Due Diligence for Outsourcing Solutions

A key consideration in preparing an e-banking cost-benefit analysis is whether the financial institution supports e-banking services in-house or outsources support to one or more third parties (i.e., a technology service provider or TSP). Transactional e-banking is typically a front-end system that relies on a programming link called an interface to transfer information and transactions between the e-banking system and the institution's core processing applications (e.g., loans, deposits, asset management). Such interfaces can be between in-house systems, outsourced systems, or a combination of both. This flexibility allows institutions to select those products and services that best meet their e-banking needs, but it can also complicate the vendor oversight process when multiple vendors are involved. Choosing to use the services of one or more TSPs can help financial institutions manage costs, obtain necessary expertise, expand customer product offerings, and improve service quality. However, this choice does not absolve financial institutions from understanding and managing the risks associated with TSP services. In fact, service providers may introduce additional risks and interdependencies that financial institutions must understand and manage.

Table 2 below summarizes some of the advantages and disadvantages of supporting technology-based products and services in-house versus contracting for support with a TSP. Regardless of whether an institution's e-banking services are outsourced or processed in-house, the institution should periodically review whether this arrangement continues to meet current and anticipated future needs.

Table 2: Advantages and Disadvantages of Common Processing Alternatives

Processing Hardware Application Software Advantages Disadvantages
In-house Purchased or Leased Developed in-house Systems designed to meet institution's specific needs.

Ability to offer unique products and services.

Direct oversight of risks.
Costs to develop/maintain system.

Requires high level of technical expertise.
Purchased with in-house modifications Cheaper than in-house developed, while retaining ability to adapt system and directly oversee risks. Cost of technical expertise to maintain system, modify vendor's software, and integrate vendor updates.
Purchased without modifications Requires lower level of expertise to maintain system and applications.

Direct oversight of risks.
Limited ability to customize products/services and differentiate unique products.
Outsourced To TSP Outsourced To TSP Minimal need for technical expertise.

Increases implementation speed.

Lower start-up costs.
No ownership interest.

Limited ability to customize products/services.

Need processes to oversee risks in outsourced activities or services.

 

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