Real-time payment reconciliation reduces FX settlement risk by improving the banks’ visibility of their settlement exposures, avoiding the danger of paying out to counterparties which are unable to meet their own obligations. Baton’s Core-Payments™ solution brings real-time connectivity and visibility to the settlement management process.
A challenge faced by many banks is the lack of real-time visibility into their settlement exposures at a counterparty level.
Global time differences mean that end-of-day account statements sent on value date in North America do not reach Asia until the following day. Payment reconciliations, therefore, are necessarily made value date +1. This is the earliest that banks can be sure whether or not a counterparty has met its payment obligation unless they run a manual search/match process which can prove highly labour-intensive. Sometimes a bank may not be aware for several days, or even weeks, after value date that a payment has failed, and may have been continuing to make payments in ignorance to a counterparty which has failed to meet its own obligations.
The risk of paying out to a counterparty which is failing (or has failed) or is breaching limits is therefore very real for market participants, and the repercussions are not only financial but also reputational and regulatory.
In the absence of robust technology allowing real-time payment reconciliation, legacy reconciliation processes are still in use, with firms – including top-tier banks – needing to rely heavily on manual intervention from remote teams in order to identify problems or track specific payments.
The inability to reconcile payments in real time has a firm-wide impact. For the treasury/funding desk, it means the inability to accurately update balances and manage funding. For operations teams it means significant manual input to the payment reconciliations process, leading to inefficiencies and a likelihood of human errors. In the event of a flash crash or geopolitical upheaval such as the Russian invasion of Ukraine, manual intervention can extend as far as the checking of transactions with individual counterparties before a decision is made about releasing funds. But the impact is not only felt by the middle and back offices: continuing to pay a counterparty which fails to meet its own obligations opens up huge settlement risk (financial) and control issues, quickly becoming a front office problem, not to mention the regulatory challenges where a bank has not displayed strong controls over its payment processes.
“The inability to reconcile payments in real time has a firm-wide impact. For the treasury/funding desk, it means the inability to accurately update balances and manage funding. For operations teams it means significant manual input to the payment reconciliations process, leading to inefficiencies and a likelihood of human errors”
The benefits of real-time payment reconciliation
In recent years, top-tier banks have been working towards real-time payment reconciliation with a view to improving their treasury function and predicting actual versus projected payments. However, the benefits extend beyond cash management and operational efficiencies.
Firms with the ability to reconcile payments in real time are able to use the information from the reconciliation process to create conditional, or linked payments, also known as Payment-on-Payment (PoP). In today’s competitive and client-centric environment, this allows banks to service clients with lower credit ratings or no credit ratings at all, such as fintech companies or start-ups. Traditionally it has been difficult to persuade bank risk managers to accept clients with this kind of credit profile. This reluctance can be addressed by utilising real time payment reconciliation and putting business rules in place that dictate that a client will only be paid on receipt of a particular payment from them.
That said, there will always be occasions where a bank’s obligation to such a client, from an FX perspective, might be earlier than the client’s own obligation. In those instances, workflows can be put in place dictating that payment can be released in accordance with pre-approved or predetermined thresholds or limits (with such approvals retained within an audit trail) for these clients.
“Traditionally, it has been difficult to persuade bank risk managers to accept clients with this kind of credit profile. This reluctance can be addressed by utilising real time payment reconciliation and putting business rules in place that dictate that a client will only be paid on receipt of a particular payment from them”
So what do banks need?
Simply, banks need to invest in robust technology to enable real-time payment reconciliation and to link the information to cashflows, allowing not only for funding updates but also for the implementation of workflows based on business rules and logic. These will further improve the efficiency of their relationships with certain types of counterparty and allow them to provide a value-added service to their corporate clients by providing payment visibility.
Having a real time view of their funding position for each currency, particularly for those which are very illiquid or costly to fund close to cut-off is enormously beneficial to banks. It makes it possible to follow-up proactively and automatically with counterparties to ascertain whether payment will be made before cut-off and, if not, to fund while the market still has liquidity for that particular currency. Without this real-time information, funding can become an expensive decision to be made close to market cut-off in order for the bank to avoid failing its obligations to its other counterparties.
“Having a real time view of their funding position for each currency, particularly for those which are very illiquid or costly to fund close to cut-off is enormously beneficial to banks”
The Baton approach to Real-time Payment Reconciliation
Baton Systems offers an intelligent, intuitive and secure approach to real-time payment reconciliations. Its Core-Payments™ solution offers a suite of tools that integrate with the banks to consume settlement obligations and relevant SWIFT messages. Core-Payments reconciles inbound and outbound payments as they are received and sent. Using this real-time data, Baton’s smart workflows check, hold or release payments according to configurable business rules.
By using Core-Payments, firms can avoid ever breaching limits or paying out against a failing counterparty. Nostros can be managed more effectively, avoiding overdrafts or failed settlements. Manual input is significantly reduced, leading to fewer errors and greater productivity.
“Core-Payments reconciles inbound and outbound payments as they are received and sent. Using this real-time data, Baton’s smart workflows check, hold or release payments according to configurable business rules”
Focus on delivery
While some banks have begun in-house work towards faster payment reconciliation processes, they have yet to fully utilise the data to create workflows and configure business rules which can be applied to the process. Baton’s rules-based framework for using real-time data, reconciling payments, and creating custom workflows, accelerates time to market and removes limitations and risk.
Core-Payments is highly scalable and can be integrated seamlessly with legacy systems and processes. Firms are not required to undertake expensive and risky ‘rip and replace’ projects, although it should be noted that Core-Payments provides a pathway for a full technology upgrade.
By adopting Core-Payments to facilitate real-time payment reconciliations, banks are able to reduce operational and settlement risk, better manage funding and improve workflow efficiency, all of which benefits not only individual firms but the market as a whole.
“Baton’s rules-based framework for using real-time data, reconciling payments, and creating custom workflows, accelerates time to market and removes limitations and risk”
I hope you found this blog useful in explaining how real-time payment reconciliations and conditional/linked payments can give banks control over their payment and settlement processes.