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Changing Dynamics in the Banking Industry August 2013

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Regulations, technology and new alternative channels have changed the US banking industry dynamics

Old Ways of Banking are No More Applicable

• New regulations, which came in the aftermath of the financial crisis, are putting pressure on the industry profitability – Durbin Amendment (i.e. the capping of interchange on average 22 cents) was estimated to reduce the US bank’s revenues by 1.5% in 2011 – Volcker rule was estimated to reduce combined pretax earnings for the eight largest US banks by up to US$ 10 Bn annually • 61 Mn US consumers will use mobile banking in 2013 – 65% of mobile bankers used mobile web sites and 45% used applications in 2012 – Banking apps to reach 35 Bn in 2014 • The total dollar loaded onto prepaid cards will increase to US$ 201.9 Bn in 2013

Banks are Outsourcing to Optimize Operations and Technology Costs

• US retail bank’s margins are getting squeezed – Net interest margin for all US banks in Q4 2012 is at 3.37% compared to 3.39% in previous quarter and 3.53% for FY 2011. This is even lower than the long term average of 3.92% – Bank of America’s net interest margin reduced to 2.43% in Q12013 compared to 2.51% in 2012 • Cost of compliance to new regulations are also going up • Banks are struggling to curtail technology spend; the US bank are expected to spend US$ 41.5 Bn on technology in 2013 • In such a scenario, banks are increasingly looking for outsourcing to reduce compliance burden, and optimized operational and technology costs

Outsourcing is Showing Positive Trends

• According to world retail banking report, 77% of retail banks now outsource at least one part of their business • Common industry estimates show that outsourcing provides bank with a saving of 20%-40%, depending on whether processes are located locally or abroad

Source: S&P, IDC, Forrester, Ovum, Sutherland Research

© 2013 Sutherland Global Services Inc., All rights reserved. Privileged and confidential information of Sutherland Global Services Inc.

www.sutherlandglobal.com September 26, 2013

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Financial industry is one of the top revenue segments for the world’s leading IT companies

IT Spending by Banking Industry

• The banking sector had 11.6% of the overall worldwide IT market share in 2012 and the same is expect to reach 12% by 2016 • Global banking industry’s five-year CAGR of 3.8% in overall IT spending is also above average when compared to the cross-industry’s CAGR of 3.0% during 2011-16 • North American banks IT spending has fared better than their European counterparts. Total IT spending is expected to grow at a 4.4% CAGR through 2016 to reach US$ 131.5 Bn

Contribution of BFSI in Leading IT Companies’ Revenues Company Name Cognizant

BFSI As % Of Total Revenue

BFSI Revenue (US$ Bn)

Total Revenue (US$ Bn)

Reporting Year

41.3%

3

7.4

FY 2012

43%

4.04

9.38

FY 2011

Wipro

~27%

1.9

7.2

FY 2012

Infosys

~33%

2.3

6.98

FY 2012

CSC

~10%

1.6

15.87

FY 2012

TCS

Source: Sutherland Research and Analysis

© 2013 Sutherland Global Services Inc., All rights reserved. Privileged and confidential information of Sutherland Global Services Inc.

www.sutherlandglobal.com September 26, 2013

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US top banks outsource non-core operations to optimize operational costs Banking and financial services firms in the Forbes 2000 companies list have around 110 captive centers in different parts of the world

Outsourcing by US Top Banks Bank Citi

Description • • • •

In 2012, HCL Technologies' BPO arm signed large outsourcing contract with Citibank in an estimated US$ 200 Mn deal HCL was expected to set up back-end processes for loans, financial products and customer service By this deal, Citibank is looking for offshore investments which would yield high revenue In 2012,Citi had around 900 professionals working across its centers of excellence in Mumbai, Bangalore , Chennai and Gurgaon

JPMC

Wells Fargo

Bank of America

US National Association

JPMC is planning to transfer more of its business support operations to the global in-house center (GIC) in Manila (Philippines) to reduce costs – JPMorgan Chase Bank, N.A.–Philippine Global Center has emerged as Manila’s largest GIC of a global corporation by revenue – The center generated almost US$ 0.23 Bn (PHP 10 Bn) in revenues in 2011 • In 2006, JP Morgan selected Cognizant to provide IT and back office services to the company – The deal was for ~US$ 250-US$ 300 Mn – It provides various services such as mobile testing, process consulting, virtualization and Testing As A Service (Taas) • •

Wells Fargo was looking to move some jobs outside the US as it pushes forward with a company-wide cost-cutting program The company is aiming to reduce quarterly expenses by about US$ 1.7 Bn to US$ 11.25 Bn by the end of 2012

• •

Bank of America has a back-office center in Indian cities of Hyderabad, Noida and Gurgaon Bank of America outsourced IT and back office projects worth nearly US$ 5 Bn to India, as they seek to lower costs of complying with new regulations and integrate banking systems Bank is relocating its business-support operations to the Philippines especially its labor-intensive and information technology-enabled business services

• • •

The bank has its contact center located in Minneapolis-St. Paul, Greater Milwaukee, Portland, Cincinnati and Denver US Bancorp’s prepaid card processing is done in-house through its division Fidelity National Information Services Inc. (FIS) – The process has 210 people to handle it

Source: Sutherland Research

© 2013 Sutherland Global Services Inc., All rights reserved. Privileged and confidential information of Sutherland Global Services Inc.

www.sutherlandglobal.com September 26, 2013

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Though outsourcing may result in 40% cost-saving, it becomes risky if operations are not managed properly

Growth of Banking Captives

Growing Risks in Captives

• The BPO industry has evolved from the outsourcing of quasi-clerical activities (e.g., printing and data storage) in 1970s to high-end functions such as credit analytics and risk management in 2013 • The main driver behind the outsourcing by banks is cost reduction, which might be in the tune of 20% to 40%

• As per the regulatory body, US Office of Foreign Assets Control (OFAC ), Standard Chartered entered into financial transactions with Iranian clients eyeing the millions that they could make by means of transaction fees – Standard Chartered’s captive unit in Chennai (India) handled compliance system, and was deficient to track the illegal transactions that their parent company was involved with – Once the scam was disclosed the bank was fined US$ 340 Mn by New York bank regulator • In 2006, HSBC Electronic Data Processing India Ltd., which handles the bank's back-office work from outsourcing centers in India, filed a complaint saying one of its employees accessed "personal, security and debit card information" and passed them on to associates involved in the fraud – The employee siphoned US$ 420,000 from the accounts of 20 customers

Source: Sutherland Research

© 2013 Sutherland Global Services Inc., All rights reserved. Privileged and confidential information of Sutherland Global Services Inc.

www.sutherlandglobal.com September 26, 2013

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Recent cyber-crimes bring the focus on the growing importance of rigorous risk auditing from global operation perspective

Overview

• ElectraCard Services (ECS), a payment solution company, used to process prepaid travel cards for National Bank of Ras Al Khaimah PSC (RAKBANK) • Enstage Inc. also a payment solutions and processing provider for the global market place handled card payments for Bank of Muscat of Oman

• ElectraCard Services and Enstage Inc. were attacked by a global cyber-crime ring in December 2012 and February 2013, respectively • A cyber-crime ring broke into the computers of these two credit card processors

What Went Wrong?

• The gang changed the withdrawal limits and available balance in prepaid MasterCard debit cards issued by the banks • PIN and Magnetic strip data were compromised • The accounts were exploited in co-ordinated ATM withdrawals in 27 countries • Cash withdrawn from National Bank of Ras Al Khaimah PSC and Bank of Muscat of Oman were US$ 5 Mn and US$ 40 Mn, respectively

• Due to the scam, ElectraCard suffered a net loss of US$ 1.65 Mn in FY 2012. Its sales declined by 1.6%

Impact

• The banks were either supposed to bring claims against the processing companies in court, or they could file claims with their insurers and those of the processing companies

Source: Sutherland Research

© 2013 Sutherland Global Services Inc., All rights reserved. Privileged and confidential information of Sutherland Global Services Inc.

www.sutherlandglobal.com September 26, 2013

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Thank You

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Changing dynamics in the us banking industry