Why Asian brokers remain unsure about outsourcing
More Asian brokers than ever are
considering outsourcing back-office functions, but they remain cautious
and confused about the client benefits, according to a new survey.
The survey, by BNP Paribas Securities Services,
found that outsourcing services is growing in popularity, amid growing
regulatory and cost-cutting pressures.However, some are unsure of the positives outsourcing would bring to their business, while others do not seem to understand what their customers need from them.
BNP Paribas Securities Services'
fourth outsourcing survey for Asia asked over 200 banks and brokers in
Asia for their views on outsourcing.
The proportion who either outsourced or were considering outsourcing services such as fund administration, collateral management and general custody rose to 38%, up from 34% last year.
The proportion who either outsourced or were considering outsourcing services such as fund administration, collateral management and general custody rose to 38%, up from 34% last year.
But doubts remain about the
benefits. Here Financial News looks at the top five issues determining
whether Asia’s banks and brokers outsource or not.
*The need to keep control
The main obstacle to outsourcing the back office operations is the concern over the loss of control and visibility for the essential plumbing that sits behind a broker’s business. Across the survey, 41% said this was their top worry, followed by worries about client confidentiality shared by 29%.
But the numbers differed depending on the job title of respondents. A total of 54% of operations and network-related heads and 40% of trading execution and sales-related staff said loss of control was their top concern against only 20% of chief executive-level staff. However, 47% of bosses were worried about client confidentiality.
The main obstacle to outsourcing the back office operations is the concern over the loss of control and visibility for the essential plumbing that sits behind a broker’s business. Across the survey, 41% said this was their top worry, followed by worries about client confidentiality shared by 29%.
But the numbers differed depending on the job title of respondents. A total of 54% of operations and network-related heads and 40% of trading execution and sales-related staff said loss of control was their top concern against only 20% of chief executive-level staff. However, 47% of bosses were worried about client confidentiality.
*A desire for differentiation
The sellside thinks customer service is the key differentiator when it comes to competition, and is worried that outsourcing could hit service levels. Client service was highlighted by 78% of brokers as the top tool in differentiating themselves from the rest of the pack. The sellside also thinks their back office is the third most important criteria when it comes to winning mandates. Interestingly, though, the buyside disagrees, with only 53% of the buyside saying client service is key and 67% naming cost as the top concern. Similarly, the buyside rates the back office a lowly sixth in terms of importance, with 40% saying they would not notice or care if a broker changed any part of their back office.
The sellside thinks customer service is the key differentiator when it comes to competition, and is worried that outsourcing could hit service levels. Client service was highlighted by 78% of brokers as the top tool in differentiating themselves from the rest of the pack. The sellside also thinks their back office is the third most important criteria when it comes to winning mandates. Interestingly, though, the buyside disagrees, with only 53% of the buyside saying client service is key and 67% naming cost as the top concern. Similarly, the buyside rates the back office a lowly sixth in terms of importance, with 40% saying they would not notice or care if a broker changed any part of their back office.
*Collateral concerns
The majority of brokers are under pressure from demands that come with regulations that increase the demand for collateral and its management. The US Dodd-Frank Act, for example, will force the majority of over-the-counter derivatives trades through a central counterparty. The CCP will demand that collateral is posted against these trades as a kind of insurance policy. One of the services that custodians have been increasingly building is collateral management, which could encourage more outsourcing, the survey suggests.
The majority of brokers are under pressure from demands that come with regulations that increase the demand for collateral and its management. The US Dodd-Frank Act, for example, will force the majority of over-the-counter derivatives trades through a central counterparty. The CCP will demand that collateral is posted against these trades as a kind of insurance policy. One of the services that custodians have been increasingly building is collateral management, which could encourage more outsourcing, the survey suggests.
*Cost worries amid regulatory demands
Barnaby Nelson, head of business development and sales, Asia at BNP Paribas Securities Services, said “local market regulations” are causing the biggest headache for Asia brokers, with Dodd-Frank a close second. He said that for every dollar earned by brokers in Asia, only 55 cents is spent on servicing the customer. The survey suggests that this is a cost constraint that should encourage more outsourcing.
*Ignorance about who does what
BNP Paribas Securities Services found that some of the brokers just don’t know who is managing the collateral and other parts of the back office, including regulatory capital. On the sellside, 18% of respondents said they do not know who manages these parts of the business.
