Spending on outsourced payments processing services by US financial firms reached $3.3 billion in 2005 and will grow at a five-year compound annual growth rate (CAGR) of 4.2% to reach $4 billion by 2010, according to a study by Financial Insights.
Financial institutions are increasingly looking to third parties to manage entire payment functions, rather than the process alone, says the study.
Financial Insights says due to the accelerating rate of change in the payments industry, particularly in cheques and cards, many banks are looking at outsourcing as a way to manage their technology and market risk.
Aaron McPherson, co-author of the report and research director for payments at Financial Insights, says while the largest institutions have the scale to actually 'insource' their payment processing, mid-tier institutions will band together to achieve similar economies of scale and this may take the form of payment utilities, which provide a particular payment service for multiple institutions.
According to the study, key trends in the payments BPO market in 2006 include 'insourcing' among larger firms as banks continue to move from large-scale contracts to more targeted initiatives, while small and medium-sized banks will drive outsourcing demand as they look to compete with larger banks.
The study also reveals that while cost and efficiency considerations remain central to payments outsourcing decisions, banks are increasingly looking to sharpen strategic areas such as customer service, compliance, process integration and competitiveness.