Financial Services Outsourcing Risk

In order to realize the tactic target and to save cost, global financial institutions have been gradually outsourcing more and more their own financial business. Outsourcing in financial services is a new business in financial area, it is a financial application service that uses an application service provider to operate another enterprise's financial business entirely or partly.Viewed from international perspective, it is in the age of high-speed growth of industrial life cycle, enjoying drastic development in recent years. Recently, the financial institutions of China have also started to try out step by step in this aspect. By outsourcing in financial services, financial institutions can improve their core competitiveness, avoid operational risks and lower operational cost; but at the same time, they may experience outsourcing risks such as conflicts about contracts, interruption of contracts, shortage of human resources, mistakes or cheating, etc. This will brings many new challenges to both interior risk control and exterior financial management. In this background, in February 2005, the Forum headed by Basel Committee on Banking Supervision (BCBS) publicized the "Outsourcing in Financial Services" so as to instruct the management of outsourcing.This paper analyses the meaning of outsourcing in financial services, and expounds the theoretic foundation of it from three aspects: economics, management and society. Then it reviews the actuality and trends, identifies relevant risk events and then evaluates them after identification. By constructing the risk evaluation system and exploiting risk matrix analysis and the Borda method, we can evaluate and sort risk events and thus provide effective outsourcing risk control. Mufti-factor gradual analysis is then used after that for calculating the total risks' index which is considered when making outsourcing strategies.Due to the complex outsourcing risks, the risk control has to be conducted step-by-step and role-by-role. Risk control during the outsourcing strategy's implementation, supervising and evaluation includes both internal control and external supervising. The internal control includes the financial organizations' controlling over the entire outsourcing process, their supervising, motivating, and evaluating over the outsourcers and their examining and motivating over other relevant personnel's of the outsourcing workflow. During this explanation, a real case of outsourcing in the Development and Exploration Bank of China was inserted to emphasize the mentioned key points of risks managements over the outsourcing process. The external supervising includes the legislation introduced by the national governments and the supervising of international organizations to monitor the business. So, At last, on the foundation of comparing the supervisory rules of ten countries such as American, England and Japanese, and of analyzing the content and the supervisory meaning of "Outsourcing in Financial Services", this article concludes with some policy and legislation suggestions, for instance, financial watchdogs should strengthen supervision by reasonably limiting the outsourcing scope, delimiting the authority and procedures for surveillance and prescribing basic procedures and mechanism for financial institutions to choose contractors; urge financial institutions to set up contingency mechanism with contractors and prudently supervise transnational outsourcing in financial services. I hope that the findings of this article will be able to offer some useful insights to our country for reference, who is working out guidance of outsourcing in financial services.