Says Frost & Sullivan, India’s senior research analyst, technology practice, Gaurav Dua: "Banks are getting into the application service provider (ASP) business because they see lot of value that can be derived by it. Information technology (IT) outsourcing has gained significance primarily because of certain typicalities in IT requirements. All aspects of banking like consumer and commercial banking, and treasury have traditionally scored the highest productivity gains from investments in IT, among all other sectors."
Adds Mr Dua: "The banking sector is one of the largest consumers of IT and the most resilient one. Amidst, the present recessionary pressures affecting all sectors, IT investments in banking continue to grow steadily."
As the financial sector grows at a healthy rate, and demand for products increase, more and more players will look towards increasing their sophistication levels. That, in turn, would need a far more sophisticated in-house IT team for running and maintaining such applications.
The banking sector has seen a clear emergence of players whose sole foothold in the market is the adoption of technology innovation and re-inventing many of the traditional processes employing technology.
IT solutions for core-banking application is absolutely mission critical. These are compelling business drivers. The only dampening factor in the decision to outsource is the mission criticality of the applications and also reliability and security issues.
In developed nations, banks have been among the first movers in the outsourcing game and are outsourcing their back office processing to a third party at a remote location (Bank of America and Citibank are some of the examples in case. Royal Bank of Canada has recently turned over the management of its 4,700 ATM-fleet to NCR. Apart from normal servicing of the ATMs, NCR would also take over the bank’s cash optimization, or forecasting the amount of money to go into the machines, a task most banks keep in-house.
Says HDFC Bank’s country head, transaction banking group and retail operations, H Srikrishnan: "It is a strategic move to co-opt with multiple banks using technology as a platform. The Indian banking sector has banks which are highly automated, banks which are automated at a basic level and banks which are not automated at all. Sharing of products and ATMs is not always possible since there is inconsistency in the levels of automation." HDFC Bank has a 50:50 joint venture with i-flex solutions called Flexcel International which looks into ASP as a business.
Adds Mr Srikrishnan: "Any ASP model is per se related to transactions volumes. There is no capital expenditure but only the variable cost. The emphasis is on paying the rental fees rather than on investment and running one’s own network. As I see it, banks will move away from non-core banking activities and will outsource technology and processing. It is extremely important to partner with the right people who have the capability. For us, the chemistry worked because i-flex has been in the business for a long time."
With the rapid development in the network security front and logical security taking prominence over physical security, the ASP model would become a compelling value proposition for small- and medium-sized banks to start with. In the fiercely competitive business scenario today, even a small/medium-sized bank can provide its clients with quality services backed by the state-of-the-art technology solutions being used by the larger banks at a very affordable cost though the ASP mode.
This has the potential of altering the business dynamics of this sector in the future.
In the US and other advanced countries, a lot of banks have shown keen interest to move on the ASP-model.
This is unlike the trend in India where things have been quite slow. There are hardly 2-3 banks (co-operative and small size banks) which have have gone in for the ASP-model.
Although they see value in this model, a lackadaisical attitude on part of the top management is the cause for slow adoption. But things are likely to change in the next 2-3 years as these banks realise the benefits that would accrue to them by moving on to the ASP model.
i-flex solutions, one of the leading ASP players, is targeting the banking and financial sector and has been getting very good response from the US and European markets. Last year, a Dutch broker called Rocorp became the first European taker of i-flex solutions’ Flexcube on an ASP basis. i-flex is also getting a good response from financial players in places like Vienna, Sweden and the Netherlands. Deutsche Bank, one of Europe’s leading bank, has implemented e-treasury exchange - a solution from SunGard Treasury Systems, an operating group of SunGard. This would enable the bank to provide online financial services to their clients.
This would not only reduce manual processes, but would also reduce operating costs and increase trading efficiencies. A large number of community banks in the US are likely to move on the ASP-model.