How Advanced Reconciliation Can Help Banks Align With Regulation

Hugh Morris, vice president business development banking, Genpact LLC

As everyone knows, the 2007/8 global financial crisis catalysed significant changes across the global banking industry. In particular, banks were forced to make significant cuts to operating costs and to meet new regulatory requirements that were introduced through the likes of Basel III. These changes have and are still being felt right across bank operations, including in the back office reconciliation function.

With new requirements to meet tighter compliance regulations, including T+2 settlement deadlines, and to be significantly leaner, banks are now rethinking their operational processes to adopt a new form of reconciliation.

The background

For a long time all that was expected of reconciliation leaders was to prevent embarrassing control failures. During the financial services industry’s boom years, each line of business had independent reconciliation teams, and many of them were largely reliant on manual processing. As a result of this and to keep ahead of the complex landscape of financial products traded by their business groups, some of these teams ended up growing faster than the businesses that they supported. This meant that many teams became bloated and inefficient.

Excelling in reconciliation management and failure prevention are now also just one part of the core skills base for any successful reconciliation leader. They must understand how their function can address business goals more directly, by championing and implementing shared services model to help cut costs, meet efficiency targets and align with the relevant Basel III regulations.

Changes in reconciliation practices

Hugh Morris

As a result, reconciliation has undergone a number of structural changes from its role in the back office. The primary change is that many In-house teams are now increasingly using software and hosted solutions, in order to drive down costs.

Real-time processing is one of the technological solutions that has been implemented, directly supporting requirements to meet shortened settlement cycles. It has also become an essential tool as reconciliation expands beyond traditional accounting, to support risk management, trading and cash management.

We are increasingly encouraging banks to adopt reconciliation platforms as they provide users with a flexible and intuitive interface, to support their workflows and modelling to aid operational management. The platforms also provide strong support for reporting and auditing and for identifying high operational, financial, reputational risks such as insider trading and marketing abuses.

These reconciliation solutions create the opportunity for teams to adapt and improve by investigating ‘breaks’ through machine learning. To use a consumer example for this – smartphones “learn” the locations of offices and homes and “suggest” words to complete the sentences are used the most often. Usage can be tracked over a period of time and patterns of behaviour identified.

Similarly, by tracking ‘break’ investigations over a period of time, reconciliation software can detect patterns in the breaks and an analyst’s actions, recommending options to the analyst and offer workflows for remediation. Adopting machine learning dramatically reduces the time needed to resolve breaks, and helps banks take a significant step towards intra-day reconciliation and tighter settlement timelines.

The future of reconciliation

The last three years has seen an overhaul in the way that reconciliation groups have operated to cut costs and increase efficiencies. Several large banks dramatically rewired their reconciliation functions and moved towards a centralised, shared services structure, with a greater degree of automation and straight-through processing (STP). This is a trend that we believe will continue as banks are able to both better control their reconciliation function and lower spends by 25-40%.

However, for banks to address business issues such as liquidity and risk exposures successfully, they must continue to push this form of reconciliation, while at the same time pioneering quicker settlement cycles. The greatest opportunities in reconciliation lie ahead, but require sustained commitment to transformation in order to become faster, better, and cheaper.