As business models in financial services grow increasingly complex, banks rely more and more on third-party vendors for their internal processes. Today, a multinational bank might partner with thousands of unique vendors to support its various lines of business.
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But while reliable third-party vendors for banks are critical to success, the procurement process isn’t simple or cheap. After issuing an RFI or RFP, procurement teams typically spend months poring over proposals, participating in product demos, reviewing security features, negotiating with vendors, drawing up contracts, and conducting other diligence activities before ultimately making a purchase.
The more vendors a bank partners with, however, the more time and money it spends on procurement. And the overhead associated with the large teams of personnel required to manage such expensive relationships makes partnerships with third-party vendors for banks even more costly. It should also be noted that partnering with a small vendor can mean running through the same procurement process as partnering with a large vendor. Procurement costs are virtually the same no matter what size vendor you eventually end up partnering with. All those small deals add up.
Banks can therefore achieve significant cost savings by consolidating their third-party vendor partnerships. As more banking leaders realize this, they're driving an industry-wide trend toward vendor consolidation. And while the desire for cost savings might be the primary catalyst for the trend, it's not the only benefit worth considering. Significant efficiencies can also be achieved. Both of these have become primary drivers for vendor consolidation.
The Flooded Regtech Marketplace
Regulations that govern the financial services industry evolve constantly, and whenever a new mandate takes effect, banks must respond accordingly. While some banks might opt to develop regulatory compliance solutions internally, many will seek assistance from third-party vendors. Thus, new regulations set off a flood of companies offering new software solutions. Such is the case right now in the regtech marketplace, which means a vendor procurement team seeking compliance software to comply with a new regulation might encounter dozens of unique vendors.
But while there's no shortage of vendors offering niche products to help banks manage specific challenges, banks must look beyond niche offerings as regulations grow in number and become more complex. Such institutions inevitably want more from their existing vendors in the hopes they can consolidate workflows and data with a smaller number of trusted partners — thus achieving cost savings, workflow efficiencies, and better data management.
Fewer Vendors, More Productivity
The most visible benefits of vendor consolidation might be those enjoyed by end users. For example, employee workflows delivered on a single multifunctional regtech platform will be exponentially more efficient than those using five disparate systems to satisfy the same processes. In the latter case, employees will have to spend more time training, more time performing repetitive manual data-entry tasks, and more time logging in and out of different platforms. This will not only lead to employee frustration; it will also create more opportunities for human error. But banks that work to reduce the burden on staff members will see increases in both employee satisfaction and tech adoption while reducing compliance risks and instances of unfulfilled obligations. Providing a consolidated platform to end users creates a consistent experience that’s easy to use and intuitive across all workflows. This is important in gaining adoption among that community. Because if the experience is too difficult, disjointed, and unintuitive, users will be turned off by the software and simply won't use it.
The Data Dilemma
The ability to use and manage data effectively is critical to a bank's survival, and a reliance on a sprawling network of third-party vendors for banks can make that difficult. When a firm has multiple third-party vendors — with data sitting in different databases and systems — there’s no way to connect them without bringing the data in-house. In such an instance, the bank must take on the burden of creating data warehouses and the data infrastructure necessary to bring all of that data together. It would need to build and maintain multiple feeds to bring the data into the warehouse, and then buy and implement its own BI tools to generate reports and create analytics.
For example, if an employee compliance workflow involves five different platforms from unique vendors — say, one for managing employee trading approvals, one for training, etc. — then employee data will be dispersed across those platforms. To gain an efficient, holistic view of compliance-related activity, compliance officers need to see all that data in one place. A bank relying on all those vendors is entirely responsible for aggregating employee information across each platform. This process, as illustrated above, requires more compliance and IT personnel, more software and hardware, a data warehouse, reporting capabilities, and more security: essentially replicating the very infrastructure that a bank chose to outsource to a vendor in the first place. All of this results in tremendous duplication and a wastefulness that runs counter to the benefits of using a vendor in the first place.
A bank that can rely on one vendor, or a small selection of trusted and scalable vendors, to power its employee compliance-related activities will gain significant competitive advantages. With employee data stored centrally, generating reporting and analytics are easier, audit trails are more transparent, and information across the firm flows more efficiently and completely.
Vendor consolidation yields the often-noted cost savings and workflow efficiencies, and it allows for more efficient data management: an immediate benefit that compounds over time. With aggregated data from fewer but more comprehensive products, banks can invest more time and money in impactful, high-value opportunities to separate themselves from competitors instead of sinking precious money, time, and related firm resources into product procurement and implementation.
About the Author
As CEO of StarCompliance, Jennifer Sun is responsible for driving the company's direction and growth strategy. With 20 years of executive experience in the financial services and technology space, she leads Star to empower organizations to achieve regulatory compliance while safeguarding their integrity and business reputations.