India aims to become the back office for the world's banks

India is rich in well-educated, English-speaking, young people. It has become a prodigious exporter of their remote services: as skilled software coders and accentless call-centre voices; as long-distance salespeople and invisible insurance clerks; as diligent medical-record transcribers and patient number-crunchers. Multinational financial firms have been among their best customers. Now India wants to clamber up the value chain, offering more sophisticated services. Finance, a business that runs the gamut of sophistication from bean-counting to quantum physics, seems as good an industry as any in which to try to lure more work from expensive homelands to cheaper Indian pastures.

The bulk of that work—by value, at least—is still in information technology. The vice-president of Nasscom, the industry's trade association, says that in 2002 global financial institutions spent $120bn on IT, of which only $4bn was outsourced to India. He sees a big opportunity for Indian software companies in banks' drive towards more seamless processing of transactions, and in the closer scrutiny of back-office costs inspired by moves towards a new international capital-adequacy regime. Indian firms such as TCS, Wipro and Infosys already carry out a lot of some banks' IT operations; another firm, i-flex solutions, sells its banking-software product, “flexcube”, in more than 50 countries.

Besides software engineers, India also has millions of other bright young professionals: accountants, lawyers and business-studies graduates. They have already attracted plenty of IT-enabled work from financial firms. To take but a few: GE Capital International Services, which describes itself as the “largest shared-services environment in India”, employs more than 13,000 people in activities ranging from finance and accounting to remote marketing; Citigroup's outsourcing arm, e-Serve, has more than 3,000 people in Mumbai and Chennai; American Express has 2,000 processing transactions from around Asia and manning a 24-hour international call-centre in Delhi; HSBC a similar number in Hyderabad, Bangalore and Pune; and even the World Bank has 100 staff in Chennai.

Many firms are gradually transferring more complex processes to India. Scope, the outsourcing arm of Standard Chartered, the largest foreign bank in India, has the grand aim of becoming, in effect, the back office for many of the bank's operations in 56 countries. It already undertakes at least some work for 34. Unusually, Standard Chartered in Chennai even handles the back end of foreign-exchange trading—everything except the deal itself, from confirmation through to settlement—and copes with derivatives transactions as well. Some 2,000 people work in the Chennai “global processing centre”, with at least another 1,000 expected to join this year. Scope is still competing for business from within its own group. But it has begun exploring the idea of selling its services to outsiders—as has e-Serve.

Many big investment banks, accountants and consulting firms are farming work out to Indian-based subcontractors, even if they are shy about admitting it. Not only might clients worry about security and confidentiality, or feel short-changed when work is shipped abroad; the implicit threat of cuts in jobs (or pay) at head office might rattle morale. (This week Britain's BT was under fire over plans to outsource directory enquiries to India.)

Yet increasingly, relatively humdrum, time-consuming tasks, which would once have been foisted on ambitious but inexperienced young recruits, working long hours to earn their spurs in Wall Street or the City of London, are, thanks to the miracle of fibre-optic cable, foisted on their lower-paid Indian counterparts. And, besides the in-house operations, there are a few independent foisters. Evalueserve, in Gurgaon near Delhi, with 100 professionals, offers research and analysis to banks, venture capitalists, consultants and others. Its much smaller neighbour, SmartAnalyst, boasts four of the top ten American investment banks as clients for its tailored Internet-based research service.

A report published last year on the alarming shortfall in the pension funds of a large number of European listed companies appeared under a Western brand name. The data, however, were retrieved, collated and organised on the sixth floor of the building that houses Chennai's biggest shopping centre. There, Office Tiger employs 675 young Indians providing a virtual back office to some 20 American and European firms: banks, auditors, consultants and lawyers. Having started in desktop publishing, it now offers to replicate the functions of a bank's in-house library and its junior analysts. Joseph Sigelman, an American former investment banker who runs the fast-growing outfit, estimates that, at an hourly rate of $20-35, it routinely takes out 50% of its clients' costs.

Slumping markets and regulatory troubles are helping to expand the number of services that financial institutions are contemplating outsourcing. Hard times concentrate minds on cost saving. The hope for Indian services is that, as in the software industry, customers who came for the price will stay for the quality.