Is real-time financial reconciliation the holy grail banks have been waiting for?

Mar 14, 2019 | Articles, Practice - Digital

By John Harrop, senior consultant

In a world where immediacy is everything and competition is tough, many financial institutions are struggling to keep up. Reducing the time lapse in reporting trades and moving to real-time reconciliation could not only improve the way banks manage their liquidity but also unlock significant potential savings and make them more competitive.

Banks traditionally reconcile their nostro accounts – cash accounts they hold with another bank, usually in a foreign country or currency – using end-of-day reconciliation statements against their ledger balances at least one day after settlement (T+1). In an attempt to address this delay, several groups, including SWIFT and ABI, are trialling real-time nostro reconciliation to enable banks to manage their liquidity based on real-time data instead of using end-of-day balance information

The downside of delayed reconciliation

While not everyone will remember the collapse of Barings Bank, the City of London’s oldest merchant bank which was brought down by the actions of one trader 20 years ago, it is a perfect example of the downside of delayed reconciliation. Even once the bank had gone into administration, it took weeks to finalise its global position as there was no real-time view of the cash liquidity position. A similar scenario was repeated during the credit crunch of 2008 when Lehman Brothers collapsed. By contrast, real-time nostro reconciliation would enable financial institutions to understand their financial position much more quickly, in turn allowing them to utilise their balances much more effectively.

Why real time? 

The desire for real-time reporting is not new. There have been several initiatives in the past, including real-time gross settlement systems and continuous linked settlement, which both encouraged the move towards the creation of intra-day and real-time information. These payment versus payment and delivery versus payment initiatives were all mainly driven by the need to manage settlements more efficiently and minimise settlement risks.

Normally banks receive nostro account information at the end of the day via Swift statements sent by their correspondent banks. More often than not, the information is dispersed and needs to be aggregated overnight. During the day the level of visibility, and therefore the degree of control, over the nostro accounts is low. Real-time nostro account information would address this problem.

The benefits of implementing real-time reconciliation are not exclusive to foreign exchange (FX). Multiple products within any financial institution would benefit, although the FX world would likely see the greatest improvement due to their heavy volumes and large notional amounts. However, real-time information in itself does not have any benefits unless it is used effectively and across multiple functions within the organisation.

Making use of real-time nostro data

Several examples where a bank can make use of real-time nostro data are:

  • Online reconciliation: Reconciliation is currently based on end-of-day statements matched against batch-run general ledger entries and usually takes place settlement day plus 1. Reconciliation times could be reduced by up to one day with real-time information. 
  • Exception management: Errors could be identified and resolved more quickly, enabling issues such as fraudulent transactions to be dealt with more promptly. Any missing funds could be chased during the actual settlement day rather than a day later and payments could be checked in real time. This would in turn, reduce costs.
  • Liquidity management: With the ability to track cash movements intra-day across all nostro accounts, banks could better forecast their cash positions and base their funding requirements on their real positions rather than estimates. Intra-day information would eliminate the risk of unnecessary overdrafts or uncompleted transactions due to a lack of balance visibility and reduce the volume of liquidity reserves required. It would allow the concept of ‘just-in-time’ liquidity to be implemented, enabling banks to not only accurately gauge how much money is required in each account at any given point, but also ultimately enabling them to free up significant funds for other investments.
  • Trading desks: Understanding in real-time which customers’ trades have completed their settlement would enable settlement risk positions to be updated online immediately. This would free up credit lines more quickly and in turn increase the opportunity for extra trading.
  • Working capital: Capital has become a much more important topic within the banking world as institutions seek to reduce allocations to the business and utilise their resources more efficiently in order to increase their profits. Online nostro reconciliation would enable risk and treasury teams to monitor and minimise both intra-day and end-of-day overdraft positions, and as a result reduce the regulatory capital requirements.
  • Operations: Real-time knowledge of when trades are settled would enable operations teams to automate their delivery versus payment processes (DVP – where funds are not released until the payment by the counterparty of the trade is received) and even increase their control over this activity to cover more of their customers.
  • Open all hours: There are moves within the retail world to operate bank accounts over 24 hours. There is the possibility that this will overflow into the treasury world, making the case for online reconciliation even stronger.

While the concept of real-time reconciliation is not a new one and the benefits are already widely accepted, implementing it into the world of treasury is not proving easy.

However, the advancements in distributed ledger technologies (DLT) are presenting great opportunities to address the technological complications and build solutions that can perform online nostro-reconciliation in an effective way.

There are several initiatives in the market currently looking into the application of DLT for this purpose. Two notable initiatives include a proof-of-concept run by Swift involving 28 banks, and a separate pilot project for interbank reconciliations being run by the Italian Banking Association (ABI) with a group of 14 lenders.

Embrace the wave of technological advancements

There is no doubt that technology is advancing, and banks and other financial institutions must embrace these changes if they are to avoid falling behind. If treasury is to move with the times, then real-time nostro reconciliation should become part of the wave of technological advancements.

Brickendon’s highly-skilled and experienced consultants have the expertise to help you implement a digital solution that gives your treasury function detailed information that can unlock savings by changing funding strategies and fine-tuning capital collateral accordingly. The potential is significant.

We are an award-winning transformational consultancy with the drive, skills, knowledge and experience to help you change your business for the better. Let us show you what we can do.