Cash & Liquidity ManagementPaymentsSTP & StandardsThe Exception Becomes the Rule – Automating Exception Processing

The Exception Becomes the Rule - Automating Exception Processing

With an upsurge in centralization and a greater focus on cost savings and efficiency gains, automated exception management is rapidly becoming the new financial service accessory of the day. As revealed in SunGard’s annual research series conducted at the end of 2003, firms estimate a 30 per cent drop in transaction costs since 2002, due to automated exception management. Survey responses from 2002’s research project showed that an estimated 81 per cent of the market had automated the identification of exceptions (the first step to automated exception processing) while only 30 per cent had fully automated exception management – a number that was expected to rise to 50 per cent by 2004. As seen from the 30 per cent reduction in exceptions costs – it’s clear that this prophecy is being fulfilled.

Respondents estimated that current exception rates for securities account for about 5 per cent of transactions, and for 3 per cent of FX transactions. When asked to predict the change in exception rates over the next two years, 69 per cent of respondents believed that exceptions rates would fall. Anecdotally, respondents attributed this improvement to a combination of top management’s prioritization of operational risk management, demands for better analysis of the causes and sources of exceptions and implementation of automated exception processing technology.

The Business Case

So why are firms starting to implement a framework for the automation of exceptions? It would appear that they are convinced by the sheer mathematics – survey respondents claimed that while exceptions represent about 4 per cent of transactions, they are eating 18 per cent of transaction profits. That is a compelling business case for any technology to address. A recent TowerGroup report emphasized the characteristics required for new technology: solutions must be re-usable within the organization, they must be standardized and must provide a fast ROI. As firms increase focus on technologies that provide these requirements, exception management solutions are at the top of the list. Not only will a well implemented solution promote cost savings, it will also improve operational efficiency, it will reduce risk – both financial and operational and will provide the firm with the ability to expand service offerings, helping them achieve customer service excellence.

The Role of Centralization

Last year’s survey revealed that an estimated 25 per cent of the global top 500 financial institutions have standardized on a single, enterprise-wide technology platform to manage exceptions; and that 35 per cent have set up processing hubs to provide centralized transaction management services for their branches and lines of business in one or more of the major regions of the globe. Why centralize? Survey respondents designated improved control and improved cost management as the key drivers. As more and more financial services firms follow suit, they will require solutions that can stand up to large transaction volumes across their different lines of business, each of which has distinct requirements for processing exceptions. The solution must be flexible enough to automate exception management across transaction types, while still applying the best practices and knowledge capital that exist in the people who research and resolve exceptions at the firm today.

Real-time Information Trends

An exception management solution must also deal with the newly available stream of real-time information. As more and more information is available in real-time, successful firms are leveraging their business solutions to make use of this information. Some are providing Web access to customers for account information, including the ability to see their account balances in real-time and track the transactions that are moving across their account. Other firms are using real-time information to track a transaction throughout its lifecycle. They are comparing data that is available at different stages in the transaction lifecycle to enable them to better predict the likelihood of a transaction settling, and as a result, make better funding decisions based on that information.

Similarly, firms can leverage real-time information in their exception management models – the ability to detect an exception before it settles is a key benefit to automating the process. Pre-settlement exception management is important to financial services firms today. Survey respondents concurred that more exceptions are occurring and are thus detectable earlier in the transaction lifecycle, with 55 per cent of exceptions occurring pre-settlement, while 45 per cent are failing post-settlement. By managing a transaction throughout its lifecycle, from inception through to settlement, firms are able to predict when an exception will occur and are often able to prevent the transaction from becoming an exception before it settles. For the 55 per cent of exceptions that are said to fail pre-settlement, this is a significant cost and risk saving.

The Technology

As vendors are releasing more robust and scalable solutions, firms are implementing these transaction processing applications across the enterprise. They are leveraging a single system across their lines of business and are able to execute tighter control with standardized processes and consolidated reporting. Firms are seeing consistent and accurate transaction processing and exception management across the whole of the organization, and are replacing redundant implementations with a single framework. This reduces their vendor licensing costs as well as reducing the resources and overheads required to maintain multiple implementations. The key features all firms must examine are a solution’s ability to scale to their business; to be flexible enough to handle different business requirements; and to leverage real-time information as a business benefit.


As global firms realize the need for control across the organization and visibility to their transaction processing, they are implementing systems that can stand up to their high volumes and multiple lines of business. As more and more firms follow the trend toward centralization, technology that supports exception management across the enterprise will be critical to success.

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