January 12, 2012: The start of the credit crisis that is taking its toll in Europe was a turning point for the financial services outsourcing sector. With this new economic crisis, the outsourcing business models followed by the financial services outsourcers became quite unsuccessful. The trading of securities with underlying mortgages and related portfolios had slowed down and eventually stopped which resulted in the business models becoming out dated. However this dramatic shift did not put an end to the financial services outsourcing sector, but cleared the path for the next level of development in the industry.
Prior to 2007, the mortgage market in the UK had witnessed growth at unprecedented levels. The driving factor behind the growth was the increase in the number of mortgage lenders. Most of the lenders chose to go for the services offered by the third party service providers not only as a means to cut cost, but also as an efficient way to trade assets.
With the services provided by the third party service providers it became a lot simpler for the lenders to trade assets as it involved just paper transactions. The assets can remain in its position and do not have to transfer in physical form. Even if the ownership of the mortgage changes, the regular management of the assets is the responsibility of the same administrator.
But with the credit crunch, the money markets were shut down and the outsourcing stopped suddenly. According to a forecast made by CML, the growth will be negligible with an increase from BP 138 Billion in 2011 to BP 150 billion in 2012.
The reality is far from the above predictions. The future seems to be bright for the third party service providers, with increasing opportunities from traditional and emerging markets.
In the post crunch period, the outsourcers have learned to adapt to the environment in which they operate. They are in the process of cutting cost and restructuring their business to make sure that they are right sized for the market in which they operate. To accomplish that they are taking drastic measure such as closing down operation centers and laying off employees. The increasing opportunity is expected to come from existing clients and emerging markets. The third party service providers will be able to provide inputs to make informed decisions in matters such as managing loan books and provides insight into performance of mortgage portfolio.
The new markets for the financial outsourcers include secured and unsecured and the savings market. The secured and unsecured markets are areas of interest to specialists and new lenders, who may not possess a house loan processing infrastructure or have only limited resources in their possession. In the case of new business, outsourcing back end functions is an effective means to reduce cost.