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FROM MANUAL TO MACHINE LEARNING: HOW TO APPROACH THE RECONCILIATION ‘PROBLEM’

By Christian Nentwich, CEO at Duco

 

At the start of 2020, before the global coronavirus pandemic changed the world, financial industry experts recognised that this would become the ‘decade of data’, with firms inundated with trillions of lines of data from a multitude of sources.

One of the many effects the current crisis has had is to amplify the need for resilient, connected systems and more robust processes. With business continuity front of mind, many organisations are looking for more efficient ways to manage huge swathes of data from multiple, disparate sources quickly and accurately. Data integrity is a key concern, and many are asking how they can automate their most critical processes.

However, despite the rush to digitalise many manual systems, automating reconciliations is still one of the toughest areas to crack.  Even pre-pandemic, automating this essential control function in financial services – which can help eliminate operational risk that can lead to fraud, fines, or in the worst case, the failure of a firm – was proving elusive for many organisations. Why?

Many organisations are facing a situation where there are a multitude of systems, different processes, technology types and computing.  Within that, there are three key reasons that make automation difficult:

  • A lack of standardisation – In many cases in financial services there are no strict data standards. For example, different counterparties provide trade and position data in different formats. Each one requires a bespoke reconciliation process or expensive data normalisation.
  • Increased complexity – Cash or stock assets can be matched on a few basic fields, but for more complex products you need to take far more information into account. Most current systems are unable to deal with every asset type that crops up in a timely manner. And, that’s before we get to the range of data needed for regulatory reporting, and the associated reconciliations required.
  • Poor data quality – The enemy of automation. Missing fields, inconsistent coding schemes and unavailability of common keys make automation difficult when using current solutions due to hardcoded assumptions within those systems.

However, in a world where the quantity and complexity of data that firms need to handle is set to increase exponentially, relying on manual systems and processes is no longer feasible. So, how do firms deal with this influx of data in the most intelligent way?

We recently launched ‘The Reconciliation Maturity Model’, a new roadmap that will help financial firms improve the automation, efficiency and integrity of data across all reconciliation and data matching tasks.  The model guides reconciliation practitioners through five key stages of reconciliation maturity, from ‘manual’ through to ‘automated’ and eventually ‘self-optimising’ – where machine-learning technology automates nearly the entire process, and where intersystem reconciliations are all but eliminated

Importantly, a more progressive approach to reconciliation automation will not only result in greater operational efficiency, it will also dramatically boost operational resilience, and put forward-thinking financial institutions in a better position to benefit from new technology and the added insight that intelligent systems bring.

The five stages of reconciliation maturity are:

  1. Manual – By this we mean using Excel or some other form of spreadsheet, macros, home-grown applications or – in some instances we’ve come across – printing out sheets of paper and marking inconsistencies with a highlighter pen! However, as the organisation grows, and the data becomes more complex, the risk of error skyrockets. There’s no audit trail, no governance and it becomes increasingly expensive to scale. If in the 2020s you’re throwing an increasing number of bodies at a data matching exercise, you know something’s wrong.
  2.  Hybrid – For the majority of organisations, this takes the form of a point solution, usually deployed to automate high volume, low complexity reconciliations such as cash or custody. These point solutions – by their very nature – tend to specialise in a certain type of reconciliation. Firms trading a wide range of assets, or those dealing with complex data, may need to use multiple point solutions to handle different reconciliation types. However, there will be many reconciliations that these point solutions are not able to handle elegantly. In these cases, firms tend to fall back on manual processes. The result is a patchwork quilt of different reconciliation approaches stitched together by manual work. The whole process is costly, difficult to keep track of, and difficult to scale.
  3.  Automated – All reconciliations are consolidated onto automated systems, and small teams build and onboard reconciliations, and oversee exception investigation.The key to getting to this stage is using the right technology. To reach Stage 3, firms need to be able to onboard reconciliations in hours or days, not weeks or months. They need to be able to rely on agile, flexible technology that can deal with complexity without multi-week data transformation projects. Once this technology is in place, complexity and risk can be vastly reduced, while increasing efficiency and transparency across processes.
  4. Improving – This enables greater efficiency and oversight of the reconciliation function as a whole. It also enables firms to normalise their data across the business and implement additional data quality checks across systems, highlighting areas of incomplete or incorrect data.  Organisations are then able to start consolidating systems and removing duplicate reconciliations which have already been handled upstream.  Processes become leaner, more efficient and more transparent.
  5. Self-optimising – Full automation is deployed across the entire lifecycle of reconciliation, from onboarding to exception resolution. There is very little involvement from staff and continuous improvement is possible via a machine-learning enhanced system. Internal reconciliations are removed, leading to major reduction in cost and complexity.

While stage five is the ‘holy grail’ that all financial organisations should be aspiring to, many firms are at the ‘hybrid’ stage, and making the leap to ‘automated’ is the most challenging step.  However, once at stage three, firms are more able to move up the process to ‘self-optimising’.  At this point, with enough training data, machine learning can spot errors, outliers and poor data quality at source, reducing the number of reconciliations required.

So, while we know that moving from manual to machine learning is not an overnight process, The Reconciliation Maturity Model provides a blueprint to getting there.

The Reconciliation Maturity Model is available for download here https://content.du.co/reconciliation-maturity-model-whitepaper

 

Business

FIVE REASONS WHY YOUR BUSINESS’ PROCUREMENT TEAM SHOULD BE USING A CONTRACT MANAGEMENT SYSTEM

By Daniel Ball, business development director at Wax Digital

 

Even in today’s digital-first environment some businesses are still storing documents, such as contracts, in filing cabinets making it labour intensive to retrieve, manage and even identify important paperwork. In fact, it is calculated that poor contract management practices are costing companies an average of nine percent of their annual revenues.

Moving to a contract management system online can speed up the retrieval process and help decrease the amount of time and resources required to manage contracts. Using a CMS companies can create an online database to centralise information and store documents. Not only does this help ensure contracts are well managed and kept up-to-date, but it can also help businesses save up to 20 percent of overall costs per year.

From legal departments overseeing regulation compliance to finance teams ensuring payment deadlines are met, contract management technology benefits many areas of an organisation. So, how can a good CMS help your procurement team?

 

Daniel Ball

How will a good CMS help your procurement team?

The number of suppliers your procurement team must oversee varies depending on the size of your business. It’s not uncommon for large enterprises to be working with thousands of suppliers at one time. A CMS will use automation to record, manage and streamline data, providing procurement teams with important contract details including time and location information, as well as real time alerts such as contract breaches.

Here are five reasons why your business should be using an online contract management platform:

  1. Increased spend visibility

Using a CMS can give procurement professionals full visibility of suppliers, including the company name and location of where a product is coming from and in what quantity. This transparency will also help contribute to the risk management strategy of your business as it enables you to spot vendors who may be prone to environmental, economic and political uncertainty. In the current environment, for example, suppliers’ may have decreased or ceased production due to COVID-19 or could have been heavily impacted by the negative price of oil, making visibility increasingly important for businesses.

 

  1. Eliminates maverick spend

Centralising and streamlining contract documents will ensure that buyers can instantly access up-to-date information to see if a contract already exists. This helps buyers avoid simple and common mistakes that often occur when using manual filing systems, such as onboarding new vendors when existing agreements are in place with another supplier.

 

  1. Keeps track of contract renewals

It’s easy to forget about contract renewals or sign up for another term without ending an existing agreement, especially when using a traditional filing system. Businesses using an online CMS can set up renewal alerts in advance, allowing buyers sufficient time to source new vendors or negotiate better prices.

 

  1. Improves spend management

A centralised database means that all negotiated prices, contract conditions and other important transactions can be accessed in one place, making it easier to analyse spend. A CMS can help identify discrepancies, find where contract violations have occurred and deal with any associated problems.

 

  1. Adhering to regulatory and legislative compliance

It’s important to ensure that all suppliers are meeting the terms of their contracts. A CMS will automatically audit supplier information, meaning that any failures are immediately raised to procurement teams. The platform will also provide notifications if any new data is required or updates need to be made, avoiding potential legal issues.

It’s clear that using an online CMS will benefit your business and procurement teams by increasing spend visibility, enabling access to up to date information, ensuring contracts are closely monitored while contributing to the reduction of unnecessary spend. So, now’s the time to stop relying on those dusty old filing cabinets and start using a CMS.

 

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Business

PROTECTING YOURSELF AGAINST A RECESSION

TRUSTS

James Turner, Director at Turner Little

 

The coronavirus outbreak has spread to businesses, leaving many around the world counting costs. Notoriously, known as the Great Lockdown, it’s been affecting the world economy since early this year. The predicted recession is considered to be the steepest economic downturn since the Great Depression.

So, what does that mean for you? James Turner, Director at company formation specialists, Turner Little, suggests “While there’s no fool proof way to ‘recession-proof’ your finances, establishing a solid base now will put you in a better position to weather the storm.”

“Whilst the future of the global economic landscape is simply too complex to predict, it’s not hard to spot imbalances that have built up, as central banks and governments around the world talk about introducing further fiscal stimulus and monetary expansion, the consequences could be significant,” adds James.

A good wealth management agent will recommend starting by saving a substantial cash emergency fund in a high-yield savings account, understanding your spending habits and where you could cut back if you needed to, and establishing your long-term investing strategy now, so you can stick to it.

 

Invest wisely

If you were to solely invest based on the inevitability of a recession, you are likely to miss returns that are immediately available. If you truly want to recession-proof your assets, the best thing to do is develop a long-term strategy and invest wisely.

 

Diversification still matters

It’s dangerous to pile all your investments into a single sector, including consumer staples. Diversification is especially important during a recession when particular companies and industries can get hammered. Creating a diversified portfolio of assets blended across asset classes—such as fixed income and commodities, in addition to equities, sectors, geographies and strategies—can also act as a check on portfolio losses.

 

Build a reserve

To keep your money protected before, during and after a recession, it’s recommended to have an income generation conversation with a financial advisor. This will cover a lot of different topics, but one of the most important is the emergency fund. You’ve likely heard many times that it’s good to have between three and six months’ worth of living expenses set aside in the event of a job loss, health crisis, or other unforeseen circumstance.

 

Protect your assets

If you’re interested in talking about protecting your assets and your investment portfolio, do get in touch. We specialise in creating bespoke solutions for individuals and businesses of all sizes. The knowledge and expertise of our specialists will be able to assist with any enquires, no matter how complex.

 

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