Recon360 – Redefining Payment Reconciliation

Jan 30, 2023

Businesses record revenues and expenses every day. Ever wondered why it is important to accurately document these transactions?

Maintaining accurate financial records is critical to the success of any business. It helps the management make informed accounting decisions and ensures a strong base for growth and operations. Payment reconciliation secures the financial health of a business.

In the next few minutes, you will learn what payment reconciliation is all about, why it matters, its benefits, M2P’s Recon360, why it is a game changer, and how it works.

Let’s dive in!

What is Payment Reconciliation? Why does it Matter?

Payment reconciliation is a process that ensures the accuracy of financial records by matching them with bank statements, and world-leading interchanges viz., transaction processing switch and core banking solutions. It is essential for businesses to ensure that every transaction is properly recorded and up to date. In today’s age of digital payments, businesses are handling multiple payment gateways, interchange reports, settlement vouchers, and bank financial posting across different partners and touchpoints. Thus, it is imperative to keep track of all income and expenses for sound financial health.

Businesses must balance their payments on a cycle and time zone-based reconciliation. It is a vital aspect of bookkeeping that ensures the integrity of financial records. This process must be performed regularly for data accuracy and compliance with financial regulations.

Benefits of Payment Reconciliation

Frequent, regular, and automated payment reconciliation offers the following benefits.

Identifies and resolves errors in financial records
Tracks late or unpaid invoices
Helps maintain accurate financial records

Identifies and resolves errors in financial records

Payment reconciliation detects bookkeeping errors and unauthorized payments. By comparing internal and external records, businesses can identify discrepancies early on and quickly resolve issues related to cash flow or security breaches. This prevents fraud and ensures the financial stability and health of a business.

Tracks late or unpaid invoices

Reconciling payments on a regular basis helps businesses stay on top of late or unpaid invoices. Businesses can identify missed or delayed payments by comparing internal and external records and take action to follow up and collect them. The process not only saves effort and time but prevents financial stress.

Helps maintain accurate financial records

To make data-driven decisions, accurate financial records are a must-have. By reconciling payments regularly businesses ensure that their financial records are accurate and up-to-date. Reconciliation demonstrates financial stability when there is a need to secure investments or loans. It also supports regulatory compliance and prevents legal repercussions.

How Payment Reconciliation works

Payment reconciliation involves matching financial records with those from a bank, internet banking, NEFT, RTGS, and AEPS, for thoroughness and accuracy. By using a bank feed, the finance team can easily compare and verify payments made against accounts, thus maintaining accurate financial records. Payment reconciliation comprises two processes, viz., internal and external.

Internal Reconciliation

Maintaining accurate records of transactions can be done using internal sources such as accounting software, spreadsheets, and other record maintenance systems. Some businesses keep physical copies of receipts, invoices, and billing paperwork as a means of maintaining records. However, this physical method could be prone to human error and may not be as reliable as digital record-keeping. Choosing the right internal reconciliation method is crucial as it could involve harmonizing physical and digital records.

External Reconciliation

External reconciliation relies on transaction data coming in from external sources like bank statements that hold details of incoming and outgoing cash flow. As these statements are digitally generated and contain critical data pertaining to payments, they are reliable for accounting and reconciliation needs.

Matching Internal with External

As an ideal practice, businesses must match and cross-check internal and external records to reconcile the transactions. Entries in internal reconciliation should match those from external reconciliation. If there are discrepancies, businesses must get to the root of it to identify and resolve errors or breaches if any.

Types of Payment Reconciliation

Depending on the complexity and transaction type, the payment reconciliation process can differ from one business to another. Here are common types of payment reconciliation companies follow.

Rule-based reconciliation

The rule-based reconciliation process is automated and uses predefined criteria or rules to match transactions between different accounts. These rules are programmed into the system and the software automatically verifies matches and exceptions based on these rules. This method is highly efficient, saves time, and reduces errors compared to manual reconciliation methods. It can be customized to fit specific business needs as the rules can be modified and updated as needed.

One flexible approach to rule-based reconciliation is relaxed matching. Instead of deploying strict rules, it allows for some level of deviation or tolerance in certain parameters such as date and amount. This approach is less accurate, much faster, and needs less manual intervention. It is often used in high-volume and low-value transactions where speed and efficiency are prioritized over absolute accuracy.

Card reconciliation

Accountants use the card reconciliation method to compare credit or debit card statements to General Ledger (GL) accounts. It must be ensured that the information on a credit card bill and the information represented on the GL are consistent as every business transaction is recorded within the GL and vice versa.

Cash reconciliation

Cash reconciliation is used to verify the usage of cash from the register. The purpose of cash reconciliation is to ensure that the recorded cash balances and the bank statements match up. The cash reconciliation method enables businesses to detect inconsistencies and pinpoint the areas where the ledger and statement do not match up.

Digital wallet reconciliation

The process of digital wallet reconciliation is similar to credit card reconciliation. The only difference is the mode of payment. It is recommended to report payments received via digital wallets separately. That way they can be compared with the necessary merchant reports to ensure that records are accurate and the numbers on statements make sense.

Real-time automatic payment reconciliation

Automated payment reconciliation can accelerate month-end accounting close, reduce errors, and improve cash flow control. The ability to handle live transaction data is provided by real-time reconciliation for banks and other financial institutions.

Challenges in Payment Reconciliation

Payment reconciliation is imperative for any business. However, it comes with its own set of challenges. These challenges range from simple errors to more complex issues that can cause significant financial losses.

Manual processes

Manual processes are prone to errors and time-consuming, thereby slowing down the reconciliation process. When transactions are recorded and reconciled manually there is a greater risk of incorrect dates, transposed numbers, and other inaccuracies. Manual processes also make it difficult to keep up with the volume of transactions and identify discrepancies.

Data discrepancies

With multiple payment partners and different types of financial transactions, it can be difficult to ensure that all the data received is consistent and in a similar format. When data from disparate sources are not consistent, it can be difficult to match transactions between different accounts. Inconsistent data that lacks standardization can lead to processing delays, inaccurate reporting, and erroneous reconciling. It can also cause difficulty in achieving compliance and identifying frauds and breaches.

Lack of visibility and control

In today’s fast-paced business environment, real-time data visibility and transparency in financial reporting are must-haves. However, several businesses still depend on manual spreadsheet-based processes for reconciliation which results in inaccuracies, lack of control, and visibility. This negatively impacts credibility, strategic decisions, and long-term success.

To resolve the challenges explained above several businesses are turning to automation and the use of best-in-class account or payment reconciliation software.

How can businesses choose the best Payment Reconciliation solution?

Before choosing a reconciling solution, businesses must answer 3 crucial questions.

Is it platform agnostic?
Does it track and monitor real-time transactions?
Does it offer best-in-class data security measures?

M2P’s Recon360 offers all this and more!