Banking - the back office

According to McKinsey, Banks constantly battle to streamline their back-office "factories," with good cause these facilities can be responsible for up to half of their operating costs, excluding interest. Yet whether the factories process mortgages, securities, or other products, banks tend to use the same approach across the board: process reengineering and general cost cutting are the usual favorites, but outsourcing is gaining ground. Most banks also treat the IT operations that support back-office processes as a single, separate function requiring a separate cost-cutting program.

From one study (2002), on the relative efficiency of the back-office operations of different banks, showed that unit-processing costs for the same product can vary a good deal. In mortgage processing, for example, a cluster of banks had unit costs in the range of US$100 to US$200 for each mortgage, while others had unit costs as low as US$50. Such variations, closely linked to scale, were largely explained by how well the banks had designed their factories. Banks with low processing costs had intrinsically inexpensive operations because they had developed focused products, flexible IT platforms, and lean, highly automated processes. These banks could also support a massive increase in volume without raising fixed costs, thus sharply reducing unit-processing costs.

The second study then looked at 5 "smart-sourcing" models:

• Internal upgrades (least successful)


• Outsourcing (conclusion - a favorite way of streamlining standardized, small-scale noncore operations is to outsource them


• External co-sourcing: In a new variation on outsourcing external co-sourcing several banks pool their operations. This is an attractive approach if no large-scale provider exists, but so far, given the problems of integrating different legacy IT platforms, a rare one.


• Internal co-sourcing (shared service centers)- only a handful of players are attempting this strategy, but as banks adopt more advanced middleware we expect that it will become easier to execute. An increasingly popular variant is to move factories to cheaper locations offshore.


• Insourcing: Best-practice factories take on outside business to reach more efficient volumes.

Source for McKinsey info

Australia, take a lead. All others will follow. Insourcing, Outsourcing, Internal co-sourcing. No. What it takes is a new model, simple to use and highly efficient. It has to be digital, its got to be online and it must be collaborative. Secure. How secure do you want it? We can create the industry standards for mortgage processing. One thing it is XML based. Stocks, bonds, futures and currency are traded digitally. Too hard to apply to mortgage processing. Bullshit. Will the customer understand it? Yep, you bet. Do they understand the process now? No. Currently there is no transparancy. Can you track it now? No. If its digital, the Mortgage Broker, the Borrower and their Lawyer will all be able to track it, interact and ensure a high degree of accuracy. Is it paperless? Yep. Truly paperless. Well very close. Digital mortgage processing. Interesting.

Cost of Digital Mortgage Processing? - Definitely at the low end of US$50 And probably even a lot less.