Will Wall Street move to Bangalore? The trend certainly suggests it could. In 2001, just one of every 10 major financial institutions employed staff in developing countries offshore to cut down on administrative and back-office costs, according to a new survey by Deloitte. Today, three quarters of them do. But while software and services companies fear offshore centres “climbing the value chain” and eventually taking business from them, in finance, the power of the financial brand and the branch network makes this unlikely.
That doesn’t mean jobs are safe at home, but it may mean that the institutions themselves are not in danger of extinction. Financial sector offshoring has spread from IT to other areas such as transaction processing, finance and human resources, and has also included some “knowledge-process” areas such as analysis. While only 6% of employees at the financial institutions surveyed are in offshore locations, they cost, on an average, 40% less than hometown staff.
And the potential for further financial sector offshoring appears considerable. At the low end, retail commercial banking carried out through the Internet or by telephone, rather than through branches, can be performed at a considerable cost saving.
At the high end, the analysis, legal documentation, investment management, brokerage and trading functions performed by Wall Street involve such expensive labour that offshoring appears to offer huge savings. Only client-facing employees must necessarily remain in the US.
This means that Wall Street’s move to offshoring staff is likely to intensify in a market downturn, when costs are squeezed and process disruptions can be absorbed by spare capacity. For retail banking, the competitive threat from offshore staff is limited while banks have branch networks; those that move fully to Internet banking could well see business disappear.
For Wall Street, the main defence against teams of Indian traders and analysts are brand position and scale. Companies are reluctant to use non-brand name houses for acquisitions and major equity financings, while the debt and derivatives markets remain dominated by economies of scale against which it is difficult to compete.
What this all may mean is that while Goldman Sachs may still exist in a decade, a high proportion of its employees may be offshore, paid far less than what Wall Street currently considers a living wage.