According to the survey conducted by BNP Paribas Security Services, outsourcing of services by Asian brokers have been increasing in popularity in spite of several pressures faced such as regulatory rules and cost-cutting moves.
Even though Asian brokers are increasingly relying on outsourcing of their back-office functions, they still are not sure of the benefits their business would derive from the process. They are also unsure of the benefits that the clients might garner from such a process. Some of them do not even know what the customers want from them.
In its fourth outsourcing survey encompassing Asia, BNP Paribas Security Services collected information from around 200 brokers and banks from all over Asia for their insight on outsourcing
Factors deciding outsourcing
There are certain factors, both internal and external, which influence the Asian’s banks and brokers’ decisions whether to outsource or not.
Client service as differentiator
The main worry that keeps back brokers from outsourcing functions is their fear of affecting the customer service levels. According to the sell side, efficient client service is the key differentiator that keeps the business ahead of other competition. In the survey, around 78% brokers voted for customer service as the top differentiator for the business that separates them from other players.
The sell side has also given third position to back-office functions when it comes to importance. However, things were interesting from the bayside perspective, of which only 53% voted in favor of client service being the differentiator.
It also pushed down the importance of the back-office to a lowly sixth position as 40% considered any changes in the back-office not worth their attention. However, 67% of the bayside considered cost as the main concern.
Control, visibility and client confidentiality
Brokers are reluctant to outsource the back-office operations primarily for one reason- the fear of losing the control and visibility of the operations which supports the entire business. 41% agreed that this was their major concern with 29% voicing out their concern regarding client confidentiality.
However, these figures kept changing with the change in job titles of people. But around 45% of the heads were concerned about client confidentiality being the main obstacle preventing them from outsourcing.
Regulatory obstacles and cost concerns
The regulations in the local markets prove to be a big deterrent for Asian brokers to outsource. The US Dodd-Frank Act also adds to the woes. For every dollar that a broker earns in Asia, customer service cost is only 55 cents. The survey considers this as a positive factor that will help outsourcing.
Collateral concerns and management
There has been an increased pressure on brokers by regulations which state their demands for collateral and also its management. The Dodd-Frank Act will push the derivates via a central counterparty which treats the collateral like an insurance policy. The survey states that custodians have been focusing on collateral management which favors outsourcing.
Lack of awareness
The survey found that some brokers are unaware of the operations in the back-office such as the persons responsible for collateral management; regulatory capital etc. 18% of persons on the sell side who participated in the survey admitted that they are not aware of the people managing these operations.
These factors greatly determine whether brokers outsource their back-end functions or not. A steady increase is being seen in the outsourcing trend with more and more Asian brokers considering outsourcing.
They outsource services such as collateral management, general custody and fund administration. In spite of the lingering doubts, the percentage of brokers and banks that outsource or have been considering outsourcing these services has risen from 34% the previous year to 38% now.
And this figure is slated for even more escalation especially if the brokers and banks figure out ways to address their concerns regarding outsourcing.