The dirty secret about reconciliation and exception management is that many firms – large and small – are still using mostly manual processes. They are applying a mix of calls, faxes, data feeds, spreadsheets, internally developed applications and a desktop database to the problem, essentially what they were doing to support trading in the late 1980’s.
While I am nostalgic about the eighties, I think that reconciliation technology must leapfrog from circa 1989 to the 21st century. The good news is that it might be the right time for firms to make that jump because recs technology is at an interesting crossroads.
A study out today from market research firm Aite Group, sponsored by reconciliation vendor Gresham Computing, deals directly with the lack of automation. In fact, Neil Vernon, chief technology officer for Gresham, says he asked participants at FTF’s 7th Annual Reconciliations & Exception Management Conference and others late last year about their manual processing. The major finding was that “80% of the reconciliations that are performed are not on an enterprise platform,” Vernon says.
Neil Vernon,chief technology officer,Gresham Computing
Many processes are completed via Microsoft Excel spreadsheets, Microsoft Access databases, desktop applications or are entirely manual. Only 20 % of those questioned last year were on a recognized platform, Vernon says. The report further cites a senior operations manager at a large investment bank who says that despite having several vendor reconciliation platforms, “the majority of the firm’s reconciliations — around 70% or 80% — still take place in user-developed applications such as Excel spreadsheets.
“Why do they use Excel? Because they can get data into it quickly,” says Vernon. End-users can also create fast look-up functions and matches. But Excel reaches its limits when a firm is processing one million trades per day. “You can use Excel in real time but that’s really hard work and very expensive.”
Virginie O’Shea, the Aite analyst who is also the report’s author, says that she is not surprised by Vernon’s findings. “I think it’s a sign of how little firms have thought about operational investments in the past.”
Yet there is an expiration date coming for this “Back to the Future” situation. The Aite report cites clouds on the horizon that are going to bring these retro recs processing workarounds, patches and sneaker-net solutions to their knees:
- Regulatory pressure is rising. “Regulators are keenly focused on compelling financial institutions to prove their systems and controls architecture and asking them to provide an audit trail for any amendments to key data items—supporting these transparency requirements and providing greater automation overall is very important,” according to the report.
- Real-time and intraday processing will become nearly mandatory. “Concerns about latency have moved beyond the remit purely of the front office,” according to the report. “Middle- and back-office processes must now adapt to an intraday environment, and user-developed applications cannot hope to support these requirements.”
- Cost cutting and headcount reductions will compel firms to streamline their operations via automation. “The need to replace staff with technology is a tipping point for reconciliation technology adoption,” says Virginie O’Shea, the Aite analyst who is also the report’s author.
- Centralization is compelling firms to review their manual processes for reconciliation and seriously consider automated solutions.
- Competition in the market is heating up causing clients to “directly scrutinize financial institutions’ internal processes during the request for proposal process,” says the report. “The interviewed Tier-2 investment bank indicates that its recent buy-side clients have even asked directly about their reconciliation technology support, including front-end usability and speed of onboarding.” Along those lines, securities firms will have to move into new asset classes and “rapid onboarding of reconciliations is part of this process.” No firm wants to be left behind because they are hamstrung by inadequate systems.
- Fraud and rogue-trading activities are helping firms make the case for an automated, enterprise-wide reconciliation platform as a major break wall against crime.
O’Shea and Vernon add that the push for shorter settlement cycles underway in Europe and the challenging workflows coming
Virginie O’Shea, analyst, Aite Group
with the clearing and execution of over-the-counter derivatives will also push firms to automate recs processing.
But will firms actually bite the bullet and automate recs processing?
“A certain proportion of the market — and I think it’s an increasing proportion of the market — is keen to try and bring down operational costs,” O’Shea says. “In the long term, you can bring down man hours; you can bring down the number of people you dedicate to these processes. Some firms have got their eyes on the longer term operational costs.”
So, as we all know, some firms will stubbornly and stupidly cling to old ways until they are hit with stark choices. “Efficient operations can make the difference between staying in business or not,” O’Shea adds.
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