”The notion of ‘if it isn’t broke, don’t fix it’ is no longer tenable in a fast moving and interconnected banking world marred by uncertainties”, writes Alex Knight. In an opinion piece for Traders Magazine, the head of EMEA for fintech firm Baton Systems argues that real-time payment reconciliation is no longer just about operational efficiency, but a matter of systemic and regulatory resilience.

Urging financial institutions to “acknowledge the inherent flaws in outdated processes and embrace technological advancements to stay ahead of the curve”, Knight calls for a more “proactive approach” to payment reconciliation.

He quotes figures from a report by intelligence firm Research and Markets, which reveals that the banking sector currently makes up about 20 to 25 per cent of the world economy. Because of the sector’s size, serious ramifications could occur from “the prevalent use of outdated post-trade processes across capital markets”.

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“If a full-blown crisis emerges, counterparties can’t determine how exposed they are, because they lack the critical information needed to identify which payments have been sent and received so far that day,” Knight says.

Not just a tech issue

The delay in payment reconciliation isn’t only an issue of technological obstacles, but also one of common practice. “The existing practice of initiating the reconciliation processes only at the very end of each day (once the US dollar market is closed), leaves institutions operating in the dark regarding their exposure,” writes Knight. “The inability to ascertain real-time payment status not only undermines confidence but also perpetuates a cycle of uncertainty, compounding the risks for all parties involved.”

When faced with threats of liquidity crunches, firms may “take a cautionary approach and withhold outbound payments to the at-risk counterparties”. Funds will only be released when reconciliation confirms which counterparties are safe to proceed with – a process that is delayed by at least a day without real-time reconciliation.

Knight thus concludes that “real-time payment insight is non-negotiable”. “This proactive approach not only averts potential defaults but also fosters market stability by honouring commitments and mitigating systemic risks.”