7 Key Considerations When Choosing a Reconciliation System
By Varun Loomba, Strategic Relationship Executive, Duco.
Reconciliation software has been around in various guises for many years. Vendors and their solutions have come and gone; the market landscape is constantly evolving with ongoing acquisitions, consolidation and product launches.
If you are looking for a new reconciliation system, the choice can seem overwhelming. How do you differentiate between a vendor that has developed and supported a reconciliation solution for 20+ years with one that has been around for a shorter time but perhaps doesn’t come with legacy baggage?
Consider this: according to a recent market survey by Aite Group, reconciliation remains excruciatingly difficult. It takes firms nearly 18 days on average just to set up one simple reconciliation between two systems, but this jumps to nearly 74 days for a complex rec. (Source: Trends in Reconciliation Technology, September 2019)
Choosing a system that can help reduce that burden is clearly beneficial. So here’s a handy guide to reconciliation system evaluation that will help you quickly establish key points of differentiation – to determine what’s right for your business.
- Cloud vs installed software
With the majority of financial services organisations now starting to look to a cloud-first strategy, it makes sense to put this near the top of your selection criteria. By their nature, cloud-native systems require minimal installation, meaning they can be up and running almost immediately. Similarly, there are no hardware costs, as these are borne by the vendor. The systems are also easy to update, which helps avoid the major, potentially disruptive, upgrade projects that beset users of installed software.
Because of this, cloud-based systems tend to offer greater innovation opportunities, with new features added regularly – in some cases as often as every month. This can speed up the implementation of regulatory changes and improve responsiveness to dynamic market developments.
With the advance of cloud-based processing power and offline capabilities, there are comparatively few advantages of installed or on-premise software over cloud systems. Firms often cite security and storage of sensitive customer details as reasons for their reconciliation data to reside behind a corporate firewall, but cloud-based reconciliation systems can be just as secure, if not more so. For example, access can be governed by multi-factor authentication and data protected using the strongest encryption.
Practically every system will claim to be both flexible and scalable but close scrutiny should be paid to these two areas. They will almost certainly have an impact on the timescales required to deploy the system.
Look for a proven track record in a fast but accurate deployments that meet the customer’s requirements and expectations. Cloud systems may have an edge here as they usually offer the fastest path to securing value and thus generating ROI.
Find out how long it will take before you can start building reconciliations. With value and ROI increasingly being expected within ever shorter time horizons, you want a system that can start showing value from day one and ROI within the shortest period.
How easily can you scale up to add more volume, or different types of reconciliation? True scalability is rare, but it will help determine if the solution is suited to cater to the specific needs of various business units, no matter the complexity of reconciliations or size of the organisation.
- Overcoming poor data quality
In an ideal world, data that is to be reconciled will be accurate, in the right format and readily available. However, the reality is that data is often stored in disparate locations such as numerous spreadsheets, accounting systems and legacy platforms. The available data can come in a vast array of formats and may not be necessarily be complete or accurate.
Integrating a reconciliation solution with these systems and data sources traditionally represents one of the biggest challenges (and therefore risks) in any reconciliation project. Look for a system that will minimise the time spent on extracting, transforming and loading data (with some reconciliation systems you can do away with this step completely). This frees up budget and time to spend on migrating additional reconciliations onto the platform.
The most advanced reconciliation systems use machine learning (ML) to train the matching algorithms to look for and predict patterns that can improve how data is matched. This shortens the time required to onboard new reconciliations and significantly reduces the effort needed to deal with poor quality or unstructured data.
- Point solution vs Swiss army knife
It sounds obvious, but can the reconciliation system handle your specific instrument or transaction requirements within the time required for effective financial control? Can the platform be deployed across the enterprise to manage both financial and non-financial reconciliation tasks?
Beware point solutions that were built for a specific function, for example cash or custody recs, and require extensive IT work to cope with complex requirements, such as derivatives, inter-system reconciliation or mandated regulatory controls. The system you choose should be able to promptly handle any kind of reconciliation challenge that crops up.
- Smart workflow
Reconciliation systems traditionally flag unmatched exceptions which are then managed through automated workflow or a dedicated exceptions management solution. But can the reconciliation system go one step further and proactively manage exceptions rather than reactively responding to them?
By applying machine learning and sophisticated matching logic, certain advanced reconciliation systems are able to analyse and predict data patterns, both to improve match rates and streamline the workflow process, while removing re-investigation. This ensures the reconciliation team is working on just the high-value tasks, rather than being inundated with repetitive work.
- Price model
Most vendors will charge an annual license fee for the system, plus maintenance, support and professional services on top. When looking at pricing, it’s important to consider the Total Cost of Ownership (TCO) of the reconciliation system.
For example, how much professional services will be required? Is it an easy-to-use system requiring very little consultancy work? Or will the cost of the license ultimately be dwarfed by the services fees? Similarly, how much is the hardware, maintenance, and support of the system going to cost? With cloud-based systems, this is usually much lower, so it’s vital to do the necessary due diligence. Speak to the vendor’s reference clients. Did they end up spending big on ‘extras’?
Furthermore, watch out for pricing traps, that might restrict the instruments or type of financial messages that you can reconcile. This can limit your ability to add new reconciliations onto the platform which can hold you back from achieving optimum ROI.
- Robust solution
It goes without saying that you want a system that is robust. It needs to be reliable and proven as it will form a key part of your architecture going forward. There are three considerations.
- What process oversight and enforced controls does the vendor provide?
- What disaster recovery and failover processes are in place?
- What quality of support can you expect? Are trained implementation staff available to visit onsite?
Support has to match your planned usage. Depending on when you will be using your reconciliation system, you may need out-of-hours support or even a ‘follow-the-sun’ capability. The latter is critical if you have global teams collaborating across multiple geographies and time zones.
We live in a world governed by SLAs, so look for a proper ticketing system and well thought out support process, which will give you timely assistance on urgent issues and still find time to help with you with general ‘how to’ advice. After all, no-one likes a vendor that responds to a support call with the offer to buy more consulting days!
There are many different factors that you need to analyse when choosing a new reconciliation system. Navigating the differences between different systems is not an easy task, but if you take into consideration some of the points raised above, you will be well-positioned to benefit from the latest reconciliation innovations and technology.
For a free review of your current reconciliation systems and practices, simply contact us.