The Software-as-a-Service Era has finally arrived as the latest evolution of the service bureau model that had its origins in the days of the expensive and bulky mainframe computers.
Technology outsourcing has been making a muscular comeback for a number of reasons—weak margins, economies of scale, risk mitigation and the need for new assets.
More financial institutions are turning to the Software-as-a-Service or SaaS model, which is simply using a browser to access a software application centrally hosted in the cloud by an outside service provider. The SaaS model is compelling for lenders as challenges of the past – security, compliance and control – are being well-managed. But first a little background.
The Bad Old Days
It’s hard to believe that the lending function was once handled entirely without computers. In the 1950s, most financial institutions used bookkeeping machines, typewriters and mimeographs.
The first mainframe computers widely used in the 1960s and 1970s were too expensive for one financial institution to afford. The “mainframe age” was the zenith of the original service bureau model but as the cost and size of computers plummeted organizations moved their IT delivery to in-house servers and computers.
While not all financial institutions are shifting back to outsourcing infrastructure, many are – if not for their entire core operation, then for parts, including lending. Worldwide demand for business process outsourcing will grow at a compound annual growth rate of more than 5.7%, until 2017 – when it will peak at more than $209.4 billion in revenue, according to International Data Corp.
In the 1980s and 1990s, lending functions were moved in-house, mainly for organizations to maintain control. And lack of control has been at the heart of the barriers to outsourcing to the cloud, especially concerns about security.
These barriers are disappearing, as cloud vendors gain expertise and can ably demonstrate it. With competition, many lenders are finding it difficult to handle the entire lending function in-house anymore.
Today, private and hybrid cloud arrangements are bringing the IT scenario full-circle, allowing financial institutions to retain some control while moving much of the physical infrastructure off-site.
A Net ROA of 4%
One of the benefits of the SaaS and other service bureau models is how it is able to achieve economies of scale. Financial institutions can gain market reach and mitigate risk through, for instance, a loan participation program using a service bureau platform, 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 various categories of loans,” she says. “The financial benefits include pooling resources in a private student loan, with a net ROA of 4%.”
The loan portfolio can achieve rapid growth, says Stevens. At her organization, student loan volume increased from $0 to $20 million in just four years, after joining a CUSO, Member Student Lending LLC, in 2009. Stevens is also chair of the CUSO. And First Financial’s loan-to-share ratio held steady at around 80% throughout the depths of the Great Recession.
With the application, underwriting and servicing handled through the vendor, financial institutions reduce their overhead costs and reduce the need for in-house advanced lending expertise.
“In these times when interest rates are so low and margins are tight, it makes sense to share the risks and the expenses,” says Stevens. “If each financial institution worked on its own, each little portal through each website would have a much smaller portion of the market, and they’d all be competing with each other on pricing, rates, and other aspects of the loans.
Security Is Assured
The biggest single concern of organizations adopting cloud services and those choosing not to do so is security risk, according to the 2013 Information Week Cloud Security and Risk Survey. Of the 27% of respondents that say they have no plans to use cloud services, 48% say their primary reason is security concerns, such as leaks of customer and proprietary data.
For organizations that have adopted, plan to adopt, or are considering adopting cloud services, security concerns easily beat out other concerns, such as cloud performance, vendor lock-in, and the ability to recover data if the vendor contract ends.
Most of this stems from unease surrounding the external management of security-based services, notes Jim Steiger, senior solutions consultant for Windstream Hosted Solutions, in a recent presentation, “From Service Bureau to Software Defined Data Center.”
The good news for service bureau clients, says Steiger, is that this concern delivers a great incentive to cloud computing service providers to prioritize building and maintaining strong management of secure services.
Cloud computing is no more, nor less, secure than any other computer/server connected to a network, he adds. Regardless of the location, security is dependent on who has access – both physically and remotely. In fact, the cloud can be as secure, or even more secure, than internally hosted systems.
Software-as-a-Service is no longer the wave of the future; it has become a portal to the future in the present.
Vince Passione is CEO of LendKey Technologies Inc. in New York City. CONTACT: 1-800-881-8985 or firstname.lastname@example.org.