Disappointed with outsourcing firms and concerned about data security, some big banks now favor setting up their own offshore operations
Banks are turning away from outsourcing companies in favour of setting up their own offshore operations, according to two of Europe's biggest banks.
Increased regulatory scrutiny, failure of offshorers to deliver and the recent revelations of a £1bn fraud at Indian outsourcer Satyam are making banks wary about trusting outside companies to handle their information.
Eran Eisenberg, senior legal counsel at Barclays Bank (BCS), said financial institutions are now choosing to set up their own in-house offshore operations, known as captives, to handle business process outsourcing contracts.
"Captives offer a company benefits. Particularly from a regulatory and control perspective it offers peace of mind, control and the reassurance of it being part of the larger organisation," he told silicon.com at the Financial Institutions BPO Across Europe conference.
"I see a growth in captives – a lot of the larger outsourcing contracts have not achieved the benefits that were expected. That has driven forward a strategy of 'If we are going to make the investment, then we may as well invest in ourselves'."
Philip Davies, senior counsel at Deutsche Bank (DB), said the notion of creating a captive is receiving attention in light of the recent confession by Satyam chairman Ramalinga Raju that the company had been logging non-existent cash and interest on its balance sheet.
"We have seen a situation in recent months where a very large international supplier has thrown out a huge financial risk for its customers. We are only able to assess any partners in the light of the information that is available."
An increase in regulation is also playing its part in encouraging banks to consider captives.
"[Outsourcing] is being seen as more risky. We are seeing much more aware regulators in the market, who are understanding more fully the risks associated with outsourcing and they want to see a strong governance process in place," Davies said at the event, hosted by law firm Simmons & Simmons.
"At the moment, given the increased regulation, there is a lot of emphasis among colleagues to very carefully consider setting up a captive," he added.
However, not all companies that have set up captives have chosen to retain them: both Aviva and Citigroup recently sold off their captives to outsourcers.
Some outsourcers are already proposing financial institutions sell off their captives in order to fund the high investment costs of large business transformation outsourcing deals.
Gilbert McClung, senior corporate counsel with global BPO company ACS, told the conference: "We are offering to buy our customers assets as a way of generating deals because we know that customers will want to get rid of those assets."