EXCLUSIVE: “Reconciled to the Future” – Michael Klopchic, HSBC Canada in ‘The Fintech Magazine’

Why HSBC Canada’s Michael Klopchic believes management accounting is on the verge of a new era

When HSBC was founded in Hong Kong in 1865, the accounting profession was the realm of countless Bob Cratchits – clerks armed with quill pens, filling in columns of numbers in leather-bound journals, recording a business’s financial obligations in a world of increasingly complex global transactions.One wonders what Charles Dickens’ downtrodden hero would make of today’s payments, sent from a far-flung corner of the old British Empire, being executed faster than he could fill out a line in his ledger book. Such real-time payments and, potentially, real-time reconciliation have a huge impact on management accounting today.

“It opens up a whole new world of opportunity,” says Michael Klopchic, HSBC’s country head for Canada global liquidity and cash management.

“Businesses can make better use of their working capital and better utilise the cash that they have.”As one of the world’s biggest banks, HSBC has embraced automation to improve reconciliation for its clients, with products such as virtual accounts, virtual cards and the adoption of the ISO 20022 data exchange standard. But Klopchic admits it was the lockdowns, sparked by the coronavirus pandemic, that finally prompted many firms to put their chequebooks through the shredder.

“As we introduce virtual accounts, there is an almost unlimited amount of information that can be captured, making the treasury job much easier”

“It was the problem of having dual signatures that finished cheques for many firms,” says Klopchic. “Most corporations used to have dual signatures – if you’re in lockdown and staff are at home, how do you get the second signature? Who has the chequebook?“

Electronic dual approval existed before the pandemic, we didn’t just turn on a dime, but progress was accelerated. As payments were authorised from a phone, laptop or iPad, friction in the movement of cash was reduced, and the faster money moves, the more useful it becomes. It has changed the way our customers think about how they manage money.” Klopchic says virtual accounts are one of the big successes of automation of client products. These non-physical bank accounts, which can be allocated to customers so a treasury centre can clearly identify who originated the payment and when, aren’t new, either.

But in their latest incarnation at HSBC, clients can activate virtual accounts at will for their suppliers or customers via the bank’s HSBCnet self-service platform. That way, a client’s treasury centre can run relatively few physical accounts, denominated in various currencies, because beneath each of them sit virtual accounts assigned to each business. They ensure a clean, clear process for transactions that is fully digital and minimises the risk of data being corrupted or lost. HSBC also offers virtual cards – which are typically a business-to-business payment solution that allows companies and their employees to create single or multiple-use virtual card numbers to make payment to suppliers. For organisations with diverse supplier bases, these cards promise to deliver more visibility and control over who spends what, when and where.

“Using virtual accounts, companies now have a clear line of sight over the flow of funds, in and out, instead of multiple customers making payments into one physical account,” says Klopchic. “When you think about the work effort that companies were employing – it used to be shuffling paper statements around. Even now, if a firm isn’t fully digital, reconciliation is time consuming. As we automate, and as we introduce virtual accounts, there is an almost unlimited amount of information that can be captured, making the treasury job so much easier.”

A key building block in the ability to electronically embed and share this information has been the replacement of the now-outdated SWIFT MT payments messaging with ISO 20022 across the bank’s systems. In fact, it’s offered ISO 20022 XML solutions to clients since 2003, almost two decades ahead of SWIFT’s mandated adoption, which starts this year.

ISO 20022’s wider voluntary roll-out in the banking community was slower than hoped – often due to businesses’ legacy systems being unable to cope with its richer data fields. Even now, businesses with legacy tech may be tempted to only use the new standard for external communications and keep MT running on internal systems, but that risks data corruption and the business being left behind, warns Klopchic. The beauty of ISO 20022 is the richness of its communication potential, he says – for example, a business may wish to cover off four invoices within one payment but one of the invoices needs to be revised due to an error. Because ISO 20022 is fully digital, all this detail can be electronically processed and understood by all parties involved in the transaction process, and there’s no need to write accompanying emails or make phone calls.

Though 100 per cent straight-through processing remains ‘Utopian’, according to Klopchic, ISO 20022 brings it within reach.

“When payment systems were first developed, everyone had their own, with its own language, because we were operating in domestic environments,” he says. “The world has changed, it’s much more of a global environment. So, when you look at HSBC, we have a common language and common platform across more than 60 countries. That makes it easier for our customers to engage with us and also their own customers. But if an HSBC corporate customer is using a different language, or is on a different platform, then our product’s efficiency cannot be realised.”

Alongside a major reduction in friction, ISO 20022 represents a huge stride forward in fraud detection. According to RedCompass Labs, despite financial services firms spending around $180billion each year on financial crime compliance, still less than one per cent of global illicit financial flows are detected and investigated. During the pandemic, financial crime levels dramatically increased and banks were forced to spend more on staffing to detect fraud, and yet the fines for non-compliance kept coming. The hope around ISO 20022 is, because of its cleaner and more comprehensive data potential, automated screening will be more accurate and throw up far fewer false positives than MT. And, given the new standard’s suitability for AI solutions, fewer staff will be needed for fraud detection.

“The faster money moves, the more useful it become”

“Fraud is one of those big costs that doesn’t get talked about enough but it exists everywhere, and both individuals and organisations are being exposed to it on a regular basis,” says Klopchic. “Having ISO 20022 allows us to use a richer level of information, so we have far more certainty and clarity on where a payment has come from and where it’s going to – because fraud is about whether the money is originating from the right person, and is the money going to the right person or entity? Having ISO 20022 allows us to have much more certainty and clarity of where the payment is really destined to go. So that allows us to use straight-through processing, allowing payments to go through faster, uninterrupted, versus a manual pull-out.

“We’re still far from achieving 100 per cent straight-through, but AI allows us to insert a bot into the system, which looks at why a transaction has failed, review it, and generate an email to the customer to ask if it is legitimate or not. So what we call manual intervention is no longer manual.“Some might argue that the fintechs are further ahead than the banks on it because they are more focussed on that one area, plus they are nimble in their exploration of the technology. It will allow some of those firms to come in and work with the banks to develop an AI platform that can then be leveraged by the banks to help customers.

So, I think we’re going to see more partnerships emerging.

“People are going to come up with fantastic solutions that can be embedded with a standard product offering, which is then put into the hands of consumers and corporations. And that is the difference that we’re going to see.

“The information that we’re going to be able to generate, and absorb, ourselves, but then also deliver to our customers – from where those payments are, to invoice numbers, amounts, dates… whatever you need to build in there. It just makes life easier for everybody

This article was published in The Fintech Magazine Issue 25, Page 58-59