Alex Knight, Head of EMEA, Baton Systems
It's hard to think of any other industry where speed and accuracy are so important. It is therefore even more difficult to unravel why the banking sector still relies on slow and outdated processes for payment reconciliation.
Next month marks 50 years since the sudden collapse of Germany's mid-sized bank Herstatt due to its involvement in risky currency speculation. The bank received payments in various currencies from counterparties in different time zones, but was unable to make corresponding payments in other currencies before being shut down by rulemakers.
The problem is that, 50 years later, the importance of the banking sector in the global economy has increased. By most estimates, the banking sector accounts for around 20-25% of the global economy (Source: Research and Markets – Financial Services Global Market Report 2021: COVID-19 Impact and Recovery to 2030). Therefore, any stress on the system can have serious ramifications. If a globally systemically important bank, such as Credit Suisse, is identified as facing liquidity challenges, as was the case last year, it may adjust payments more than a day after settlement. , outdated post-trade processes prevalent across capital markets can have serious implications. Ripple effect. This means that in the event of a full-blown crisis, counterparties will lack the critical information needed to identify which payments have been sent and received up to that date, and to what extent they are at risk. This means that it is not possible to determine what is being done. Situations similar to what happened to Credit Suisse are happening to smaller financial institutions, highlighting the urgency of a significant shift to real-time payment reconciliation systems. Failure to act will not only put individual companies at risk, but will also propagate systemic risks that could lead to catastrophic outcomes reminiscent of past financial crises.
When market speculation is under the clear threat of a liquidity crunch, financial institutions naturally seek to protect their interests. Payment management is in place to reduce payment risk, but it is piecemeal and in some cases manual. This decentralized approach is often controlled at the individual business level, fostering inconsistencies, potentially introducing loopholes for errors, and creating financial, operational, liquidity, and reputational risks. Moreover, lack of monitoring can cause future system instability and amplify the severity of the situation.
At the heart of the issue is the timeliness and accuracy of payment adjustments. The existing practice of initiating the adjustment process only at the end of each day (after the USD market closes) leaves financial institutions operating in the dark regarding their exposures. Although this delay may seem harmless, it can have disastrous effects, especially in times of economic stress. Not being able to see real-time payment status not only erodes trust, but perpetuates a cycle of uncertainty and exacerbates risk for everyone involved. In certain scenarios, banks may use manual piecemeal controls to hold all withdrawals. However, there is the dilemma of identifying the payments he receives throughout the day from counterparties, hampering his ability to properly release funds. Without real-time adjustments, companies naturally take a cautious approach and ensure that any trades are safe to proceed with adjustments (which, as outlined above, are typically delayed by at least a day). We may hold outbound payments to risky counterparties until verified.
It is clear that real-time payment insights are non-negotiable to address this pressing, and frankly long-standing, concern. Integrating business, risk, finance, and operations requires a seamless flow of information without manual intervention or lag. By adopting an automated, real-time adjustment process, agencies can provide decision makers with the information they need to navigate turbulence with confidence.
Imagine a scenario where payment reconciliation happens seamlessly and continuously throughout the day. With real-time information, financial institutions can accurately assess exposure and make informed decisions regarding the release of outbound payments. This proactive approach not only avoids potential defaults, but also promotes market stability by honoring commitments and reducing systemic risk. However, achieving this transformation requires a break from complacency. The idea that “if it ain’t broke, don’t fix it” no longer holds true in a rapidly changing and interconnected banking industry marred by uncertainty. Financial institutions must recognize the flaws inherent in outdated processes and embrace technological advances to stay ahead of the curve.
At the end of the day, the need for real-time payment reconciliation is more than just operational efficiency, it's a matter of system and regulatory resilience. By prioritizing the implementation of automated, real-time reconciliation systems, financial institutions can meet their obligations, reduce risk, and contribute to more stable and orderly markets. Now is the time to act. The stakes are too high to delay.
