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Internal control: After cutting costs, what's next?

In football, for a long time, all that was expected of defenders was that they “keep clean sheets” (i.e., prevent any goals). Of late, however, they are also expected to launch their team’s counter-attacks. Similarly, all that was once expected of reconciliation leaders was that they prevent embarrassing control failures. However, excelling in the “internal control” role and preventing failures are now just table stakes. The modern reconciliation leader needs to address business goals more directly.

Over the years, the reconciliation function has undergone a number of changes in its structure, its role in the back office, and its approaches. Arguably, the greatest opportunities in reconciliation lie ahead, in sustaining this transformation and becoming faster, better, and cheaper.

Reconciliation costs have already been streamlined 
During the industry’s boom years, each line of business had independent reconciliation teams, and many of them relied on manual processing to a large extent. In a bid to keep pace with the bewildering complexity of financial products traded by their business groups, some of these reconciliation teams ended up growing faster than the businesses that they supported. 

In 2008–2009, when the industry was under pressure to cut operating costs, better sense prevailed, and several large banks subsequently dramatically rewired their reconciliation functions. These banks moved towards a centralized, shared services structure, with a greater degree of automation and straight-through processing (STP). This restructuring reduced annual reconciliation spends by 25%–40%, depending on the degree of platform consolidation and standardization of operations across lines of business. As a result, others are now following these trendsetters, and are in the process of consolidating their reconciliation platforms as a precursor to adopting firm-wide shared services.

Reconciliation efforts can still lead to quick wins 
As banks recovered from the Great Recession, reconciliation leaders contributed to the overall effort to cut costs by adopting a shared services model. Now reconciliation leaders have the opportunity to continue their “counter-attack,” due to new rules stemming from Basel III. These rules have created a growing demand for intra-day and real-time reconciliation, as a means of coping with liquidity demand and meeting T+2 settlement deadlines, which in turn reduces risk exposure.

Reengineering operations is fine; anyone for reimagining them? 
In addition to the potential benefits listed above, the reconciliation process has an opportunity to improve the existing approach to investigating breaks through machine learning.

Even if you’re not aware of the concept, you probably use machine learning in some form. For example, our smartphones “learn” the locations of our offices and homes and “suggest” words to complete the sentences that we use the most often. They do so by tracking our usage over a period of time and then identifying patterns in our behavior.

Similarly, by tracking break investigations over a period of time, reconciliation software can detect patterns in the breaks and an analyst’s actions. Thereafter, they can recommend options to the analyst and offer workflows for remediation.

Adopting machine learning would dramatically reduce the time needed to resolve breaks, and would help banks take a significant step towards intra-day reconciliation and tighter settlement timelines.

Faster, better, and cheaper 
As we have seen over the past few years, reconciliation groups have done well to overhaul their operating models in order to slash costs. Now there is a need to continue the charge forward and visibly impact business concerns like liquidity and risk exposures, while also supporting the push for quicker settlement cycles. This will show that the best defenders are capable of a little offense as well, now and again.


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