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Financial Institutions Will Spend USD 4 Bln on BPO by 2010: IDC

By Sophia Mayengbam

lFinancial institutions are increasingly looking to third parties to manage entire payment functions, rather than the process alone, found a study by IDC and Financial Insights. IDC estimates that U.S. spending on payments BPO services reached USD 3.3 billion in 2005 and will grow at a five-year compound annual growth rate (CAGR) of 4.2 percent to reach USD 4 billion by 2010.

This increasing trend of payments outsourcing presents new opportunities and challenges for financial institutions and payments processing vendors.

"Financial services institutions have been pioneering adopters of the BPO model. Payments outsourcing, an increasingly visible and gaining segment of the global business process outsourcing market, is the latest reflection of this industry's comfort with outsourced business processes," said Shruti Yadav, analyst, BPO Services at IDC. "IDC observes healthy growth in deal activity and market spending accompanied by a shift from back-office to strategic objectives and deal drivers."

According to Aaron McPherson, co-author of the report and research director for Payments at Financial Insights, an IDC Company, "The accelerating rate of change in the payments industry, particularly in checks and cards, has many financial institutions looking at outsourcing as a way to manage their technology and market risk. While the largest institutions have the scale to actually insource their payment processing, mid-tier institutions are going to want to band together to achieve similar economies of scale. This may take the form of payment utilities, which manage a particular payment method for multiple institutions."

The study reveals that while cost and efficiency considerations remain central to payments outsourcing decisions, customers are increasingly looking to impact strategic areas such as customer service, compliance, process integration, and competitiveness.

IDC and Financial Insights highlight the following key trends in the payments BPO market in 2006:
• Insourcing among larger banks, as banks continue to move from large-scale contracts to more targeted initiatives
• Small and medium-sized banks will drive outsourcing demand as they embrace outsourcing as a way to grow and compete with larger banks
• International expansion and global integration as banks focus on business development and emerging growth opportunities
• The emerging role of offshore, which is already pervading virtually all segments of the larger business outsourcing market

The study, U.S. Financial Services Payments Business Process Outsourcing 2006-2010 Forecast and Analysis, presents a five-year forecast for the U.S. market for payments business process outsourcing (BPO) services.