The Necessity of Outsourcing Services by Banks

In late October this year, the country’s largest lender announced its plan to outsource the cash management of 10,000 ATMs.

SBI has around 63,580 ATMs, and the RFP – on execution – will mean only a small per cent of such machines is or will be maintained by external agencies. Now, consider this in comparison to the following data point. The Indian ATM market is predicted to grow at a compound annual growth rate of 9.2 per cent from 2024 to 2032. Of the 2,40,000 ATMs, with Cash Recyclers growing at a 25-30% CAGR, the trend indicates a significant shift towards more efficient and advanced ATM technologies to meet evolving consumer and banking needs.??

Which brings us to the fundamental argument – In today’s fast-paced financial world, when banks are under constant pressure to innovate, reduce costs, and improve customer service, the idea of bank’s outsourcing services, whether operational, technical, or customer-facing, is necessary to remain competitive in the market.?

The Need for Outsourcing in Banking

More than a decade ago, then Finance Minister Pranab Mukherjee convened a meeting with bank chiefs to New Delhi to review their performance for the financial year. During the meeting, he emphasized adopting the opex, or operational expense, model for ATM expansion in the country, as opposed to the traditional capex, or capital expenditure, model.

He urged the attendees to explore the opex model, which involves third parties installing and managing ATMs and earning revenue for each transaction – contrasting with the capex approach, where banks are responsible for everything, from site selection to purchasing and daily maintenance of ATMs. ?

The table below provides a detailed breakdown of some of these cost factors for better clarity:

Why outsource:?

Despite the growth of digital transactions, the average monthly cash withdrawal from ATMs in India rose by 5.51% in the financial year 2024. This increase in ATM usage is expected to place greater pressure on bank branches once again. This transition could strain branch staff time, as they will need to manage routine, labour-intensive, transaction-led operations rather than focusing on product or service sales.? An ATM or banking automation product (such as passbook printing kiosk, cash recycler, currency chest) management requires specific skills, expertise, and technological advancements that would be expensive and time-consuming for banks to develop in-house. Additionally, outsourcing these functions allows banks to scale more efficiently, without the need for a large, dedicated in-house team for every department.?

If the increase in number of ATMs is not commensurate with the increase in number of debit cards to fulfil basic banking needs of the customers, banks may have high footfalls at the branches. The cost of serving the customer at the branch especially for cash transactions is significantly high as compared to an ATM. As of May 2024, India had nearly 975 million active debit cards, up from the figures at the end of January 2023. Notably, 85.9% of debit card usage is for ATM transactions. Meanwhile, cash in circulation has surged from Rs 13.35 lakh crore in March 2017 to Rs 35.15 lakh crore by March 2024, reflecting a sustained increase in ATM activity across the country—despite the growing adoption of digital payments.?

In addition to ATMs, banks can also explore outsourcing solutions for other automated services such as e-surveillance systems, which enhance security and monitoring; cash recyclers, which streamline cash handling by reducing the need for frequent physical replenishments; passbook printing kiosks, offering customers self-service options for account updates; and currency chests, which ensure secure and efficient storage and management of cash. By leveraging outsourcing for these technologies, banks can focus on core operations and strategic growth while ensuring seamless, cost-effective, and innovative service delivery.?

The growing competition among banks and fintech companies pushes them to adopt innovative solutions quickly. By outsourcing to specialized service firms, banks gain access to the latest technologies, tools, and services, often at a fraction of the cost of developing them in-house. This can provide a competitive edge in an industry where agility is crucial.?

Key Benefits of Outsourcing for Banks

Cost Efficiency

One of the most compelling reasons for banks to outsource services is cost savings. Developing and maintaining in-house capabilities for every service can be prohibitively expensive. For example, instead of investing in a large customer service center or a dedicated IT department, banks can partner with outsourcing firms that already have the necessary infrastructure and resources. This not only reduces operational costs but also cuts down on overhead, training, and technology investments.?

Access to Expertise and Innovation

Outsourcing allows banks to tap into specialized knowledge and skills that they might not possess internally. For example, in the realm of security and surveillance of banking sites, outsourcing to firms that specialize in threat detection and protection can ensure that banks stay ahead of the curve when it comes to safeguarding the customer. Outsourcing partners are often leaders in their field, using the latest technologies and best practices to provide high-quality services. By outsourcing, banks gain access to cutting-edge innovations without having to invest heavily in research and development.

Scalability and Flexibility

The financial sector is often subject to fluctuations in demand, driven by factors such as seasonality, economic conditions, or changing customer needs. Outsourcing allows banks to scale their operations quickly without the need to hire or lay off staff in response to changing market conditions. By relying on outsourcing partners, banks can flexibly adjust their services based on demand, ensuring that they can respond to customer needs efficiently and cost-effectively.

Improved Focus on Core Competencies

By outsourcing non-core activities, banks can focus more on their strategic priorities. Whether it’s strengthening customer relationships, developing new financial products, or expanding into new markets, outsourcing frees up valuable resources that can be redirected to areas that drive revenue and growth. This allows banks to remain agile and competitive, ensuring they are able to respond quickly to changes in the marketplace or shifts in customer expectations.

Regulatory Compliance and Risk Management

The regulatory landscape in the banking sector is highly complex and constantly changing. Compliance with these regulations requires specialized knowledge and resources. Outsourcing certain services—such as legal, audit, and compliance—allows banks to work with third-party experts who are up-to-date with the latest regulatory requirements. This not only reduces the risk of compliance violations but also ensures that banks are able to meet the necessary standards without dedicating internal resources to constantly monitor regulatory changes.

Enhanced Customer Experience

Outsourcing customer-facing services like call centers and chat support can improve the customer experience by providing 24/7 support and quick responses to inquiries. Outsourcing these functions to companies with expertise in customer service can lead to higher customer satisfaction, quicker problem resolution, and more personalized interactions. Additionally, outsourcing partners often have access to advanced customer relationship management (CRM) technologies that allow banks to serve customers more effectively.

Conclusion

The necessity of outsourcing in the banking industry is undeniable. The ability to adapt quickly to changes in the market while maintaining a strong customer service orientation is critical in today’s dynamic financial environment, and outsourcing plays a central role in making that possible. Ultimately, outsourcing is not just a strategy for cost reduction; it is an essential enabler of growth and competitiveness in the modern banking world.?