In the complex world of online payments, even small mistakes with the accuracy of transaction data can have big consequences. That’s why payment reconciliation - the process of ensuring that payment transactions data align between internal, payment gateway or bank records - is so crucial. In this edition of Payments 101, we will cover the basics of payment reconciliation and its advantages for merchants.
What is payment reconciliation?
Payment reconciliation is the process of confirming that payment transactions align perfectly with those recorded by the bank or payment gateway. This financial cross-check helps in identifying inaccuracies, spotting potential fraud, and ensuring a comprehensive audit trail.
Payment reconciliation comprises various key pillars that collectively ensure the harmony of internal systems with bank or payment provider records.
Transaction verification: Transaction verification serves as the foundational pillar of reconciliation. It involves matching individual transactions recorded by your internal financial system with those logged by your payment gateway or processor. The goal is to confirm the symmetry of every transaction, whether a sale, refund, or chargeback, in both records. Discrepancies are identified immediately and addressed to prevent the accumulation of financial errors.
Settlement, clearing, and bank reconciliation: Online transactions often engage a settlement and clearing process between multiple parties, including payment processors, banks, and merchants. This process ensures that settlement amounts received from payment processors or banks align with the expected settlement amounts per the organization's internal records. Bank reconciliation, a vital component of this process, verifies that these transactions are accurately recorded in the organization's bank statements, and uncovers any discrepancies that may need further investigation.
Chargeback management: Chargebacks occur when customers dispute a payment and request a refund from their card issuer or payment provider. Managing chargebacks involves tracking and reconciling the financial impact of these cases and confirming that the organization's records align with the chargeback status and resolution. The total transaction amount as well as additional fines imposed by the payment gateways and card schemes need to be properly recognized in the books for completeness.
Refunds and reversals: Payment reconciliation includes managing and reconciling refunded transactions initiated by the organization due to customer requests, cancellations, or returns. This stage involves tracking and reconciling the refund amounts with the original payment transactions to ensure accuracy.
Rewards and marketing funds: Many organizations offer customer rewards, discounts, or promotional credits. These incentives are typically accounted for separately from the main transaction. However, they must still be part of the reconciliation process. Tracking and reconciling these amounts accurately is crucial to ensure they match with the promotional campaigns run by your marketing team. These amounts are usually withdrawn from the total payment amount and might not be reflected in settlements, potentially leading to discrepancies. An error in tracking these incentives could lead to misstated finances, impacting the profitability of your business.
Reporting and documentation: Reconciliation of online payments also involves generating comprehensive reports and maintaining proper documentation of the reconciliation activities. This includes documenting discrepancies, resolution steps taken, and retaining relevant records.
What are the benefits of payment reconciliation?
Beyond the task of matching internal records with those of banks or payment providers, payment reconciliation offers extensive benefits for sustainable cash-flow management. While maintaining accurate numbers is essential, the impact of payment reconciliation extends even further, influencing vital aspects of business operations:
- Ensures financial accuracy: With payment reconciliation, businesses can ensure the data in their books matches the actual funds received or paid out. This accuracy is vital for financial reporting, planning, and decision-making.
- Helps detect fraud: Reconciliation can help identify fraudulent transactions or irregularities that might otherwise go unnoticed. By flagging these issues promptly, businesses can minimize potential losses.
- Supports regulatory compliance: For many businesses, regular reconciliation is not just good practice: it's a regulatory requirement. Keeping accurate financial records helps companies stay compliant and prepare for audits or business reviews.
- Promotes operational efficiency: By identifying and resolving payment issues quickly, businesses can avoid delays and improve their overall operational efficiency. This is particularly crucial in sectors where quick turnaround times are expected, such as e-commerce.
Payment reconciliation is not a one-size-fits-all process, and the steps involved can vary based on the complexity of a business's operations and technology stack. For a small business with fewer transactions, manual reconciliation might be feasible. However, for larger enterprises dealing with high volumes of transactions across multiple payment methods, automated solutions that can scale become a necessity.
Automate your reconciliation process with Payrails
No more spreadsheets and manual matching: Payrails’ automated reconciliation simplifies all types of payment reconciliation, conserving your team’s resources while minimizing human error. We automate 95% of the reconciliation process, increasing speed and precision and unlocking valuable resources.
Curious what automated reconciliation can do for your business? Discover your options by getting in touch with our team today for a personalized consultation.
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