Part I Efstathiou Q/A: Why Banking Captives are Dead and the Nearshore Mobile Service Opportunity

In a new interview, Andy Efstathiou, Director of Banking Sourcing at NelsonHall, tells us why the captive market is going nowhere fast, why cost arbitrage is favoring the Nearshore …

In a new interview, Andy Efstathiou, Director of Banking Sourcing at NelsonHall, tells us why the captive market is going nowhere fast, why cost arbitrage is favoring the Nearshore and how Canadien and Latin America players are well positioned to capitalize on the mobile payment migration. This is the  first of a two part Q/A with Andy.

Q: We’re all familiar with the outsourcing versus captive center debate, but has anything changed in recent times in the banking sector? Is there one that companies are leaning towards?

Efstathiou: Absolutely. Banks are capital constrained, and so they’re not at all interested in setting up new captives. That’s the first and main reason – the capital constraints. But another reason is that the captive centers they have set up overwhelmingly have not reached scale, and this is true whether they’re offshore or nearshore. The only exception is maybe the captives they have in their home countries. Everything else has not achieved economies of scale. As I mentioned before, there’s been a downturn in outsourcing contracts for ITO and BPO providers in the past year or two, and it’s because as volumes declined in the economic crisis many banks brought work back in-house so they could maintain some semblance of scale in their internal operations.

They’re going at it a bit differently now. While not creating new captives, and in fact many of them have sold their captive centers, what they’re now doing is rebalancing the workload across their existing captives and facilities. They’re trying to push onshore work to the nearshore, nearshore work to offshore centers, and so on, to cheaper locations.

Most captive centers are 10 to 30% more expensive than a third party provider, so many banks are once again considering the third party option. We expect many more contracts for third party outsourcers over the next 12 to 18 months, or at least increased scope within existing contracts. They will be taking work from the captive centers.

Are there certain functions that are better done in-house in a captive center than outsourced to a third party?

Efstathiou: This is actually something the clients are trying to redefine at this point. In general if it’s something highly customized

Bottom line: the labor arbitrage opportunity to offshore destinations has narrowed, and that has made Nearshoring much more attractive.

and a competitive differentiator, firms will obviously keep that in-house. If it’s highly customized, that usually means it will only apply to a single geography, or will be the “secret sauce” that the company has. If it’s standardized globally, it usually goes far offshore and if it’s standardized regionally, it probably goes to the nearshore. That being said, firms are still trying to find the most cost-effective delivery model within that basic framework.

How has the Nearshore sourcing scene changed in the last few years? What are the new trends you’re seeing?

Efstathiou: It’s been a quiet time in the world market in terms of new contracts. At the same time the cost of investment in places like India has risen, in part because their currency has appreciated, and partly because they have had significant wage inflation and real estate inflation. Bottom line: the labor arbitrage opportunity to offshore destinations has narrowed, and that has made Nearshoring much more attractive.

To add to that, even the traditional offshore companies and especially the financial services firms that I cover have been increasing the amount of work they do by getting into processes that can’t be performed offshore, but could be delivered from the nearshore or even onshore.  That has worked well for Nearshore locations for two reasons. First, they’re able to deliver services in the same time zone to either the US or Canada, and second, they can support the local operations of businesses expanding into emerging markets in Latin America. We’re seeing delivery centers being set up to support global banks entering or expanding in LatAm markets. So all of that has worked to the Nearshore advantage, including a different and much more relevant language set than offshore locations in India and China.

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What are companies doing differently in Latin America? Are there any new types of product offerings specific to the Nearshore region?

Efstathiou: There is definitely a desire to implement innovative types of product offerings. One of the big new ones right now is mobile payment – it didn’t exist even a few years ago. The first avenue of that is in the mature markets, where you would need language support, exception processing support, as well as the proximity and similar time zone that Latin American locations can offer.

The second avenue though, is enabling mobile payment in places like Latin America itself. When you go outside the US or Canada, there’s very low adoption as a percentage of the total population for banking or owning credit cards, but very high adoption for having a mobile phone. So the credit card brands like Visa and Mastercard are in effect creating a credit card capability on mobile phones. They’re expanding into what they call “the un-banked market” – they can enable people who don’t have bank accounts to access the same types of services that a person with a bank account could have, only through a mobile phone.

Of course this is in the very early stages mostly in pilot programs, but it’s now beginning to roll out, and I think it’s going to provide a lot of opportunity for Nearshore sourcing. What’s more, the functions that mobile payment servicing requires will be very similar to those of credit card services, for which there’s already the capability in Latin America. And of course the other big player in the region is the telecom industry which is already a big consumer of offshore and nearshore support services. Mobile payments would enhance the telecom industry’s demand for those services in a big way.

In Part 2 of this interview, Efstathiou discusses what buyers are looking for in the Nearshore, how client preferences are shifting, and what challenges they’re facing in Latin America. Don’t miss it!

 

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