Outsourcing FX Services
By John McElwaine
May 30, 2004

Summary: John McElwaine looks at the reason to outsource foreign exchange services, and examines the critical factors to explore when choosing an outsourcing provider.

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While today’s competitive financial market demands that banks respond to market needs quickly and efficiently, there was a time when only the largest money centers could afford to offer foreign exchange (FX) services. Technological advancements have now made a foreign exchange product line accessible to banks of all sizes but, in today’s economy, banks have to consider the feasibility of offering these products and services. As a fee-based product offering, foreign exchange services can enhance a bank’s revenue stream while meeting a market need. Yet the costs for creating a FX processing environment can be enormous. 

It is for this reason that foreign exchange is an area that numerous banks outsource to correspondent banks or non-bank providers in order to compete in today’s financial market. Outsourcing FX products and services allows banks to offer an advanced technology solution, industry expertise and superior customer service without the cost of back office investments. According to Art Gillis, principal of Computer Based Solutions in Dallas, Texas, about 43 percent of America’s 9,355 banks and thrifts currently outsource some of their operations. 

When choosing an outsourcing solution, banks should focus on the services that will allow them to keep overhead costs to a minimum yet enable them to focus on business development opportunities.

The top ten reasons to outsource FX:

- Increase revenue and profits derived from fee-based services.
- Improve operational efficiencies and productivity levels by automating administrative tasks.
- Deliver value to customers to enhance business relationships.
- Expand service lines to capture more business from existing customers.
- Achieve more competitive exchange rates through wholesale purchasing.
- Control costs. If cash is not tied up in capital expense, it can be reinvested in areas offering the greatest return on investment.
- Leverage the Internet to streamline and automate products, services and processing of transactions.
- Acquire industry expertise and expedite market entry.
- Enhance the ability to manage the rate spread on transactions.
- Enhance account management through real-time management reports on the purchase and sales of foreign currencies and the income generated from each product. 

Ten questions to ask when evaluating a foreign exchange online system:

- Is the system networked from the parent bank to branch banks?
- Does the system provide flexibility for your bank to share revenue with the provider or to mark up rates and still have the ability to remain competitive?
- Is the system integrated seamlessly with your bank’s other systems?
- Does the system allow your bank to retain control over profit margins, processes and account management procedures?
- Can the bank re-brand the system for its bank and subsidiaries?
- What capabilities are available to store, track, and send your customers information?
- How are investigations handled?
- What are the security features?
- Can your bank create a centralized or decentralized process for managing its foreign exchange transactions?
- Does the system enable your bank to provide customers real-time market information?

Choosing the right financial institution
The notion of giving an outsider access to highly sensitive information can initially stir reluctance among banks. Banks often evaluate the competitive threat a correspondent bank provider poses when outsourcing because they often have access to a customer’s confidential banking information. Therefore, companies must carefully assess the offerings, experience, credibility and demonstrated capabilities of potential bank and non-bank service providers.