01 June 2005 Features

 

Looking for a difference

If you can’t automate the last 10 per cent of exceptions, then you can at least turn it to your advantage. David Bannister looks at how banks can gain competitive differentiation

There is still a lot of work to be done to automate the exception handling process, but everyone knows that the last portion will be impossible — there will always be exceptions, it’s in their nature.

“You can’t get rid of exceptions, but what you will see are banks starting to use their exception management process as part of their differentiator in the market,” says Charles Banister, director, Global Custody, Citigroup Global Transaction Services EMEA.

Chris Winter, head of operations JPMorgan Transaction Services is in broad agreement. “We absolutely see this as a differentiator — when a client comes in and says we want this, generally we’re going to say yes.”

Winter says that client requests are one of three common situations that create exceptions in the normal run of business, other than failures.

“There is the classic proof-of-concept exception where you’ve got an idea and you’re testing the waters, so you’re not going to automate it. These are generally well-documented and you’re going in with your eyes open,” he says.

“Then there are the systems or risk exceptions, where you also have your eyes open, and frankly you don’t want things to go straight through because you need that extra level of integrity. The third is where clients are driving it, when they’re asking for extra services or different twists to a product. These are probably the ones where you’ve had the documentation at the last minute.

“Anything other than those are holes in your original design, and of course none of us ever have those,” says Winter.

It is the fact that a lot of the spade work has been done in automating the exceptions process that means the focus can go on adding value in the processing chain.

“When you’re looking at automation, banks have taken the biggest volumes that are the easiest to automate. The first thing was typically instruction processing — the old MT52X messages — and taking those in, processing it through the system down to the market without touching the sides,” says Banister. “That capability has been around in the industry for 15 years plus now. There have been inroads made in other parts of the processing — from instructions on settlement processing and the automation of confirmations coming back from sub-custodians.”

This has not been an even success story, depending on the complexity of the problem, obviously. “When you look at more complex parts of securities processing, then automation across the industry has had varying success rates. The 80/20 rule applies — you can quickly get to 80 per cent, but to get to 85, 90, 95 per cent it is obviously a challenge. For instructions and settlement in most large organisations we’re seeing 90 percent plus STP rates for settlements,” says Banister.

“When you come to things like corporate actions, the industry now is probably where settlements were 10 to 12 years ago. There have been successes with some types of corporate action or with some parts of the cycle but there are still inroads to be made,” says Banister. “If you asked any large player what percentage of MT565 [Swift corporate action] messages they can take into their system automatically, apply, update and prepare an instruction down to market, I’d be pretty surprised if anyone is anywhere near 80 per cent at the moment.”

JPMorgan’s Winter cites similar figures: “Fundamentally, we’d expect 93 per cent STP for payments on the high-value cross-border wires — for the ACH or BACS type of product it’s more like 99.99 recurring per cent. In the securities world, it’s probably in the mid 80 per cent.

The trick is to learn to live with it, agrees everyone.

“What you do once a trade has failed — other than just give an update to the client — is where you can begin to differentiate your service,” says Banister. “Any of the big banks can automatically apply a fail reason and send it to the customer without anyone touching it. If you talk about exception handling as one of the key differentiators in terms of how you portray yourself as a strong provider, it’s not how well you manage your STP rates, it’s how well you manage when it’s not STP.”

According to Winter, this is at the heart of the matter and affects how banks organise themselves to take advantage of the opportunities.

“In order to make it work, you have to ring fence it so that the work is flowing to a group of folk who are adept and trained on the exceptions,” he says. “Out of that come the workflow tools, which in varying degrees are the cornerstones of making the decision of whether it’s worth going for full automation, living in a manual world or coming half way to a “manumatic” state, where parts of the process are automated over time.”

In turn, this is leading to the development of a new role for what in the past has been seen as something of a thankless task, regarded by many as boring and repetitive. This is changing rapidly, leading to a demand for skilled staff to move into the role — a process that will be something of a cultural shift.

“One of the trends that we see is that the dull jobs have all been automated,” says Winter. “The industry has been successful in automating the run-of-the-mill stuff, so what we’re left with is what used to be called middle-office — and that is where most of the value-added is. What we’re finding is that the job has become more interesting.”

There are a number of benefits that stem from this, he says. “It cuts down on the basic churn, because no-one wants to do a repetitive job. The industry has to keep upskilling in order to retain people.”

Citi’s Banister says that the automation of the exceptions process, as well as the increase in STP rates has contributed to this. “What you find now is that most transactions, provided the data’s been formatted and is in the right place, go straight through: the systems are there to highlight what’s wrong. The staff looking at exceptions typically have to be higher skilled than they were 10 years ago, because they have to diagnose what’s wrong, and because of the complexity of formatting of messages and the range of services being a lot broader. Now you need specialists to diagnose and identify what’s gone wrong and how to correct it.”

Fortunately, consolidation in the industry has created a labour pool from which this resource can be drawn. “Realignment of the workforce means that you are left with the real experts,” says Banister.

The flipside of this is the classic Turkeys voting for Christmas situation. “STP is a job killer,” says Ralph Silva, senior analyst, European banking & payments at TowerGroup. “Technology isn’t an issue at all. By their nature, exceptions are unusual — if I know what the exception is, it isn’t an exception — so you need the most experienced people to be looking at them, and how do you motivate those people to deal with the crap?”

Silva cites one European bank where, as a result of trade automation, management is looking to remove 300-odd proprietary traders and replace them with just a handful, creating a very highly skilled pool that could be moved to new areas if the job culture issues could be overcome. Not to mention the cost of change.

Even as these changes are taking place, further developments are continuing in improving STP rates and in preventing exceptions from occurring in the first place. “When you’re developing systems, you know where your break points are and that’s where you build your exception management: this is a fairly mature industry, and we know the best place to capture an exception, fix it and speed it along, that’s how our systems have evolved over the years,” says Banister. “Now everyone wants to fix things upfront, which is where enrichment at an Omgeo or FIX level comes in so that from trade execution you’re enriching data with standing instruction data and you don’t get issues downstream.”

Which, logic suggests, means that the new breed of specialists handling the exceptional exceptions will need to become ever more skilled for some time.