Bank’s Outsourcing business model at Risk – should you worry?

Over the last week or so, there were three separate news stories around banks and their outsourcing partners.  While not directly related to trade finance and working capital, banks now have to be extra cautious with every outsourcing arrangement for services provided for treasury management, letters of credit, payments, FX clearing, USD clearing, etc.  Inevitably, this will impact services smaller banks can deliver to their clients, which does have an impact on those smaller clients ability to do business, particularly cross border.

The three separate, but linked stories are:

1)    J.P. Morgan is now reviewing its several hundred U.S. bank relationship that use the bank for back office functions.  This business, known as Correspondent Banking, could impact what services those banks can offer if JPM decides to no longer service them due to of heightened regulatory scrutiny and record fines.

2)    Regulators are now requiring Banks to risk score vendors.     This more detailed scrutiny of vendors, including their financial stability, debt, revenue, their impact on critical operations within the bank, amongst other things could result in some smaller vendors providing services in a sensitive area that won't be able to satisfy all of the bank's requirements.

3)    RBS lost a six year dispute with a trade back office software vendor over the right to use their software for processing trade finance transactions.  A New York district judge ordered RBS to stop using the software from Complex Systems for new trade transactions within 60 days.  This could be disruptive to both RBS business and the business of other bank clients they serve.

The implications of this are unknown, but could result in fewer, larger vendors working with banks, limiting both choice and potentially innovation.  Vendors like Prime Revenue, Taulia, TradeCard (now GT Nexus), Nipendo, and many others have pushed the banks to be more responsive to their customers as the world gets more interconnected.  Even vendors that ultimately fail, but trail blaze, for example, creating an auction market for small business  invoices, helps the next round of participants build on the proof of concept and failures.

Having fewer, larger vendors could result in less pressure to innovate and update their technology.  Not necessarily the kind of consequence regulators would want as they continue to force banks to be their enforcement agents.

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