Financial services knowledge process outsourcing industry is expected to be worth $5 billion by 2010, a study by KPMG said.

According to KPMG, the KPO phenomenon will have far reaching consequences for the global financial services industry over the next three years.

There is likely to be a significant shift in the boundaries between 'outsourceable' and 'non-outsourceable' activities, offshoring strategies expected to embrace new locations and most global banks and insurers expected to adopt KPO strategies, the study says.

Also, decisions about outsourcing may be accelerated to preserve and increase competitive advantage and more rigorous regulatory and compliance control will likely be demanded as KPO providers deliver more complex services, it says.

India is expected to remain a preferred location for KPO activity but organisations are expected to look for alternative locations for additional delivery centres, both from a customer and service provider perspective.

The study also says that there are a few limitations on the potential growth of the KPO industry over the next three years like skill set shortage, declining US dollar and compliance and regulatory pressures.

Some of the key challenges that can emerge in the industry are maintaining high quality standards, investment in KPO infrastructure, lack of talent pool, requirement of higher level of control, confidentiality and enhanced risk management, it points out.