surged in the past three years following the COVID pandemic and amid the slowdown. Some of the factors contributing to this include:

• Increasing requirement for automating business processes through remote delivery models across organizations
• Heightened market regulations driving the transition to shorter settlement cycles
• Accelerated demand from end customers to shift to digital models
• Need to scale up quickly to match capabilities with new players in the market, such as FinTechs and non-banks
• Need for low-cost IT infrastructure and data accessibility
• Enhanced data privacy and security

Unlike pure-play operations outsourcing, which primarily targets cost reduction, an operational transformation strategy focuses on optimizing workflows to foster organization-wide synergy and achieve long-term, stable gains. While every organization takes a unique approach to operational transformation, these efforts can be crystallized into three key approaches:

• Operations-IT alignment: Synchronization of IT investments in line with organizations’ wider business goals
• Data & Intelligence (D&I) integrated workflows: Leverage of automation, AI-, and analytics-led solutions to make operations faster and intelligent
• Platform-led operations: Deployment of domain-centric platforms for automated processing of large volumes of transactions

Through these dimensions, enterprises are seeking to transition their current state of operations into a more sustainable, integrated state of operations in the coming future. Exhibit 1 highlights the current and aspirational state of financial institutions.

Table 1: Pros and cons of the siloed and integrated states

Even though integrated operations warrant higher initial investment, enterprises are gradually adopting this model as their focus shifts from short-sighted goals of immediate cost takeout to long-term return on investments. This focus shift is explained by three key questions that enterprises are increasingly seeking to address:

1. How to drive the velocity of change?

Financial institutions are striving to accelerate change velocity to address evolving macro, consumer, competitive, and regulatory trends. However, in the current state, this change becomes slow due to siloed teams that are focused on individual outcomes and key results (OKRs). In contrast, integrated, technology-infused operations promote shared, forward-looking goals, facilitating faster change. As organizations recognize this, more data and intelligence-centric outsourcing deals now involve business unit heads alongside CIOs as decision makers, ensuring greater domain and process synergy.

2. How to bring in additional value while reducing the Total Cost of Ownership (TCO)?

As an organization’s wider goal is to reduce the overall cost, enterprise stakeholders are gradually moving away from the thought process of bringing down the cost of individual operations, IT, and technology teams to optimizing the total cost of ownership. For instance, while standalone operations outsourcing was the traditional answer to quick ROI, banks are now following a two-pronged approach of automating transaction-intensive functions and outsourcing judgment-intensive functions to gain to a stable, long-term ROI.

Along with reducing TCO, an integrated approach unlocks business value by using data, analytics, and AI to enhance decision-making, uncover customer insights, and drive new revenue streams via personalized service offerings.

3. How to make business operations more resilient?

Following the pandemic, resilience has become one of the top priorities for BFS firms. Institutions are aiming to safeguard against macroeconomic and regulatory changes and build operations that are agile, scalable, and secure. Thus, banks are looking to switch to a model where technology adapts to external fluctuations and helps minimize operational disruptions.

Is the time right to prioritize transformation? Case in point: 

The case of traditional UK banks provides a compelling answer to why operational transformation is imperative in today’s scenario. Compared to fintechs, traditional banks in the UK were laggard in adopting digital operations, particularly within CX-centric functions, in the past decade. As customers became more digitally savvy, fintechs were quick to offer seamless, online banking experiences. As a result, many customers shifted to these digital-first alternatives. By the first half of 2023, neobanks such as Revolut and Monzo were nearly at par with established banks in terms of customer base. The past two years witnessed over 300 physical branch closures of traditional banks due to customer shifts to digital services. In response to the significant shift in customer expectations, traditional banks have been forced to rethink their approach, accelerating digital adoption to stay competitive.

How to set the wheels of progress in motion? An operational transformation toolkit for BFS enterprises:

The following section entails a self-assessment framework for enterprises (in Exhibit 2) to evaluate their current operational transformation maturity and select a sourcing approach accordingly.

Enterprises need to optimize prioritization of initiatives based on their readiness stage to ensure the most impactful transformation outcomes. This is highlighted in Exhibit 3 below.

Based on the stage of operational and infrastructure maturity, an organization can prioritize the degree of transformation feasible. For instance, Fundamental-state enterprises can begin by introducing business intelligence and RPA tools for select processes, while mature-state enterprises can start leveraging technologies such as advanced analytics and end-to-end automation platforms.

How leading banks are navigating their transformation journey:

Based on their operational maturity and infrastructure compatibility, banks are selecting from three main approaches: Data and Intelligence (D&I)-integrated operations, the deployment of technology platforms, and aligning operations with IT.

Examples of such initiatives in the past three years are mentioned below:

A leading UK bank:

With an aim to optimize cost and enhance process efficiency, a UK-based retail bank roped in a third-party provider to leverage its services for IT and support functions along with digitally transforming its business. As part of the engagement, the bank will leverage the provider’s automation and AI capabilities to accelerate transaction processing and enhance customer experience.

A leading Europe-based global bank

To streamline customer-facing workflows and enhance the lending experience, the bank partnered with a BPO provider to identify and automate processes across multiple functions and leverage AI for quicker loan processing. Consequently, the bank achieved a 25% increase in productivity and reduced account closure times by approximately 30%.

A top 5 mortgage-backed securities dealer

Faced with an outdated proprietary technology platform that couldn’t support T+2 settlement cycles, the firm turned to a third-party provider for both technology and services. The provider took over post-trade operations while facilitating the firm’s transition to a modern equities platform. This partnership enabled the firm to scale its operations effectively and meet regulatory requirements.

Conclusion:

The decision to transition to an integrated operations approach depends on whether an organization prioritizes short-term cost-cutting or long-term efficiency. While both approaches offer distinct advantages, adopting a strategy focused on sustainable growth equips enterprises to withstand external disruptions and maintain their relevance in an evolving market. Given the significant investments required, although justified by the strong ROI and the complexity of internal execution, partnering with a third party offers access to production-ready and proven solutions, a skilled talent pool with domain and technical expertise, and cost-effectiveness to help enterprises achieve their goals. For questions or to explore this topic further, reach out to us.

Authors:

Suman Upardrasta

Sahil Chaudhary

Ritwik Rudra

Sakshi Maurya

In the dynamic landscape of banking, financial services, and insurance (BFSI), risk and compliance (R&C) functions have become critical. Read on to explore the growing trend of outsourcing R&C processes, including the strategic advantages, regulatory considerations, and the role of specialized service providers in bolstering operational efficiency and compliance resilience amid evolving industry dynamics. Reach out to us to discuss further.

Risk and compliance (R&C) functions may not directly generate revenue, but they are crucial for the effective execution of business strategies and ongoing operations of banking, financial services, and insurance (BFSI) enterprises. Conventionally, R&C only receive attention when something goes wrong, like regulatory enforcement. It’s time to adopt a proactive and strategic approach.

Recently, there have been rising volumes for processes related to R&C, putting significant pressure on in-house compliance teams of BFSI enterprises, as the cost of failing to meet R&C mandates is extremely high. For example, Binance faced a US$4.3 billion penalty in 2023 due to lapses in anti-money laundering program. Similarly, in 2024 HSBC has been fined £57.4 million for customer deposit protection failings.

So, what’s the solution? While some BFSI enterprises, due to regulatory requirements or other sensitivities, must keep all compliance activities in-house, for others, outsourcing part or all of their compliance functions is a viable alternative. This shift not only addresses immediate pressures but also positions BFSI enterprises for future resilience and competitiveness.

The catch? Regulatory guidance emphasizes that even when compliance activities are outsourced, the company retains accountability for meeting its regulatory obligations. Hence, the need to have a thorough decisioning strategy when it comes to risk and compliance outsourcing.

Traditionally, R&C outsourcing in the BFSI sector has been limited to areas like KYC, AML, credit risk, operational, and third-party risk management, with some audit support services. However, the industry has recently become more open to outsourcing critical processes such as market and liquidity risk, fraud management and chargeback, enterprise risk management, internal audit support, risk consulting, and ESG services.

Exhibit 1: Risk and compliance value chain as defined by Everest Group

The rising propensity to outsource R&C processes is driven by a multitude of factors, including:

Current macroeconomic headwinds: The ongoing recessionary pressures are putting cost constraints on BFSI enterprises as they navigate a high-interest environment. Outsourcing R&C promises much-needed cost-effectiveness when compared to maintaining an in-house compliance team.

Rising volumes of R&C requirements: Current geopolitical scenarios, such as the Israel-Palestine and Russia-Ukraine conflicts, along with major global elections, have heightened the need for processes like sanction screening and Politically Exposed People (PEP) monitoring. Additionally, the macroeconomic environment, where many are living paycheck-to-paycheck, has led to an increase in fraud and chargeback instances. Outsourcing to specialist firms can help increase efficiencies due to economies of scale and a clear operational focus.

The increasing complexity of R&C processes: Fraudsters have become tech-savvy, and the global regulations keep on evolving. Outsourcing can provide quicker access to advanced systems, such as compliance analytics and AI-based risk models, that might be costly or time-consuming to develop in-house. By outsourcing compliance tasks, BFSI enterprises can focus on their core capabilities and strategic goals, thereby increasing productivity and competitiveness.

Access to specialized talent: As BFSI enterprises expand their compliance efforts and integrate them within core business operations, the demand for skilled compliance talent has risen. Effective compliance management now requires not only financial, legal, and analytical skills but also strong operational experience, a combination that is in short supply and can be complemented by an R&C specialist outsourcing partner.

Evolving enterprise priorities within risk and compliance

The COVID-19 pandemic forced BFSI enterprises to rapidly adapt their operations. As the pandemic evolved into an economic crisis, it triggered unemployment and social unrest, presenting challenges like business disruption, remote work, data security, cyber threats, and increased risk and compliance monitoring.

Failures of major banks such as Silicon Valley Bank, Credit Suisse, Silvergate Bank, and First Republic Bank highlighted the urgent need for continuous investment in legal, risk, audit, and compliance functions amid rising inflation and asset/liability mismatches.

Enhanced regulatory scrutiny is another key factor, as highlighted below:

• AI and external data use control: The EU Artificial Intelligence Act, the first comprehensive legal framework for AI, was adopted on March 13, 2024. The new Colorado Division of Insurance regulations require insurers to test AI/data systems for bias
• Cybersecurity and data safety: The Consumer Financial Protection Bureau (CFPB) proposed rules on consumer-authorized financial data-sharing, and New York’s expanded cybersecurity rule mandates annual reviews of written policies by a governance committee
• Capital and solvency oversight: The Financial Stability Oversight Council (FSOC) finalized a framework for assessing risks to US financial stability, including non-bank financial companies and payment systems. The CFPB proposed supervision of digital wallet and payment apps, while the National Association of Insurance Commissioners (NAIC) seeks to protect consumers by ensuring the solvency of life insurers through revised risk-based capital requirements

This more stringent supervisory environment pressures banking organizations to accelerate remediation efforts and operate with less room for error.

The road ahead

Outsourcing broader R&C is similar to the early days of IT outsourcing, where companies gradually outsourced processes one or two at a time. BFSI enterprises should strategically decide which compliance activities to outsource, ensuring these processes are already stable and effective in-house, as outsourcing alone won’t fix existing issues.

As the R&C landscape evolves, financial institutions must proactively adapt by assigning clear compliance responsibilities, integrating technology (AI, analytics, automation), and establishing robust risk management frameworks. Service providers will be essential in supporting these compliance efforts.

For more on R&C outsourcing trends and achieving regulatory compliance, contact Dheeraj Maken (dheeraj.maken@everestgrp.com), Kriti Gupta (kriti.gupta@everestgrp.com) and Ritwik Rudra (ritwik.rudra@everestgrp.com), or download our report, “High Tide of Transformation – Financial Crime and Compliance (FCC) State of the Market 2024.”

Don’t miss our webinar, What’s Next in Financial Services? Driving Transformation Through Sourcing, Technology, and Operations, to learn how BFSI firms are driving business transformation in response to the macroeconomic environment, evolving customer needs, the tightening regulatory landscape, and the rapid adoption of AI and cloud technologies.