Financial services (transactions, investments, and risk management) are the center of this global economy. From banking and insurance to investment management and financial advisory services, financial services are running the world in the very literal sense of the word. 

The core of financial services are banks, which offer deposit accounts, loans, credit services, and payment processing, and where individuals and businesses save, borrow, and transfer money. Credit unions and savings institutions provide similar services. An important area is investment services, where firms help clients decide whether to invest in stocks, bonds, mutual funds, and other financial products. Asset management and brokerage firms manage investment portfolios and advise on growing wealth. These services cater to both individual investors and large institutions like pension funds.

Insurance services protect against accidents, illness, property damage, or business liability. Insurance companies provide policies to individuals and businesses to protect them in case of unforeseen events. Financial advisory services guide clients in making informed financial decisions, such as planning for retirement, managing taxes, or setting up a budget. 

Financial advisors guide their clients on allocating assets, reducing debt, and achieving long-term financial goals. These services keep the world functional, which is why they can be extremely cost-heavy. 

Many services can be unavailable to businesses and individuals who need help to afford the heavy costs. 

There is one solution to the problem: offshoring financial services.

This is a strategy in which companies delegate financial tasks (like accounting, payroll, tax filing, auditing, and financial reporting) to a remote team in another country. Businesses do this to save costs, increase efficiency, and access a large specialized talent pool. However, offshoring can have its own set of pros and cons. 

This article will explore offshoring financial services, its origins, and provide an in-depth look at its advantages and disadvantages.

What is Offshoring Financial Services?

Offshoring financial services means building a remote, in-house finance team in another country. These countries usually have lower labor costs and well-established financial expertise. Bookkeeping, tax preparation, and payroll processing are offloaded to save on costs and increase focus on core functions.

Offshoring can be part of a broader strategy to reduce operational costs while maintaining quality service since these teams are typically located in countries with educational systems and large labor markets, offering skilled professionals at a fraction of the cost of hiring domestically.

The Beginnings of Offshoring Financial Services

The roots of offshoring financial services are in the late 20th century when companies started outsourcing to lower-cost countries like India and the Philippines. 

Initially, businesses focused on IT and customer service. Once companies realized the benefits of building dedicated teams in these places instead of hiring third-party service providers, they switched to offshoring. Financial services can also be outsourced, but businesses that need greater control over their financial ops choose to retain visibility into their processes by building offshore teams. Over time, financial services became a popular area for offshoring due to the cost benefits and the increasing availability of highly skilled professionals in offshore locations.

By the early 2000s, many multinational corporations were offshoring their financial departments, including bookkeeping, payroll, tax compliance, and financial reporting. The rise of technology and globalization furthered this trend. 

Pros of Offshoring Financial Services

1. Cost Savings

One of the main reasons companies choose offshoring is that labor costs in countries like India, the Philippines, and Eastern Europe are lower than in the U.S. or the U.K. Businesses can perform financial tasks at a fraction of the domestic cost and reduce overhead expenses. India is an excellent choice for offshoring finance roles because of the plethora of outstanding STEM schools there. The labor costs, however, aren’t as inflated as in the West.

For example, a certified accountant in the U.S. may cost a company $100,000 annually, while an equally qualified professional in India will do the same work for $15,000. 

Companies agree to offshore their financial services due to this massive gap in labor costs.

2. Access to Skilled Professionals

Many countries that offer offshoring services have a large pool of highly educated and skilled financial professionals. Countries like India and the Philippines have educational systems on par with the best STEM schools in the US. They continue to produce excellent finance graduates every year. These professionals are well-trained in global accounting standards, financial management, and auditing.

Companies can access this quality of specialized talent by offshoring finance roles in these countries. This cost-work quality balance is simply not available locally. Businesses can maintain high-quality financial operations without extensive in-house training or recruitment efforts.

3. 24/7 Operations

In the financial sector, every minute counts.
And the clock is always ticking.

It would help if a company in the U.S. could have its offshore team in India work on financial tasks while the domestic office is closed. This would lead to faster turnaround times, as tasks could be completed overnight.

Round-the-clock operations are great for productivity and maintaining healthy deadlines. Reporting or payroll would be completed on time. In industries requiring quick decision-making based on financial data, there’s nothing like an offshore team taking over from onsite teams daily. 

4. Scalability

When a company needs to expand its financial department, it can hire more offshore professionals without investing in additional infrastructure or overhead costs.

This flexibility is particularly useful for growing businesses or companies facing seasonal fluctuations in demand because they can increase or decrease their offshore team based on current needs.

Whatever your particular financial offering, being prepared for ups and downs is a huge advantage in the long run. 

5. Better Focus on Core Ops

Being proactive is great, but how many CEOs have the time to pore over their monthly MIS and analyze them? Your business likely needs your attention elsewhere, and fitting your finances into your busy schedule only increases your chances of burning out.

Instead of dedicating time and resources to handling financial operations, companies should concentrate on product development, customer service, and business strategy.

Offshoring financial helps businesses simplify their operations and improve efficiency in areas that matter most to their growth.

Cons of Offshoring Financial Services

1. Potential Misunderstandings

Teams need understanding and camaraderie to work together, and one of the major challenges of offshoring financial services is communication. Working with teams in different time zones and cultures can lead to misunderstandings and delays. 

Language barriers can impede complex financial matters where accuracy and a shared understanding of the benchmarks for success are key to project completion.

Miscommunication between the offshore team and the company increases the chances of errors, delays, or even compliance issues. Companies must invest in strong communication tools and protocols to minimize these risks.

2. Data Security Concerns

You will be sharing sensitive financial information with a third-party provider. This raises concerns about data security and privacy. Countries have different data protection regulations, and offshore partners must comply with global data security standards.

These risks are higher when the information being stored or processed offshore is finance-related.

The risk of data breaches, cyber-attacks, and unauthorized access is just higher. Encryption, firewalls, and access controls should be used to protect financial data.

3. Regulatory and Compliance Risks

Different countries have different financial regulations, and offshoring financial services can lead to compliance roadblocks. Offshoring partners should be familiar with local and international accounting standards and regulations, and most trustworthy partners handle this. 

Failure to comply with regulatory requirements can result in fines, penalties, and reputational damage. Companies must perform due diligence when selecting offshore partners to ensure they meet both countries’ legal and compliance obligations.

4. Loss of Control

Giving up some control over day-to-day operations is never easy. When a company outsources its financial tasks, it must rely on the provider to deliver accurate and timely results. Frustrating and stressful, isn’t it?

Having an offshore team is a great way out of this. 

You continue to own all decisions based on financial data, whether quick or long-term. If the outsourced work doesn’t meet the company’s needs, it can slow the decision-making process. Since offshore teams are fully integrated into the company’s culture and values, they know how to align their financial analysis with their long-term goals.

5. Possible Hidden Costs

While cost savings are one of the main reasons for offshoring financial services, there are often hidden costs that companies may need to anticipate. These can include the cost of setting up offshore operations, training offshore staff, and managing communication and collaboration tools.

Unexpected expenses related to compliance, legal fees, and quality control will occur, so businesses must carefully calculate all potential costs before deciding to offshore their financial services to ensure that the savings outweigh the risks.

Tips for Successful Offshoring of Financial Services

The offshoring guide/partner is responsible for ensuring smooth processes and hassle-free project delivery. Here are some tips to help businesses successfully offshore their financial operations:

Choose the Right Partner: Select an offshore provider wisely. They should come with a proven track record in financial services, and experience working with companies in your industry would be an added benefit.

Clear Communication Channels: Tools like video conferencing, project management software, and instant messaging are add-ons; what’s really needed is a culture of open and honest communication. Being realistic about this is very important.

Compliance: The offshore provider should comply with all relevant regulations and data security standards. Compliance should be verified through regular audits.

Start Small: Offshore non-critical financial tasks before gradually expanding to more complex processes. This will allow you to assess the offshore provider’s performance before fully committing.

Conclusion: Finishing Thoughts

Finance offshoring is a simple topic to understand but a complex task to carry out.

Which is why InCommon is here to help. Our expertise in building stellar teams dedicated to financial operations is deep. We screen and vet from a large pool of readily available skilled talent. 

If you’re wondering how to dip your toes in the water, our experts are always available to discuss your specific needs and create solutions tailored to your purposes.

The journey is easier with us at your side.