Reconciliation for Securities: Vendor Solutions and the Impact of AI

Executive Summary

 

Reconciliation is the process of comparing two or more sets of data to verify they agree with each other. It typically involves six distinct steps: data loading, matching, break classification, research, resolution, and reporting.

Reconciliation is a crucial part of securities processing. Despite this, there has been chronic underinvestment in reconciliation software in recent years. Many market participants had assumed that blockchain technologies would obviate the need to perform reconciliations entirely, that there would be a distributed ledger accessible to all and that disagreements over positions or transactions would be a thing of the past. Market participants, however, have slowly come to realise that this is not the case and investment in reconciliation software has slowly started to increase again.

To address this lack of investment, software providers have increasingly started marketing their solutions as intelligent process automation (IPA) tools, purporting that artificial intelligence (AI) has revolutionised the world of reconciliations. IPA, however, does not always play a role in the different steps of reconciliation and where it does, it does not necessarily live up to the overhyped promises made regarding AI. Instead, significant levels of manual input are still frequently required, and basic rules-based systems are often sufficient.

There are two submarkets in reconciliation software:

  • Securities reconciliation, which is focused on asset managers, broker dealers, custodians, etc.
  • General ledger reconciliation, which involves cash reconciliation for banks and corporations.

About US$900 million is spent annually on general ledger software solutions, significantly more than securities reconciliation at US$439 million.   Interestingly, software vendors in the general ledger space do not place the same importance on buzz words such as “AI” or “IPA”.

Leading vendors in the securities reconciliation market include: Broadridge, Duco, EZOPS, FIS, Fund Recs, Gresham, SmartStream, SS&C and many more. Few solutions on the market can complete all steps of the reconciliation process and market participants must frequently piece together solutions from different providers.  

 

Compared to other parts of the fintech sector, acquisitions in the securities reconciliation space are rather limited, apart from Gresham, which has made multiple purchases in recent years, and Duco, which has received several investments.

There are multiple opportunities for reconciliations in the future, including:

  • Reconciliation for regulatory reporting
  • An unaddressed market for smaller players, who cannot afford the high implementation fees levied by reconciliation software vendors
  • The creation of a reconciliation software which can process all six steps of the reconciliation process, which could be achieved through M&A

Figure 1. Reconciliation market growth

Source: Opimas Analysis

 

 

 

© OPIMAS, 2022. All Rights Reserved.