In an era defined by digital transformation, the financial industry stands at the forefront of technological innovation. As financial institutions seek to streamline operations, enhance customer experiences, and remain competitive in an increasingly complex landscape, the outsourcing of software development has emerged as a strategic imperative.
However, for companies operating within highly regulated environments, navigating the intricacies of software outsourcing presents unique challenges. From compliance with stringent regulatory frameworks to safeguarding sensitive data, the intersection of software outsourcing and regulatory requirements demands a different approach.
This post explores the complexities and best practices associated with software outsourcing, with a specific focus on the dynamic landscape of the financial sector. By shedding light on key strategies and considerations, companies can effectively utilize the benefits of outsourcing while mitigating associated risks, thereby driving innovation and maintaining regulatory compliance in tandem.
78% of businesses worldwide feel positive about their relationship with their outsourcing company.
Around 30% of companies outsource to improve service, while another 55% outsource to cut costs.
47% of companies say that they’re planning to accelerate their use of cloud managed services.
The top three reasons for software outsourcing are cost-cutting (59%), enabling focus on core business (57%), and solving capacity issues (47%).
A business could save around 60% of overhead costs by investing in software outsourcing.
66% of businesses that outsource software development plan to increase their outsourcing.
Outsourcing, whether in regular industries or regulated industries, involves delegating certain business functions or processes to external parties. However, the approach to outsourcing can vary significantly between these two contexts due to the unique challenges and considerations inherent in regulated industries.
In regular industries, outsourcing is often driven primarily by cost efficiency and scalability. Companies may choose to outsource non-core functions such as IT support, customer service, or manufacturing to specialized vendors or service providers, allowing them to focus on their core competencies and strategic objectives. The primary goal in regular industries is typically to reduce operational costs, improve flexibility, and enhance competitiveness in the market.
On the other hand, in regulated industries such as finance, healthcare, or pharmaceuticals, outsourcing entails additional layers of complexity. Regulatory requirements impose strict guidelines and standards on how certain business functions are performed and how data is managed and protected. As such, the outsourcing of critical processes or services in regulated industries must adhere to these regulatory frameworks to ensure compliance and mitigate associated risks.
One of the key differences between outsourcing in regular industries and regulated industries lies in the level of oversight and control required. In regulated industries, companies must carefully select software development partners that demonstrate a thorough understanding of regulatory requirements and possess robust compliance measures. Contracts and service level agreements (SLAs) must incorporate provisions for regulatory compliance, data security, and risk management, often necessitating more comprehensive due diligence and ongoing monitoring of outsourced activities.
Moreover, the consequences of non-compliance in regulated industries can be severe, including fines, legal penalties, reputational damage, and even the suspension or revocation of operating licenses. As a result, companies operating in regulated industries must exercise greater caution and diligence when outsourcing critical functions or handling sensitive data.
Another important distinction is the level of customization and specialization required in regulated industries. Unlike regular industries where outsourcing arrangements may focus primarily on cost savings and efficiency gains, outsourcing in regulated industries often necessitates custom solutions tailored to meet specific regulatory requirements and industry standards. This may involve the development of custom software solutions, specialized training programs, or dedicated compliance teams to ensure adherence to regulatory mandates.
Overall, while outsourcing offers numerous benefits in both regular and regulated industries, the approach and considerations differ significantly between these contexts. In regulated industries, compliance with regulatory requirements, data security, and risk mitigation take precedence, necessitating a more strategic approach to outsourcing decisions and partnerships.
| Aspect | Non-Regulated Industries | Regulated Industries |
| Primary drivers | Cost reduction, efficiency | Compliance, data security, risk management |
| Risk level | Moderate | High – legal and financial |
| Oversight | Standard SLAs | Enhanced vetting, compliance clauses |
| Customization | Often standardized solutions | Highly tailored to regulation-specific needs |
| Consequences of failure | Operational setbacks | Legal fines, reputational loss, license revocation |
While it is difficult to find certain general trends across all segments of financial services, we can note several characteristics of the software outsourcing landscape in this field.
For financial institutions, software development is often outsourced to specialized vendors who provide tailored solutions in fields ranging from algorithmic trading systems to risk management platforms or mobile banking apps. By outsourcing software development, financial companies can access specialized expertise and reduce time-to-market with new products that adapt quickly to changing market conditions.
In response to the ever-increasing complexity of regulatory requirements in today's world—a development that financial organizations must both note and respond to (to ensure they remain in compliance with laws like SOX, Dodd-Frank and GDPR).
A financial organization benefits from outsourced RegTech solutions in many ways. To begin with, outsourcing makes automation of compliance processes less expensive; secondly, it provides enhanced capabilities for regulatory reporting and thirdly reduces the chances that one will be caught out by regulation.
How do financial institutions safeguard sensitive customer data, prevent fraud, and protect against cyber threats?
To strengthen their cyber defenses effectively means that financial firms outsource software development for cybersecurity solutions. Because intrusion detection systems, threat intelligence platforms, and encryption technology cannot be developed in-house, the best way of achieving this goal is to subcontract the work out. What's more, with outsourcing, financial institutions can find vulnerabilities in their cyber defenses more easily and so minimize the impact that each one has and can also respond more efficiently to security incidents when they do occur.
Regulation has much to do with software development in the finance industry. The regulatory climate shapes every step of product creation—from design and implementation to testing and deployment. Because of the restrictions that the regulatory environment imposes, legislation in the finance industry imposes strict requirements pertaining to data privacy, security, and transparency as well as risk control. And so, complying with regulatory standards becomes a major consideration for financial institutions that develop software solutions.
Regulations like Europe's General Data Protection Regulation (GDPR) and the United States' Gramm-Leach-Bliley Act (GLBA) have placed strict requirements on how sensitive financial information can be collected, stored, or processed. In order to fulfill these legal obligations and keep user's information safe at all times, software developers need to incorporate robust data privacy measures into their applications—including encryption, access controls, and anonymized data.
Financial regulators impose rigorous security standards to protect against cyber threats, data breaches and unauthorized access to financial systems. Software developers must adhere to industry best practices and regulatory guidelines for secure coding, vulnerability management and incident response. Compliance with standards such as the Payment Card Industry Data Security Standard (PCI DSS) and the ISO/IEC 27001 framework is essential to demonstrate the security of software systems and protection against potential security breaches
Legislation such as the Markets in Financial Instruments Directive (MiFID II) means financial institutions need to execute a transaction monitoring change function within the application or any kind of breach of contracts, to comply with regulations requiring that they report and meet their duties for ensuring market discipline. Software engineers were employed to perform this task.
Regulatory frameworks often require financial institutions to maintain comprehensive audit trails and records of software development activities, changes, and deployments. Software developers must implement features for logging, auditing and tracking changes to software systems, ensuring transparency, accountability and compliance with regulatory audit requirements. Version control systems, code repositories and automated deployment pipelines are essential tools for maintaining auditability and traceability in software development processes.
Financial regulators may require software systems to undergo rigorous testing and validation to ensure compliance with regulatory requirements and industry standards. Software developers must conduct thorough testing, including functional testing, security testing and compliance testing, to validate the correctness, reliability and regulatory compliance of software solutions. Automated testing frameworks and compliance validation tools can streamline the testing process and facilitate the identification and resolution of compliance issues.
In summary, regulations are profoundly impacting software development in the finance industry by imposing requirements for data privacy, security, transaction monitoring, auditability and compliance testing. Software developers must incorporate regulatory compliance considerations into every phase of the development lifecycle to ensure that software solutions meet the industry's stringent requirements and support the compliance efforts of financial institutions. Failure to comply with regulatory standards can result in legal consequences, financial penalties, reputational damage and loss of customer trust, underscoring the importance of regulatory compliance in software development for the finance industry.
In financial industry, non-compliance carries significant implications, ranging from financial penalties and legal sanctions to reputational damage and loss of customer trust. Here are some key implications of non-compliance:
There have been instances where failures in software development for finance were attributed, at least in part, to regulatory compliance issues. Here are a few examples:
Knight Capital Group: In 2012, Knight Capital Group, a major trading firm, suffered a software glitch that resulted in millions of dollars in losses within a matter of minutes. The glitch was caused by a faulty software deployment that triggered inaccurate trades in the market. It was later revealed that the software failed to comply with certain industry regulations related to the deployment and testing of trading algorithms. The incident led to regulatory investigations, significant financial losses for Knight Capital, and ultimately, the sale of the company to a rival trading firm.
The London Whale Incident: In 2012, JPMorgan Chase experienced substantial losses due to a series of risky trades executed by a trader known as the "London Whale." The losses, which amounted to billions of dollars, were attributed in part to the failure of the bank's risk management software to accurately assess and mitigate the risks associated with complex financial transactions. The incident raised questions about the effectiveness of the bank's risk management practices and its compliance with regulatory requirements related to risk reporting and oversight.
The 2008 Financial Crisis: While not solely attributable to software development failures, the 2008 financial crisis highlighted tech issues within the financial industry, including shortcomings in risk management practices and regulatory oversight. Many financial institutions relied on complex financial models and risk assessment software that failed to accurately predict the impact of mortgage-backed securities and other financial instruments. The crisis prompted regulatory reforms such as the Dodd-Frank Act, which sought to strengthen oversight of financial markets and improve risk management practices to prevent similar crises in the future.
In the beginning of 2022, Revolut experienced a theft of over $20 million. This occurred because of differences between U.S. and European systems, leading to some transactions being declined but then refunded using Revolut's funds. These refunded amounts were subsequently withdrawn from ATMs. It's likely that a software glitch had been present since 2021 and was only fixed in spring 2022 when Revolut's partner alerted them to missing funds. This vulnerability was exploited by multiple malicious parties, resulting in the theft of more than $20 million.
The Equifax case stands out as one of the most infamous examples of a data breach. In 2017, Equifax, a prominent credit reporting agency, fell victim to a breach wherein the sensitive details of more than 143 million customers were compromised. The company's failure to adequately safeguard this information resulted in a settlement of $700 million, highlighting the significant consequences of negligence in data protection.
Outsourcing in the finance industry can offer numerous benefits, including cost savings, access to specialized expertise, and increased flexibility. However, successful outsourcing in this industry requires careful planning, effective communication, and robust risk management strategies. Here are some tips for successful outsourcing in the finance industry:
Think of outsourcing Like building a secure investment portfolio.
Have an exit strategy (Exit plan): In investing, you always need to know when to exit a position. The same goes for outsourcing. Whether due to regulatory changes, shifting priorities, or performance issues, make sure you have a well-defined exit strategy in place. This way, if things don't go as planned, your business can pivot smoothly without jeopardizing your financial stability.
Start with a blueprint (Define objectives and scope): Just like you wouldn’t invest in a portfolio without a clear strategy, you can’t start an outsourcing project without defined goals. Understand exactly what you want to outsource, the desired outcomes, and how you’ll measure success. It’s essential to lay down the right financial objectives upfront.
Choose a reputable financial advisor (Select experienced software development partners): Outsourcing in finance is a high-stakes game, much like managing investments. You need a partner who understands the complexities of financial regulations and compliance. Look for a partner with experience in navigating the world of financial services, data protection laws like GDPR, and industry-specific challenges.
Keep communication open (Communication channels): In finance, managing assets means constant monitoring and quick decision-making. Similarly, outsourcing requires clear, continuous communication. Set up regular check-ins, data-sharing protocols, and direct lines of communication to keep the project on track and avoid any surprises.
Follow the regulations (Compliance): Just like every investment comes with its own set of rules and regulations, outsourcing in finance requires strict adherence to industry standards. From GDPR to MiFID II, your software development partner must understand and follow these guidelines. Compliance isn’t just a checkbox. It’s a fundamental part of the framework.
Protect your assets (Security): Just as you’d protect your investment portfolio with solid risk management practices, outsourcing in the finance sector requires robust data security measures. Ensure your software development partner employs encryption, access control, and continuous audits to protect your financial data from cyber threats.
Diversify your partnerships (Vendor relationship management): A successful investment strategy often involves diversification. Working with multiple trusted partners to reduce risk. Similarly, outsourcing is about building a network of reliable partners who understand your business and help manage different aspects of your financial operations. Strong relationships built on trust and collaboration are essential to long-term success.
When choosing a software development partner for industries like finance, experience with regulatory requirements is crucial. Your software development partner should be well-versed in compliance standards, reducing the risk of non-compliance and legal issues. A partner with proven expertise in these fields can navigate complex regulations, anticipate challenges, and offer tailored solutions.
Experienced partners bring valuable industry insights, trusted relationships with regulators, and a track record of delivering secure, high-quality software. Their knowledge ensures smoother approval processes, and their specialized expertise helps meet the unique needs of regulated sectors.
For the finance industry, choosing the right partner with deep knowledge of compliance and regulatory frameworks is key to success. They help you stay ahead of legal challenges, mitigate risks, and drive innovation while ensuring long-term sustainability.
Strong contractual agreements and service level agreements (SLAs) are essential for outsourcing in finance. These agreements set clear expectations, define the scope, and establish performance metrics that align with industry regulations like GDPR, GLBA, and MiFID II.
A well-crafted SLA ensures accountability by specifying service availability, response times, and security measures. It also includes provisions for data security, confidentiality, and intellectual property rights. Crucially, these agreements outline termination procedures, providing a smooth exit strategy if necessary.
With robust contracts and SLAs in place, financial institutions can manage risks, ensure compliance, and maintain strong, productive partnerships with their outsourcing vendors.
When outsourcing in the finance industry, choosing a vendor with proven experience is crucial. Financial institutions face strict regulations and complex security requirements, and a knowledgeable vendor helps navigate these challenges. Here's why experience matters:
Partnering with a vendor who knows the finance industry inside and out helps mitigate risks, speed up project timelines, and ensure your compliance and security needs are met - critical for achieving long-term success in the financial sector.
The Client is a large banking institution based in Europe, established in 1864.
Today the bank has approximately 421.000 clients, with a network of more than a 100 retail branches and 4 corporate centres. The Client decided to migrate its entire core banking system, and for that project they were looking for a reliable software development partner.
The Client is Addiko bank, an agile, ambitious, and disruptive bank that constantly sets new standards in the BFSI sector. They are a part of an Austrian banking group that operates in five CSEE countries. Around 0.8 million customers are served through six subsidiary banks and 170 well-dispersed branches and modern digital channels.
Their service portfolio is focused on lending activities and payment services for SMEs and consumers. This includes services such as internet banking solutions, cash loans, instant cash loans, online deposits and others which can provide liquidity. Since the client is focused on modern customer experience with minimal paperwork and no branch office visits, their products and services have been standardized. This improves efficiency, ensures great customer experience, and maintains asset quality via a prudent risk approach.
The client needed a solution that would allow them to provide loan services to customers faster and more efficiently.
The Client is one of the largest Banking Groups in the Euro Zone and leader in various business areas – retail banking, corporate clients and asset management. The Group offers its services to over 11 million customers through a network of around 4,300 branches in Europe, the Middle East and North Africa.
The Bank's main business challenge was to beat the competition in launching a comprehensive digital banking for end-users - citizens. Accordingly, the Group has set its business goal - the shortest possible "time to market" with the highest possible quality of new service.
Mercury Processing Services International (MPSI) is established in 2009. Today, MPSI is a part of the international group NEXI as an important financial transaction processor and provider of cutting-edge services and solutions for banking institutions.
In order to accelerate and improve the overall internal development process, Serengeti has been hired to significantly expand the existing development team, implement DevOps principles and expand the client's testing team. The goal is to implement and increase the degree of automation of the core application development cycle and the development of event-driven systems for developer’s support.
We take pleasure in creating software solutions that meet our clients' specific business objectives. Our emphasis on open communication and cooperation guarantees that we work effortlessly with our clients to meet their business goals.
By remaining current on industry trends and adopting continuous learning, we allow our clients to successfully exploit cutting-edge technology. We aspire to preserve our reputation for dependability, functioning as a long-term software development partner.
Navigate the outsourcing landscape with confidence, knowing that we're dedicated to optimizing resources and fostering innovation in partnership with your team.
