Financial Institutions Warms Up to AI to End Reconciliation Silos, Drive Cost Savings and Efficiency (Tirupathi Rao Dockara and Rajat Yadav, Wipro)
Need for Improved Reconciliation Systems
A quick look at the wish list of executives at leading Financial Institutions (FIs) will highlight the need for improved reconciliation functions more than ever before.
The New Innovative Reconciliation System would provide built-in intelligent trend analysis for automation of the most repetitive reconciliation activities and incorporate business knowledge with easy tool configurability. It would also deploy fast, offer scalable performance and exhibit Artificial Intelligence (AI) such as machine learning that can offer real-time support for reconciliation.
Reconciliation is no longer perceived and addressed as only an operational function. It’s now largely driven by regulatory compliance and minimizing risk. European Market Infrastructure Regulation (EMIR) and the Dodd-Frank Act in the U.S. require the investment community to perform portfolio reconciliations bilaterally by counterparties and qualified third parties.
Most financial services firms have siloed reconciliation systems or have multiple reconciliation activities running at the same time making it difficult to meet regulatory requirements while trying to gain control over costly inefficient processes. Basel III implementation requires banking institutions to reconcile transactional data from across organizations for inputs on risk calculations. Increased reporting requirements of MiFID II, MiFIR & FATCA require data to be pulled from across the organization and reconciled while maintaining a full audit trail.
WHAT MAKES THE CURRENT MODEL UNTENABLE?
From front-to-back office functions, including treasury and compliance, reconciliation systems have a significant role to play in every area of a FI’s operations. Over the years, Financial Institutions have implemented different recon solutions for their varied reconciliation needs, which lead to an unsustainable and inefficient recon landscape.
Financial Institutions have been using a mix of reconciliation options to meet compliance and regulatory requirements:
- Reliance on Manual Reconciliation
Lack of easy configurable recon solutions and complex reconciliation needs make it imperative for organizations to still perform manual reconciliations as a work around in back office operations such as inter system recon, chargebacks, suspense account recons. Manual processes relying on “key individuals,” expose organizations to financial and legal risks.
- Legacy / In-House Custom-Built Solutions
Often running on Outdated Technologies, in-house custom-built solutions are typically challenging to maintain. Such non-scalable solutions are also difficult to retire and often need reverse engineering to understand the business logic programmed-in over the years. Even today many of the back-office critical reconciliations are run with the help of legacy mainframe end-of-the-day batch processes, where the users depend on the physical print reports for addressing the reported breaks, such systems require additional supplementary workarounds requiring high degree of manual intervention to fulfill the business function needs.
- Vendor Reconciliation Solutions
Financial Institutions use different vendor systems for various types of reconciliations due to the lack of a “one-stop” solution. Most FIs use more than one vendor platform (i.e. different solutions for Cash/Nostro, OTC Derivatives, Trade confirmations, and Forex reconciliations).
This leads to account reconciliation becoming a manual, time-consuming and highly-costly process. Some of the key challenges FIs face are:
- Decentralized solution implementations (inefficient and costly siloed-approach)
- Inability to process massive data volumes, leading to implementation of multiple reconciliation systems
- Unable to keep pace with the changing market dynamics due to long reconciliation onboarding timescales and low level of automation
- High volumes of unresolved business exceptions (breaks) as tools have limited engineering, AI and machine learning capability to capture business knowledge within configuration rules
- Absence of end-to-end functionality: Separate ancillary tools are generally needed for integration, reporting, archival and disaster recovery
WHAT IS A SUSTAINABLE RECONCILIATION MODEL?
Financial Institutions need to transform the reconciliation technology and work towards implementing a centralized platform that is capable of handling entire operations. It should be a highly-configurable solution reducing redundancies.
A centralized platform should be a One-Stop Solution for end-to-end reconciliation services like enterprise integration, reporting, document management, archival and disaster recovery. This helps in reducing the overall implementation timelines, TCO, and provides better integrated features.
Key Features of a Sustainable Reconciliation Solution:
· Use of Cognitive Learning to absorb business knowledge and auto-learning of match rules; Cognitive Learning tools identify patterns and enhance auto matching
· High Match Rates – High performance matching algorithm with Artificial Intelligence
· High Processing Speed – Intelligent transaction matching algorithm which ensures high processing speed and volumes
· Single Platform – Single solution for all the reconciliation needs (Cash/Nostro, OTC Derivatives, Trade confirmations, Forex)
· Complete Data / Transaction Lifecycle Management – Integrated solution which can transform, cleanse, and reconcile the transactions across their lifecycle
· Fast & Simple Recon Onboarding – Highly-configurable and User-Interface based onboarding with no coding or scripting required
· Flexible Service Models – choice of an economical shared-cloud service model, or on-premise exclusive Private Cloud service
· Data Quality – Integrated data exception management to resolve issues prior to reconciliation run
· Dashboards – Real-time risk and performance indicator dashboards
Moving from siloed implementations (point solutions) to centrally-managed reconciliation platforms is the Best Way Forward. Financial Institutions will be able to automate manual processes, retire outdated legacy systems, and consolidate disparate point solutions. The result will be a step towards a forward-looking organization, ready to comply with the ever-changing regulations and face the volatile market dynamics with agility.
ABOUT THE AUTHORS:
Tirupathi Rao Dockara is the Product Manager for Wipro’s IP Solution. Tirupathi has been leading software project teams for development of distributed client server applications in Storage, BFSI, Retail and Green IT domains for the past 17 years. He manages the development center for Business Automation and Software Innovation.
Rajat Yadav, with over last 17 years of experience, is responsible for conceptualizing business needs for Wipro’s IP Solution and has been leading consulting, product innovation and solution design. He also has expertise in domain consulting, pre-sales, customer engagement and sales partner engagements.
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