Service bureaus have had a long journey serving the nation’s financial services industry dating back from the large and expensive mainframe computers used in the 1960s and 1970s. Like most technology innovations, prices dropped and a move to in-house servers was made.
Service bureaus today, though, are making a muscular comeback as organizations are turning to business process outsourcing for certain functions and solutions to diversify assets and achieve economies of scale in all areas of operation.
While not all financial institutions are shifting back to outsourcing IT, many are—if not for their entire core operation, then for specific areas. This is, in effect, the definition of business process outsourcing (BPO) — outsourcing specific functions and solutions, according to International Data Corp. The firm predicts worldwide demand for BPO services will grow at a compound annual growth rate of more than 5.7%, until 2017—when it will peak at more than $209.4 billion in revenue.
“Outsourced” business models from the days of manual processing are now becoming known as software as a service (SaaS), an era that brings the benefits of lending via a service bureau.
There are a number of benefits to working with a SaaS partner, including:
Economies Of Scale
The service bureau model pools the resources of many financial institutions to create economies of scale. This allows smaller financial institutions to move into new asset classes and to grow their loan portfolios — through increased volume with existing members and the addition of new customers.
By using a service bureau model, risk is shared by all participants.
Increase In ROA
Financial institutions joining private student loan participation networks are earning a net ROA of 4% on their loans.
The Hybrid Cloud model allows financial institutions to retain some control on-site while moving much of the physical infrastructure off-site, thus combining a public and private cloud.
Seamless User Interface
If your organization chooses the service bureau model for its lending operations, it’s likely the interface will be seamless to the borrower. Generally, the borrower starts out on your financial institution’s website, and continues on into the vendor’s platform.
Hardware, software, and network systems are already in place at the vendor’s facility. Systems can be ready to use in days, and sometimes in hours.
The subscription model, often with a base fee and a usage-based fee, can result in a total cost of ownership that’s much less than purchasing and hosting the software yourself, because many of the costs are shared by multiple customers.Support services costs are shared by multiple customers and can be lower than when going it alone.
Vendors generally provide technical support from staff that is knowledgeable about the basic aspects of the software and the computing platform it runs on. One of the key benefits many participants list for moving to a service bureau arrangement is a reduced need for in-house staff and skills.
The software and related systems operating through a service bureau often are already configured for multiple platforms. Mobile access, for example, should be managed by people knowledgeable in mobile access and security—knowledge your staff might not have.
Most vendors ensure the high availability of their systems, and protect data from accidental (or intentional) damage or destruction. Providing such capabilities on your own can require specialized knowledge and considerable expense.
The service bureau model of data management, via the cloud, is fast becoming a necessity, notes Fredric Paul, in an article for Tech Page One. “The cloud’s biggest enterprise wins to-date have come in private clouds — proprietary, on-premise solutions using cloud-based architectures,” he says. “But the cloud continues to pick up momentum as it takes over more business functions and gradually expands into public cloud services.”
He notes that many experts estimate internal storage requirements are doubling every 14 months, and the pace is accelerating. Paul suggests that in the near future a hybrid approach — a middle ground between public and private clouds — will be quite common for most organizations.
Learn more about how to select and implement the right partnership with a SaaS provider in our free white paper, The SaaS Era: Grow Your Portfolio via the Cloud by clicking the image below.