Addressing Complexities in Financial Reporting and Ledgering

Financial reporting and accounting present unique challenges. The importance of a designated system of record cannot be overstated. This system acts as a source of truth and provides 24/7 insight to avoid messy situations like the Synapse situation we’ve seen play out in recent weeks .

When it comes to ledgering, the situation can quickly escalate from manageable to chaotic. Imagine managing a single customer using a debit card product. Well, that can more or less be done on an Excel sheet—simple enough. However, a basic table becomes insufficient and unreliable as customers grow to 10, 100, or even thousands, each with different payment dates, chargebacks, and refunds. Now, instead of Excel, you have a rigid database table. This is where traditional methods fail.

One core challenge in ledgering is the factor of time, which we’ve talked about before . Time complicates everything, especially when multiple parties are involved.?

For instance, one business came to Canopy for help as they revealed inconsistencies in bank cut-off times from their loan tape reports, leading to discrepancies in accounting for transactions. In this example, the data was all there, just “hidden” from some key parties. Unfortunately, this is not always the case. These inconsistencies snowball into gaps in reconciliation and underscore the need for a designated lending system of record—a single source of truth that everyone agrees on from the start.

Transparency is another crucial element. Many older loan management systems (LMS) historically relied on daily batch file uploads, causing delays and inconsistencies. One system might have a set of transactions while the bank waits to upload the previous day's batch files. This discrepancy is why we built our system to be real-time, immutable, and line-item level. Instead of looking at groups of accounts, we focus on individual events, ensuring accuracy and transparency.

Before you get into hot water, you should have conversations with all involved parties to align on the program's rules. The disconnect often seen in BaaS comes from a lack of communication between fintechs and banks. Middleware solutions might approve things without a proper understanding between all parties involved. The first step is to get everyone around the table and align on time zones, accounting methods, and the source of truth.

Drawing from my experience at @Earnest, the complexities of lending highlight the importance of time alignment. For instance, there's a 10-day payoff window in student loan refinancing, during which interest continues to accrue. This makes accurate data crucial. Similarly, at @GreenSky, we faced challenges with batch file uploads, which caused gaps in daily reports and questioned the truthfulness of data.

In light of recent events with Synapse and Evolve, with fintech customers disagreeing on account balances, it's a reminder that ledgering issues are not new. The Synapse situation, where $85 million was unaccounted for, highlights the complexities of ledger reconciliation. The intermediary, Synapse, was supposed to be the golden source of customer assets across multiple banks. However, discrepancies between ledgers led to significant issues.

The Comerica Bank example further illustrates the challenges of maintaining accurate records. During a tech upgrade, customer balances were not properly updated, resulting in missing funds. This scenario shows the importance of having a robust system of record (SOR) and highlights that these problems are not unique to BaaS, but are fundamental issues in banking.

Let these incidents be a cautionary tale in modern-day lending. Understanding the core of banking and ledger reconciliation is critical. A core banking system performs essential functions like recording payments against balances, treasury management, and regulatory reporting. However, when multiple ledgers are involved, as in BaaS, the complexity increases, making reconciliation difficult.

Getting ledgering right isn’t trivial, it’s a must. Fintech companies must excel in ledgering or partner with those who do to avoid catastrophic failures. By focusing on transparency, real-time data, and alignment from the outset, we can address the complexities of financial reporting head-on and ensure the accuracy and reliability of our systems.