Financial institutions can enhance risk management and reduce costs through a reconciliation global center of excellence. Timing is critical. The cost of falling further behind industry standards is rising.
To date, the “path of least resistance” has been to create a series of one-off reconciliation processes rather than allocate the resources to implement scalable, best-in-class solutions.
But this path is no longer viable. The urgency behind revamping reconciliation processes is driven by four factors:
- Increased complex regulatory requirements
Dodd-Frank, European Market Infrastructure Regulation and Basel III are three examples of increased regulatory requirements. Seamless risk management and world-class reconciliation solutions are needed to solve for this increased regulatory scrutiny.
2. Focus on optimization of firm capital including collateral requirements
Operating in dynamic global markets, financial services firms are challenged to clear, reconcile and settle trades in real time as well as to report and correct problems expediently. Both sell-side and buy-side firms trading globally must handle risks of currency conversion, capital charges, execution delays and other requirements.
3. Cost of multiple IT applications and inconsistent business processes
As trading volumes increase driven by hedge funds, derivatives and high-frequency trading, efficient processes for reconciliation become more important. Despite this need, many global financial institutions are performing reconciliation in silos with spreadsheets and other rudimentary, manual tools.
4. High labor costs
Most banks are searching for elusive low-hanging cost reductions. Reconciliation activities account for about 30% to 40% of total back office labor costs. Therefore, financial services firms are under pressure to reduce back-office costs and keep them aligned with firm revenues.
The risks are many, and the timing is short. Given their complexity, incremental small changes to reconciliation processes will not suffice. So how are firms adopting?
To solve for this, many financial institutions are outsourcing to a centralized reconciliation function in order to consolidate experienced staff with cutting-edge technology. Quick wins include faster implementation speed, better cost management and risk reduction. These reconciliation Business Process Outsourcing (BPO) providers tend to reduce exception rates in excess of 25%.
This outsourcing of reconciliation is expected to grow exponentially. Some predict the adoption of outsourced reconciliation solutions will grow by 350%.
But how do firms achieve this centralized reconciliation function? Financial services firms with the best results follow four basic steps:
- Develop a roadmap for an enterprise reconciliation function. Firms need to self-assess their current reconciliation technology and operations capabilities and identify gaps.
- Evaluate firm’s expertise. Firms need to ask themselves whether they have the needed specialized reconciliation knowledge to support the diverse needs.
- Evaluate operational risk management. Firms need to determine whether their current reconciliation capabilities adequately address operational risks and address compliance issues.
- Assess costs. Firms need to weigh budget needs against current expenditures on reconciliation. Questions firms must ask include, “Where can we create cost efficiencies?” or “How can we decrease fixed costs?”
These measures can help financial services firms improve their reconciliation processes, at a time when they need the savings and risk mitigation the most.