Could PSD2 and Open Banking change the Outsourcing market?

Letting a specialist Outsourcing provider handle “your mess for less” is the popular attraction of outsourcing. Banks save money by handing over their hardware, software, networking and even IT staff to a third party. Banks often say they want to outsource to focus on their core business, to improve flexibility or to access a skilled team.

Turning an outsourcing vision into reality

There are many challenges in turning an outsourcing vision into reality. The first difficulty is that professional and experienced outsourcing providers do not accept a mess. Outsource providers want precisely documented processes and high levels of automation so that they can design effective commercial contracts and detailed service level agreements.

The standard of process documentation and automation often depends on how much “Machine to Machine,” “Human to Machine” and “Human to Human” interaction in the “non-core” service processes that a bank might wish to outsource.

Different kinds of communication

Machine to Machine communications has content suitable for data fields that can easily pass between applications. The level of detail in the interactions will also influence the potential for Open APIs. Interactions like regular payments contain identifiers and depictions that easily map to a data structure. The standard of detail is very high. These interactions have identifiers and representations that fit comfortably into a data structure. Some of the highly structured foreign exchange and money markets transactions carried out by Bank Treasury Departments do not require any human intervention.

Human to Machine interaction includes structured forms of information that are completed by a person during a service exchange. In applying for a loan, a consumer completes various processes with requests, forms, parameters, and structured reports. These service operations require human interaction with computers.

Human to Human interaction contains freeform or unstructured information exchanged between people during the service. For example, a loan application by a sophisticated corporate customer deals with the assessment of a very detailed request. It also has extensive analysis of qualitative and quantitative information on the enterprise client’s market position and business performance. There could be intense scrutiny of lending to that corporate customer that has already taken place. Machines can not handle these service operations.

Operating costs

Although banks that outsource cite strategic reasons to “focus on core activities,” there is often a goal to try to save money on operating costs. In the case of bank IT functions, outsourcing contracts can last many years and can promise annual savings of about 20 percent. In the short term, outsourcing specialists can lose money because of the investment required in taking over legacy systems and streamlining processes. Over the long run, they aim to make money by consolidating staff across multiple clients, streamlining operations and achieving economies of scale.

Option: Make or Buy?

Sometimes banks choose the “Buy” Option in the “Make or Buy” decision by choosing an Outsource Provider, and they produce a very positive outcome. The Outsource Provider does offer a good combination of high-quality on-shoring/near-shoring sites and the right amount of cost effective offshoring. The provider offers realistic promises and makes substantial investments. Service levels are satisfactory, and bank customers are undisturbed. The arrangement produces lower operating costs. There are small gaps rather vast gulfs between bank expectation and supplier execution.

Both parties have good levels of trust and the bank lets the provider change and adapt the operating model and methodology. This confidence is of vital importance, because without this development and transformation effort, outsourcing providers struggle to make money. The more processes a bank allows to move to the outsourcing vendor’s systems, the greater the potential savings. Banks can sometimes get better outcomes if they are focusing on how the outsourcing provider can make them more competitive or help to bring out products faster.

Definition of Open Banking

Open Banking is an emerging and high-profile area in financial services. There is a “market forces” definition of Open Banking. It refers to the use of Open APIs that enable third-party developers to build applications and services around banks. There is perhaps also a “regulatory” definition of Open Banking, focused on greater transparency and choices for bank account holders that is being enforced by regulators.

Some commentators suggest that Open APIs could cure many ills in modern banking (such as low growth and low rates of innovation). An Open Banking ecosystem will allow services providers a greater choice of whether to develop their services internally or purchasing them externally. Some researchers are starting to suggest that the typical “Make or Buy decision” now has a “Sell Option.” This emerging Sell Option could create new dynamics within the Make or Buy decision.

Opportunities for banks

There will be opportunities for banks to open APIs for service domains that support non-strategic business processes. The “Sell Option” in an Open Banking Ecosystem is particularly relevant for non-strategic business processes that have lots of “Machine to Machine” and “Human to Machine” interactions rather than “Human to Human.” Outsource providers want precisely documented banking processes and high levels of automation, and so do Third Party API Developers. In crude terms, once a mess is tidied up in a non-strategic process, the decision could be “outsource or publish.”

There are also service domains to support core business processes that are usually not subject to make-or-buy decision-making for strategic reasons. The Sell Option is especially relevant for services that support this kind of business processes. It could be important in an Open Banking Ecosystem to keep these support operations in-house.

For example, a bank may aim for a high level of automation for its consumer loan operations. The service will require lending models, that allow the customer to self-serve the appropriate loan product in a Human to Machine interaction. The customer’s historical spending patterns and credit ratings could be generated in full by Machine to Machine communications. Machine to Human interactions deliver the loan contract terms to the customer. In the absence of any Human to Human interactions, this is a tidy process that could be performed by a third-party Outsource Provider in a more cost-effective offshore location. It is also a highly structured business process that could have an Open API.


In crude conclusion, based on traditional Make or Buy approaches, the bank would make its decision based upon a cost comparison between the internal development costs and the costs of procuring an external solution. However, when evaluating the Make decision in an Open Banking Ecosystem, the bank will also consider the opportunities to expose and sell the use of their services through APIs. This new dimension could change the economics of the Outsourcing market in banking. It could also create a new dynamic with banks, as they seek to retain the product-specific processes and their attached support processes that could underpin their Open Banking strategies.

Door: Paul Rohan, Author, “PSD2 in Plain English” at Rohan Consulting Services Ltd
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