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Payment Reconciliation: What It Is & Why Successful Business Needs It

Boaz Gam

Boaz Gam


14 min
Payment Reconciliation: In Simple Terms The Anatomy of Bookkeeping Magic
Why Is Payment Reconciliation So Important? What can get in your way?

Payment reconciliation is a process, which allows you to keep track of the precise state of your company’s finances. We’ll review how it works and how your venue can benefit from it.

Payment Reconciliation: In Simple Terms

So, what’s a payment reconciliation? Simply put, this is a feature/process, which allows matching your company’s account balance with the statements received from:

  1. Your bank account.
  2. Your payment gateway.

Reconciliation with partners and banks is one of those areas that appears to be an afterthought comparing with the technologies that everyone has in mind: omnichannel, anti-fraud, and so on. At the same time, in our practice we are faced with the fact that solutions for the back office are equally important for the payment business, because companies may spend a lot of resources on the correct organization of the process.

The Anatomy of Bookkeeping Magic

What is Payment reconciliation from the technical point of view? Roughly speaking, it is based on the cross-check method that is applied to the financial figures. Cross-check method originally came from the world of science.

And this validation is possible due to the fact that numerous sources of data are used and meticulously researched in the cross-check method.

In our case, we need financial data. So, to make payment reconciliation valid, we’ll need:

  • Internal documents that regard the company’s expenses and profits.
  • Receipts issued by your company.
  • Payment gateway data.
  • Bank statements.
  • Sales statistics.

When all of these components are in place, payment reconciliation can begin. The system will match data from these sources, looking for possible blunders, technical errors, discrepancies or even preplanned fraud attempts.

Why Is Payment Reconciliation So Important?

Reconciliation of commercial payments is radically important for every business venue: physical or digital.

Here are some of the reasons why reconciliation of electronic payments is unskippable:

  • Taxation. Whether you run a one-man business or a whole company with a staff of employees, you need to pay the taxes. Payment reconciliation shows valid data that you will use by the end of each fiscal period.
  • Fraud. If performed regularly — like once a month — this method can easily identify fraud attempts coming from your partners, clients, and even employees. One of the most common schemes is an employee concealing money (mostly cash) received from the clients. But comparing sales vs. profits via reconciliation easily prevents this.
  • Statistics. Another perk we get from this technique is a better understanding of which payment methods your customers prefer. Do they use Visa or Discovery mostly? Or maybe they are into digital wallets and cryptocurrencies? And how about exotic payment options that are popular in certain countries only?
  • Problems. No system is fully insured from errors and glitches. With this process, you will avoid bouncing checks to the business partners, track the outstanding checks, avoid banking errors, know how much money there is in your corporate account, actually, and so on.
  • Legal issues. In case there are hefty discrepancies in your accounting regularly, this may attract unwanted attention from the tax service — they can suspect tax evasion or other types of fraud.
  • Time. All in all, this method makes things go faster, especially when it’s the end of the fiscal period. In turn, this helps economize time and effort of the personnel. Or you personally, if we’re talking about a one-man operation.

These are perks that help you win the game when you process payment info reconciliation. In the long run, they will dramatically impact your venue in a positive way.

What can get in your way?

Based on our experience and specific cases, we decided to discuss in greater depth the requirements and the main difficulties of the reconciliation process and possible solutions to them.

  1. Accounting for all participants in the processing chain

    In real business, several participants can be involved in the processing process: besides PSP, Merchant, and Bank, there are also can be different mediators who should also receive their revenue share.

    Let’s take a marketplace as an example. A certain provider offers some solutions from different vendors that merchants can use. These solutions already assume the presence of acquiring in a particular bank. The bank makes payouts directly to the Merchant, but there is also a provider fee in this payment, i.e., the bank must accept the scheme of mutual settlements between the Merchant and the Provider and implement it. But unfortunately, banks do not support such schemes, leaving merchants and their providers to deal with mutual settlement issues on their own.

    Companies that have a financial license do not have enough resources to organize the reconciliation process between all the participants correctly.

  2. Multicurrency is another stumbling block

    Since the payment business is global, the participants of the processing can conduct settlements in different currencies. For example, Merchant receives payment from the customer in USD, the transaction is internally converted into Euro as the bank could process the transaction in Euro only. According to the results of the reporting period, the Bank or PSP transfers money to the Merchant in the currency of the Merchant current account, and this may not be the Euro, not even the USD, but another currency.

    The most vivid and clear example, in our opinion, is a cross-border transfer.

    For example, the authorized currency of the sender's card is USD, whereas the recipient - is Euro. For the transfer to come to the card in Euro internal conversion is used in a platform with a certain rate. At the same time, the service itself can be international and be established by Merchant with jurisdiction in Russia. His accounts are also opened in Russian currency, which means that the refund from the bank to his account must also be in RUB. The payment provider, from his side, can include additional fees for each conversion. Thus, we are dealing with a complex structure of mutual settlements, where:

    • different currencies should be taken into account and reduced to a common denominator;
    • PSP commissions are considered not only for the service but also for the conversion.
  3. Terms of day closure and different time zones

    Different banks adhere to different rules of days closure, which do not match with regular reporting periods of the platform. So, there can be inconsistencies between the quantity and number of transactions that were processed by the platform on the day “A” and the results that the bank shows at the output. Some transactions can simply not be included into the reporting period, the amount wouldn’t match, and the merchant will ask “where is my money”?

    Additionally, the different time zones in which the bank, PSP and merchant are located have its own influence on this process.

    Another factor that affects the results of the calculations is delayed payments. The acquirer takes a commission not only for each transaction, but the tariff can also include conditions relating to the nature of the traffic. For example, at the end of each week, the bank analyzes the total number of declines for the week and when a critical number is reached, takes an additional fee from the merchant. Thus, the report will include not only commissions for each transaction for one day, but also accruals for the whole week.

  4. External conditions that affect the work of banks

    In addition to its own rules for processing transactions and paying financial results, banks adhere to both the rules of regulators on the part of the state, and the rules established by international payment systems. Such factors can be the cause why money for the performed transaction will not come from the issuer’ account.

  5. Complex interbank schemes of interaction

    The acquiring banks themselves can work through other acquiring banks in order to process transactions. The most lively and well-known example in the industry is the Chinese banks scheme of work. There are about 10 banks that have an official license for processing, the rest, slightly smaller, are connected to these banks and so on. To reach the final point of processing, a transaction can pass several different banks. Such a complex scheme also has a significant impact on financial results. As it is clear, after all banks charge commission for services on every step. It is almost impossible to calculate this process correctly - due to the closed market and how quickly players change on it. An additional factor is the scheme used in China, according to which purchases are made in international currency - in CNY, and then converted into domestic currency - RMB. The conversion rate is 1:1. But taking into account the scheme in which several banks are involved, so many commissions are imposed on the transaction, that the transaction cost on end-point can increase by several units.

    We listed the main problems we faced with through 10 years of international business. In our opinion, it is simply impossible to solve this problem comprehensively today. It is necessary to consider a huge number of influencing each other and changing factors to create an ideal solution. The complexity is also compounded by the fact that it is very difficult for banks and payment systems to calculate tariffs precisely, because they also consider a huge number of criteria. What we're talking about if the tariff plans of international payment systems take dozens of pages.

    The most effective way out is to segment the problems and try to optimize the work for each of the directions. At the same time, the solution for reconsideration can work only if it is maximally customized and tuned to the needs of a particular PSP and will take into account the nature of the Merchant's business and the features of the acquiring banks the PSP operates with.

Now we would like to share our knowledge about the most important features that the solution should be tuned with to make this complicated process as simple as possible.

  1. Accounting for all participants in the processing chain

    Carrying out reconciliations with different participants of processing manually is a difficult task that requires significant resources from the PSP. To avoid this, we use a model that considers five links of this chain: Acquirer, Acquirer Reseller, PSP, Merchant Reseller, Merchant. Based on this scheme it becomes possible to automate Interaction at different stages, taking into account all tariff plans and commissions that are used in the calculation of financial results. The system becomes a part that considers the financial results and conducts reconciliation between all the participants in the chain. Considering the common practice when the bank sends the reconciliation files and information about earnings for the period to PSP, this PSP becomes a regulator of financial relations, as it has full information about the financial conditions of work and can check these results on the basis of data from the bank. As a result, each user can check their earnings and their compliance with the configured tariffs - the information becomes transparent, and it is received automatically.

  2. Multicurrency is another stumbling block

    Depending on the processing scheme, we can apply different schemes for accounting of multi-currency transactions.

    For example, in the case of working in the international market, the merchant's products or services price will be presented on the website depending on the customer country. At the same time the merchant use one account in the bank acquirer in a certain currency. If we add to this the condition that the merchant's account is opened in another jurisdiction and the merchant can receive payments to his account, for example, in USD only, a complex scheme arises that requires processing of transactions in different currencies with converting and then accounting them during the reconciliation. Depending on the client's business specifics and the payment flow that he uses, we develop a scheme of work that allows him to convert the currency at every stage: at the moment of the transaction, at the time of sending the transaction to be processed and at the time of sending money to the merchant, if they also needed to be converted. All conversion rates are fixed in the system.

    Thanks to this, users will be able to receive correct and clear information about the amount of their earnings. The system considers:

    • The conversion rate that was applied to purchases and its result
    • The purchase amount in various currencies - in the payment currency, in the currency of the merchant current account, in the currency of the bank accepted the transaction.
    • Up-to-date information on conversion rates for different providers.
    • Additionally, we provide an opportunity to analyze the overall business turnover, including multicurrency traffic by bringing its values to one currency.
  3. Terms of day closure and different time zones

    Each acquirer closes business days according to its rules, usually it is a 24-hour interval, considering the days off in the time zone of the acquirer. For reconciliations to be carried out correctly and settlement date to coincide, we use several tools:

    1. The best and easiest case is when the bank notifies PSP about the clearing date by sending the registry containing the clearing date for each transaction or by sending call-back for each transaction individually. So, system will always have the correct info about each transaction with no need to make complicated reconciliations.
    2. If banks allow yourself to initiate the closing date, we set up the customization tools in the system for information exchange between the bank and the payment platform. The system sends data on turnover per day and in case these data coincide with the bank's data, the bank accepts it and closes the day in accordance with the system request. If the data does not match, then starts an exchange of transaction registers between the platform and the bank in order to calculate the inconsistencies and bring the data to a unified kind. Information on the results of the reconciliation is sent to PSP in the selected format.
    3. Automatic shift of dates according to the time zone of the acquirer. Automatically shifting the dates of the transaction processing is a solution by which you can achieve synchronization with bank data.
    4. Manual time synchronization

      Used in case when transaction clearing occurs automatically but depends on other factors. For example, a bank officer in charge of closing the day presses the button and makes clearing at 7 pm, in his time zone, so it is impossible to automatically adjust the time shift in the system. The closing time of the day will be different often.

      With the ability to manually transfer the transaction dates according to the closing dates in the bank, you can also receive data that will match with the bank data.

    A similar way to manually change the date for bunch of transactions or even for a single transaction is used in case if external factors, such as regulators 'requirements, public holidays, etc., influence on the processing of banks' transactions.

  4. Complex interbank schemes of interaction

    In previous article we cited an example of the difficulties in calculating and reconciling financial results typical for work in the international market of China. The case when the internal conversion of international currency CNY to RMB occurs. This case not only complicates the reconciliation, but it can also affect the merchant's business – if for the purchase the larger amount were written-off from the client than it was indicated on a website, it can cause the chargeback. Merchant loses money for the purchase and runs the risk of getting fines.

    To avoid this situation, in our system we added functionality that allows you to understate the transaction amount when it is sent for processing to the bank.

    In addition to the common difficulties that a business may face due to the lack of a reconciliation mechanism, there is one more thing that can also affect the merchant's business. In the bank's tariffs, not only commissions for each transaction can be included, but also other additional conditions. For example, the requirements for amount of traffic that the merchant sends to the bank. If the volumes are less than agreed, the rate may increase. If the merchant, due to regular reconciliations, will have correct and full information on the amount and nature of the traffic that the bank has processed, he can take measures that will help him not to lose money or even move to a more favorable tariff in time.

    For example, a merchant shares its traffic between two banks. Using the reconciliation tools, he, until the end of the reporting period, can trace the dynamics and come to the conclusion that the current volumes do not meet the requirements of one of the banks. In this case, part of the traffic can be sent to the right bank, which will help him to comply with the agreement and avoid additional costs.

In conclusion:

We gave you the answer to What is payment reconciliation. We explained which dangers its absence will bring. And we showed you the undeniable benefits. Now it’s your turn to make your company highly competent at handling its bookkeeping.

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