Blockchain Unlocks Huge Benefits for Reconciliation
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Blockchain Unlocks Huge Benefits for Reconciliation

The current process used for reconciling inter-entity accounting data and trade transaction records proves to be inordinately arduous, complex, costly and time-consuming. Blockchain technology can be effectively leveraged by financial companies to streamline their reconciliation processes and make them a lot more efficient.

Blockchain is an emerging technology that offers a new approach to data management and sharing. It offers a robust solution to inefficiencies which prevail in supporting the redundant processes. Using Blockchain, the market participants can work in real time on shared common datasets. As a group of independent parties work with their universal data sources, automatic reconciliation happens simultaneously among all the participants. The transparent and real-time data availability offers immense benefits to trade and settlement operations and perfect accounting data reconciliation, thereby eliminating any potential for disputes among the counterparties and the banks involved. Effective account reconciliation would enable companies to proactively identify and resolve issues before they result in misstatements of financial accounting and reporting records, often leading to substantial write-offs. Since Blockchain maintains an automated audit transaction trail, it reduces manual processing needed for final data validation and reconciliation.

What some of the influential research, advisory and consulting firms have observed about Blockchain is instructive and is worth reflecting on. As per a report by a leading research and consulting company , DLT (Distributed Ledger Technology) could eliminate inefficiencies arising from extended reconciliation timeframes, connecting disparate stakeholders, the risk of documentary fraud and limited transaction visibility.

As per another leading advisory firm , companies are showing substantial interest in creating POCs by using Blockchain to reengineer core accounting and reconciliation processes.

A professional services firm on the other hand, estimates that close to 50-100 finance team work days are lost each month for many banks and insurers in reconciling differences. Adopting a shared ledger approach will help greatly by enabling all the parties concerned to identify the common transactions at source so that data is simultaneously published for all thereby significantly reducing the number of reconciliations required.

Blockchain technology also offers the possibility to make complete remittance information available to all the parties involved in transactions. This reduces the time and manual effort needed for payment reconciliation which can now be completed in minutes versus days. How could you make this work in practice? A lot of planning and reinvention is needed in order to solve the complex reconciliation challenges.

Global Entity Reconciliation Plagued by Challenges

The primary challenges for reconciliation arise due to missing information, transaction mismatch and fragmented communication among the various entities and processes doing the reconciliation. When public entities are under quarterly pressure to publish their financial results under strict timelines, they choose to carry forward any remaining unreconciled items to the next period. Over time, this can accumulate to cause a material mismatch in the participating entities. The accounting errors, duplication of transaction entries, and adjustments due to cancellation of transactions can further complicate the reconciliation process.

The current reconciliation process varies quite a bit among the counterparties and entities involved as all don’t use the same process or technology. If a few of them are still using the old time-consuming processes, it can protract the reconciliation process for all.

Finally, though banks have been exploring a common, standardized reconciliation process where each party can perform the similar set of activities in real time and in-sync, this has not yet been achieved. The challenges continue to remain with the repercussions of ballooning costs for reconciliation.

Effective management of their reconciliation processes and technologies will enable firms to identify the risks and foresee errors before they lead to mismatches in their financial statements. Current solutions are only compensatory measures and they eventually end up being expensive and time-consuming in the final reckoning.

  • Blockchain technology-based solutions distribute common financial information to all participants during any remittance. This enables the participating entity (node) to download all relevant information for matching their payment information directly with the information received from bank.
  • Blockchain enables a common ledger within all the participating entities which will avoid undesired tasks/ records during reconciliation. API exposed by the Blockchain system can be used by all other applications and entities while doing cross-matching during reconciliation. The digital signature can help in audit by keeping a precise record of any change made in the Blockchain network.
  • The data storage capability of Blockchain is shared across all the participating nodes in real time so that transactions captured in the transactional ledger are shared downstream with all the other nodes. This makes real-time reconciliation a distinct possibility.
  • Another approach is to use the Ethereum based solution which encrypts the specific reference data for each entity using hashing. The source data is stored and available for all the participating nodes while only the hashed data is submitted to the Ethereum Blockchain. This is best implemented using private Blockchain and Microsoft Azure cloud. For example, the smart contracts programmed in Solidity, will reconcile the data against consensus and the results are made available to each participating node in a user-friendly web page. The participating nodes will have the ability to view their own data and detect any anomalies in real time and correct them.

Our Banking and Capital Market Center for Excellence helps clients achieve key business objectives through their deep industry experience and 360-degree view using emerging tech trends like Blockchain.

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