For many, their reconciliation software has become part of the office furniture – sat in the corner, not upgraded or even reviewed in years. But there is a growing shift toward updating or introducing new reconciliation solutions that are service-based, standard-driven and highly focused on automation, according to Richard Chapman, vice president, strategy and business development, Data and Process Solutions, FIS.
Sadly, however, a large part of the market has yet to make the move. A 2019 report by Aite Group found that 53 percent of firms are working with technology that is five years old or older. Indeed, many reconciliation and data management systems across financial institutions are running on code from the 1990s, when the first wave of reconciliation software appeared in the market.
“I think there are hurdles in the way of updating or implementing new services, but there’s lots of different ways to overcome them,” says Chapman, who believes education is important in facilitating firms’ moves toward new and improved technology. He highlights three main changes as easing the pain of a reconciliation solution refresh: the move toward increased risk assumption by vendors, the creation of best practice templates for rapid deployment, and the increased utilization of artificial intelligence (AI) to improve automation.
The market for reconciliation software is also undergoing a shift from on-premise deployment and traditional hosting to fully managed or even outsourced reconciliation services, says Chapman.
“The consumption model is all moving toward service. People don’t want tech, they don’t want to have to resource it, they don’t want to have to manage the infrastructure or upgrades, maintain the configuration or think about how the results are generated. In the old days, the typical service approach was hosting, but firms are looking for vendors to assume a greater proportion of risk so they can focus on core competitive advantages. The more risk a service provider is prepared to take on, the more attractive it becomes. The broader the depth of service, the higher the value and simpler the resulting operating model,” he says.
Another key driver behind the change is cost-efficiency. “People are extremely concerned about cash flow, so capital-intensive projects and capital-intensive spend is not on the agenda right now. They're trying to find ways to avoid that spend, so a service-orientated consumption model that doesn't have lumpy capital expenditure is extremely attractive.”
Coronavirus has also shined a light on the importance of strong business continuity planning, expediting the move to fully managed or outsourced services that was already in flight. While firms will likely cut discretionary technology spend in several areas, Chapman explains that automating manual reconciliation processes or converting legacy reconciliation software to monthly service models achieves the perfect combination of immediate return on investment, resilient operating models, and scalable and transparent processes. Firms will likely spend in this arena simply to ensure business continuity and create operational agility.
“We’re seeing customers coming to us thinking they need to start taking the concept of managed reconciliation services seriously,” he says. “There’s already been a huge focus on budget reallocation toward business continuity planning and it’s just the tip of the iceberg.”
Another trend in reconciliation software consumption is the desire for best practice solutions, with bespoke self-configured software falling out of favour.
“The market’s moved on. Reconciliation is a necessary part of many operational processes, including regulatory reporting and financial reporting. Firms don’t want to do it differently, they want to start by implementing something that is the same as their peers,” says Chapman. Firms can then customize their solutions if they wish, though FIS has noticed that they’re increasingly finding customization unnecessary.
Self-service reconciliations are still available and in many cases are initially attractive, but Chapman says firms tend to move away from assuming that risk, preferring that FIS manage each step of the process.
“Again, it’s about removing risk and cost. For those that still want to carry some element of the deployment within their own teams, a combination of packaged deployment and self-service configuration is a way to lighten that implementation hurdle,” he says.
As AI and machine learning become more widely accepted within financial services, more firms will embrace automation in their reconciliation systems to remove the need for manual work.
“My observation is people rarely care how reconciliations are built any more. They care about results and ease of use,” says Chapman.
“There’s much greater acceptance of AI in the financial world then even five years ago. What we’re seeing from our customers is that there’s real interest in how much you can automate, how you can guarantee that level of automation, and what additional manual tasks you can remove.”
FIS’ reconciliations utilize an inspectable ruleset for standard matching of records but augments this with the Virtual Reconciler, which is a machine learning engine. The Virtual Reconciler uses this AI engine to identify trends and insights based upon manually matched items. Using these manual matches as a training set, it will predict records that users would have matched manually and then matches them on their behalf. This predicative matching approach means that rules continuously evolve and protect organizations from natural degradation.
“If you consistently accept what the virtual reconciliation produces, it will generate an inspectable rule or an inspectable ruleset to achieve the same result, so that it can be reviewed from an audit and compliance perspective. So there's still a balance between inspectable and AI – you can't have a black box that just makes decisions without some ability to justify or explain actions.”
For many firms that are seeking AI solutions to enhance their reconciliations, there are challenges around upgrading their on-premise technology to include newer capabilities, or in needing alternative service and technology if their existing software does not measure up. According to Chapman, 25 percent of FIS’ customers upgrade their software every two years or less.
“The challenge, even for our top customers, is getting into the mindset of continuous delivery. Perhaps because of historic experiences, there’s a feeling that a huge amount of testing needs to happen every time you update a system. Technology has moved on now to make it so much more seamless to deploy new features and capabilities as an overlay to the existing capabilities. This is another contributing factor in the move to fully managed reconciliation services that require no maintenance by the client, and we provide service level agreements guaranteeing the availability of the reconciliation results themselves, not just the application,” he says.
70 percent of FIS’ 2019 new name clients signed up for their fully managed reconciliation service, which includes updates to the latest features every six months.
It’s clear that reconciliation software, and the services that vendors offer around it, have come on leaps and bounds. But, as coronavirus highlights the need for operational agility and resilience, the question is how long it will take the industry to make the jump?