The Software-as-a-Service Era hasfinally arrived as the latest evolution of the service bureau modelthat had its origins in the days of the expensive and bulkymainframe computers.

Technology outsourcing has been making a muscular comeback for anumber of reasons—weak margins, economies of scale, risk mitigationand the need for new assets.

More financial institutions are turning to theSoftware-as-a-Service or SaaS model, which is simply using abrowser to access a software application centrally hosted in thecloud by an outside service provider. The SaaS model is compellingfor lenders as challenges of the past – security, compliance andcontrol – are being well-managed. But first a littlebackground.

The Bad Old Days

It's hard to believe that the lending function was once handledentirely without computers. In the 1950s, most financialinstitutions used bookkeeping machines, typewriters andmimeographs.

The first mainframe computers widely used in the 1960s and 1970swere too expensive for one financial institution to afford. The“mainframe age” was the zenith of the original service bureau modelbut as the cost and size of computers plummeted organizations movedtheir IT delivery to in-house servers and computers.

While not all financial institutions are shifting back tooutsourcing infrastructure, many are – if not for their entire coreoperation, then for parts, including lending. Worldwide demand forbusiness process outsourcing will grow at a compound annual growthrate of more than 5.7%, until 2017 – when it will peak at more than$209.4 billion in revenue, according to International DataCorp.

In the 1980s and 1990s, lending functions were moved in-house,mainly for organizations to maintain control. And lack of controlhas been at the heart of the barriers to outsourcing to the cloud,especially concerns about security.

These barriers are disappearing, as cloud vendors gain expertiseand can ably demonstrate it. With competition, many lenders arefinding it difficult to handle the entire lending function in-houseanymore.

Today, private and hybrid cloud arrangements are bringing the ITscenario full-circle, allowing financial institutions to retainsome control while moving much of the physical infrastructureoff-site.

A Net ROA of 4%

One of the benefits of the SaaS and other service bureau modelsis how it is able to achieve economies of scale. Financialinstitutions can gain market reach and mitigate risk through, forinstance, a loan participation program using a service bureauplatform, according to Alice Stevens, chief operations officer at$196 million asset First Financial Federal Credit Union in Wall,N.J.

“It spreads the risk and spreads the concentration in variouscategories of loans,” she says. “The financial benefits includepooling resources in a private student loan, with a net ROA of4%.”

The loan portfolio can achieve rapid growth, says Stevens. Ather organization, student loan volume increased from $0 to $20million in just four years, after joining a CUSO, Member StudentLending LLC, in 2009. Stevens is also chair of the CUSO. And FirstFinancial's loan-to-share ratio held steady at around 80%throughout the depths of the Great Recession.

With the application, underwriting and servicing handled throughthe vendor, financial institutions reduce their overhead costs andreduce the need for in-house advanced lending expertise.

“In these times when interest rates are so low and margins aretight, it makes sense to share the risks and the expenses,” saysStevens. “If each financial institution worked on its own, eachlittle portal through each website would have a much smallerportion of the market, and they'd all be competing with each otheron pricing, rates, and other aspects of the loans.

Security Is Assured

The biggest single concern of organizations adopting cloudservices and those choosing not to do so is security risk,according to the 2013 Information Week Cloud Security andRisk Survey. Of the 27% of respondents that say they have no plansto use cloud services, 48% say their primary reason is securityconcerns, such as leaks of customer and proprietary data.

For organizations that have adopted, plan to adopt, or areconsidering adopting cloud services, security concerns easily beatout other concerns, such as cloud performance, vendor lock-in, andthe ability to recover data if the vendor contract ends.

Most of this stems from unease surrounding the externalmanagement of security-based services, notes Jim Steiger, seniorsolutions consultant for Windstream Hosted Solutions, in a recentpresentation, “From Service Bureau to Software Defined DataCenter.”

The good news for service bureau clients, says Steiger, is thatthis concern delivers a great incentive to cloud computing serviceproviders to prioritize building and maintaining strong managementof secure services.

Cloud computing is no more, nor less, secure than any othercomputer/server connected to a network, he adds. Regardless of thelocation, security is dependent on who has access – both physicallyand remotely. In fact, the cloud can be as secure, or even moresecure, than internally hosted systems.

Software-as-a-Service is no longer the wave of the future; ithas become a portal to the future in thepresent.

Vince Passione is CEO of LendKey Technologies Inc. in NewYork City. CONTACT: 1-800-881-8985 or [email protected].