This is the first of a two-part series.

Reconciling cash accounts is a vital function for corporations. These reconciliation services are also essential for banks, particularly when it comes to developing additional revenue in connection with commercial accounts. In order to understand where these services are today and where they are going, we first have to explore how they came about in the first place.

Back in the middle of the last century, the volume of checks that were being written and cashed exploded. Many companies struggled to keep up with transaction volumes and balance their checking accounts. That was when banks stepped in and began offering reconciliation services to commercial customers. At first, the banks offered these services free of charge as a consideration for other bank business, such as idle deposits and commercial loans.
During the late 1970s, interest rates skyrocketed to the mid-teens. This caused cash management to become a critical treasury function. Banks realized they had a valuable data store, as well as a monopoly on payment processing to support this analysis. So, bank cash management services were born, with account reconciliation as a key component of those services. Banks then started charging fees for these reconciliation services, and credit-based commercial relationships were no longer an integral part of the deal. Because of their value, non-credit cash management services were able to stand on their own.

That brings us to today, where these services are still provided for a fee. However, now that interest rates have fallen so low, two questions arise:

1. Why do companies still need these services?
2. Why are they still paying for them?

To answer these questions, we can thank new technology for sustaining—and even expanding— these services. The need for these crucial functions allows banks to continue to charge companies for non-credit cash management services. But, as usual, the technology that has allowed bank reconciliation services to grow and flourish can be both a blessing and a curse.

Let’s start with the good side of the technological advances in bank reconciliation services. Originally, no electronic communication channels existed between banks and customers. Today, online banking has become a staple for many companies. To that end, two of the great technology advances of our time—the personal computer and the Internet—have enhanced bank cash management services. Everything is better, faster and cheaper. Banks can provide 24/7/365 online access to the latest data, including transaction initiation.

Further, almost every commercial customer has an accounting system that can create a transaction file for transmission to the bank as frequently as desired. Checks can be deposited without ever going to the bank. There is even a plan in the works to manage bank relationships electronically—the last of the really painful bank processes. It looks like we are headed for a perfect banking world.

And now, here’s the not-so-good side: this new technology has made it easy to create and modify transactions. It has become easier for anyone to print checks—all you need is a sample signed check and some MICR ink. Moreover, it’s not just about checks anymore. Automated Clearing House (ACH) transactions are no longer direct one-way transactions from originator to receiver with nothing to verify or reconcile. Extra ACH steps can include check conversion and point of sale, either over the Web or over the phone.

This extra networking can be invaded by a clever hacker or a dishonest employee. ACH now accepts international transactions with a whole new set of risk profiles. So, we have traded the relatively benign risk of idle cash for the possibility of fraud and theft. But, once again, reconciliation comes to the rescue and provides even more value to commercial bank customers.

Presently, most banks rely on old mainframe computer systems to provide their account reconciliation services. Increasingly, such legacy systems cannot support, or integrate with, the technology needed for advanced customer services, such as Internet banking workstations, electronic delivery or even PDFs. With new technology becoming more prevalent in today’s business climate, banks will need to improve the functionality and efficiency of their corporate services. Ultimately, banks will need the ability to communicate seamlessly with corporate back offices, leading to straight-through processing, where the only manual activities will be review and decision-making actions that cannot be automated.

Check back next week for the conclusion of this 2 part series: The Past, Present and Future of Bank Reconciliation Services. In the next post, we will discuss how Chesapeake System Solutions can assist banks with reconciliation services.

If you have any questions, you can contact Chesapeake Systems Solutions by calling 410.356.6805 or visit Chessys.com today!

Chesapeake provides industry-leading, end-to-end financial solutions that seamlessly integrate cash management/treasury with general ledger account reconciliation, account analysis, and regulatory compliance functions. Information-sharing across all applications optimizes funds management, improves the financial close process, increases the efficiency and accuracy of general ledger account reconciliation, and simplifies compliance by enforcing company policies and procedures and financial regulations. Chesapeake solutions deliver actionable information and productivity improvements that can benefit a wide range of organizations, yielding tangible ROI from your software investment. From retailers to banks and financial services organizations to insurance companies, Chesapeake solutions help minimize risk, reduce costs, and maximize profitability.

You can also follow Chesapeake on Facebook, Twitter, and LinkedIn.