Merchant Payments Operations: Accounting and Reconciliation

Merchant reconciliation is a dry and complex job. We will fail in our business if we didn't properly handle the reconciliations. Lots of merchants focus on driving the sales and reduce the MDR but they miss the loss due to reconciliation. Any delays in a business’s reconciliation can result in serious risk of compliance and security issues, asset loss, and fraud. As per the recent data study from business insider expected loss due to reconciliation and accounting around 130 Billion in 2020. Not a small amount correct?

It may even be a simple matter of outdated reconciliation processes and systems or lack of consistency. Whatever the cause, delayed reconciliations can have serious, lasting consequences.

Compliance Risks

Delayed bank reconciliations, as we have noted, may result from a number of factors. The smallest mistakes in data entry or transfer, payments reporting, or disbursement of cash for payroll or expenses can result in inaccurate accounting.

Staff or improperly managed systems may also overcorrect in order to reconcile accounts, leaving gaps in reports. These kinds of oversights, when not corrected over time by internal controls, lead to unreliable financial reporting and affect a business’s ability to comply with other applicable laws and regulations.

Consistent reconciliation keeps business practices regulated and aboveboard, avoiding painful issues during tax season.

Asset Loss

Another common effect of delayed reconciliations, asset loss often comes from a business’s failure to track faulty systems and processes. Legacy systems unable to integrate with new payment methods or platforms may have trouble matching transactions or handling cases from different networks. Errors in manual data entry may lead to improper case management, requiring the company to offer customer refunds.

Without a clear trail that is regularly updated and monitored, companies may go months or years before realizing the source of revenue leakage. Reconciling in a timely manner can tighten processes for maximum efficiency and keep asset loss to a minimum.

Risk of Fraud

Fraud is a constant concern for many businesses, but few are looking internally for potential issues. Timely reconciliation helps detect both fraudulent customer payments and fraud committed by staff or executives. When data is pouring in from many different sources, it’s nearly impossible to identify specific patterns or issues until the reconciliation process begins.

When reconciliation is delayed, potential issues like an unusually high number of second chargebacks or refunds, or business operation funds being spent for personal use, can go unnoticed. Larger fraud concerns on a company-wide level, such as embezzlement, are more likely to be caught earlier on if there is a regulated system in place.

Security Threats

Delays in reconciliation make it hard to address external security threats, such as cyberattacks and hacks. While some cybersecurity threats are more obvious, data breach risks, especially in mobile and digital payments, are harder to expose.

Perpetrators may not leave an obvious trail and a business could be unaware they are even under attack until they are able to take a closer look at their current financials. Reconciliation systems are designed to accurately manage bonafide exceptions and report unusual activity.

By delaying reconciliation, businesses open themselves up to a vast amount of risk from both internal and external sources. Having a system and internal controls in place to ensure accurate reporting and dispute resolution can help them keep their processes in check and running smoothly.

As digital payments dominate the business world, it is imperative for companies of all sizes to prioritize timely and consistent reconciliation.

Reconciliation is a complex job that calls for automation. Variations in cutoff times, inconsistent currency conversions, uneven support of data formatting, and naming conventions across banks/PSP/acquirers are all challenges that the business’s money team must address.

Rethinking Reconciliation Strengthens Operations

Reconciliation is the process of comparing the status and amount of authorized transactions to the settled funds received. This generally involves three data sources: the business’s own order system, transaction data from the acquirer or PSP, and bank statements. To accomplish this, the business has a few reconciliation methods to choose from:

• 2-Way Reconciliation: The merchant compares only 2 of the 3 data sources, orders against transaction data for example. This is a sub-optimal path for obvious reasons, as it is an incomplete reconciliation. 
• 3-Way Reconciliation: The merchant compares transactions logged in their internal system to reports generated by its payment providers, and then to the bank accounts where settled transactions are ultimately deposited. This improves visibility but data shortcomings inhibit total transparency.
• Transaction Level Reconciliation – This path produces the clearest picture but is difficult to do as bank statements generally do not support transaction-level data, instead of providing aggregate data to match to the sum on the order and payments reports. Further, PSPs and acquirers do not all support transaction-level reporting, particularly for non-card transactions.
• Aggregate Level Reconciliation – This path is the most common but without the underlying numeric detail it is hard to produce crisp reconciliation results. Variations in cutoff times for processing and reporting, reporting of chargebacks and reversals, currency exchange, and simple time zone differences add further complexity.

Daily manual processes like these:

• Take too much time to accomplish
• Introduce user errors from data entry, data import, and report generation mistakes
• Lower the accounting team’s morale because it is routine, boring, and unproductive

Further, manual processes and spreadsheets are impossible to manage from a control sand process perspective:

• How do you track changes? 
• How well can you secure access to spreadsheet-based financial data? 
• What happens if the person who manages the spreadsheet process leaves or is out of the office for a period of time?

With a workflow redesign, the increased efficiency can even improve the accounting team’s morale, allowing members to focus on strategic or other high-value activities. We all want to contribute to the success of the business and not to be saddled with tasks that should be automated end-to-end.

Key Areas of Consideration

Processes and Software in Use

Reconciliation processes vary by merchant size, organizational structure, and technical maturity.

Payment Provider Reporting:

A critical input into the reconciliation process is the daily reports generated by payment providers. The format and transactional data included in these reports differ across providers, payment systems, and countries. These differences can stymie the integration and reconciliation task before the Accounting team. It is important to leverage the payment provider’s support team and relationship managers if the reports cause frequent reconciliation issues. Timely report delivery is also critical to ensure no time-sensitive processes are affected.

Overview of Processes and Policies

Accounting departments, especially at more established merchants, can be limited through reliance on tradition – that is, doing things the way they’ve always been done. Of course, such historic processes and policies can become outdated and inefficient. 

All too many merchants continue to use Excel spreadsheets to manage their accounting processes. They are more prone to user error and must perform far more manual steps to complete what can often be automated. For example, during a monthly close, the Accounting team must manage spreadsheet version control, the storage of files in shared internal folders, and manage approvals, steps that become increasingly unsustainable as an organization grows and becomes more complex. 

When we undertake a payment operations assessment for a merchant or biller, we often find the reconciliation process to be rich with opportunity for improvement.

Centralize for Team Visibility

A centralized solution that standardizes accounting processes provides visibility into these processes across organizational stakeholders. Centralization helps ensure that other team members are able to access critical information when they need it, creating further efficiencies across the organization.

Conclusion:

Properly applied payment reconciliation ensures a smooth transition between payment processing and dispute resolution. Any delays in a business’s reconciliation can result in serious risk of compliance and security issues, asset loss, and fraud.

Bank statements and general ledger records are the backbones of business operations. They keep track of receipts, outstanding receivables, and collections. Payroll and operating expenses have to be checked, recorded, and verified every tax season.

Timely reconciliation ensures that most back-office functions and processes, and some middle and front-office as well, are performing effectively. Without it, businesses can easily fail to detect, and correct, issues before they become serious.

Dispute resolution and reconciliation begin once a merchant has initiated the settlement process and fulfills the customer order or after fulfillment during the course of the settlement. The lifecycle proceeds as follows:

• Data Management and Matching. Transaction data is extracted, loaded, and confirmed. The merchant’s reconciliation system matches transaction records, identifies exceptions, and distributes them for case management and dispute resolution.
• Case Management. A new case is opened so the exception can be documented and resolved promptly by the reconciliation system.
• Account Reconciliation. Once dispute resolution has been achieved, the account can be properly reconciled and an up-to-date report created for the ledger.