In July 2012, consulting firm Celent published a report highlighting the reluctance of wealth managers to outsource processes, largely due to privacy concerns. It noted, however, that in the wake of the global financial crisis, the tide was turning as many firms were starting to outsource technology and operations infrastructure – though it cited Asia as a laggard region. Five years on, demand for outsourcing services remains weak in Asia, despite the eagerness of large private banks to act as third-party service providers and the rapid rise of banking software solutions firms.
Private banks are inclined to keep their tech and other processes in-house partly because they desire to remain autonomous and self-sufficient, though this hesitance to delegate is also driven by a genuine concern that external service providers still do not have in place sufficient safeguards to protect clients’ privacy – a non-negotiable condition in the private wealth space.
Indeed, Ashley Globerman, wealth management analyst at Celent, tells Asian Private Banker that security issues still “remain the top concern when outsourcing”.
So too does Toby Pittaway, a Singapore-based partner at Oliver Wyman, who points out that client confidentiality and data security remain a major restraint. “As a result, levels of outsourcing are materially lower in wealth management than in asset management,” Pittaway says.
Recent research by Celent shows that outsourcing in wealth management in North America and Europe is “very advanced” and “advanced”, respectively. However, the state of outsourcing in Asia is classed as “still developing”.
According to Globerman, wealth management firms typically outsource to increase efficiencies, adapt to technological advances, improve the client experience, and improve regulatory compliance. She also expects to see more outsourcing around front-office functions, such as suitability tests, components of the advice and financial planning process, and help desk services.
Furthermore, institutions are turning to automated KYC solutions and are now considering contracting outsourced KYC specialists, says Manhim Yu, partner at Ernst & Young Advisory Services’ fraud investigation and dispute services unit, who notes that regulators now expect “a more standardised approach to KYC procedures”.
But if private banks are to loosen their grip on these business lines and turn to external service providers, these vendors will need to convince them that their systems are robust. One way that external providers are moving to allay security concerns is by adopting industry standards on physical and information security and/or offering two-factor strong authentication, says Globerman.
Demand lags supply
Private banks in Asia have for some time debated the merits of outsourcing, with at least one large private bank suggesting that smaller players should adopt this approach.
UBS’ APAC president Kathryn Shih recently told Asian Private Banker that smaller private banks – which may otherwise succumb to a rising regulatory burden and considerable upfront costs when installing front-to-back platforms – should consider outsourcing parts of their businesses to larger institutions, including UBS.
“The upfront costs for tech investments are high,” Shih said. “That is why you are seeing the smaller private banks who are unable to afford such systems selling their businesses. How many private banks in Asia have the scale and ability to fund a robust technology platform? Not many.”
“A possible alternative for smaller private banks to ride the tech wave is to rent a [technology] platform from bigger players,” Shih added.
Thus far, however, smaller firms seem less-than-enthusiastic about turning to their larger rivals.
BMO Private Bank’s Asia CEO, Monique Chan, recently said that “there are risks of outsourcing, such as quality control and data security”.
“It may be a cost-effective answer but does a private bank want to lose autonomy and its independence?” she asked.
Meanwhile, fintech firms – including Avaloq – already offer specialised BPO services in the region.
Avaloq set up a BPO centre in Singapore in 2015. Currently, Deutsche Bank Wealth Management is the only client of Avaloq’s BPO centre in the city-state, although the firm’s founder and CEO, Francisco Fernandez. said recently that there are “more [private banks] in the pipeline”.
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