Payments reconciliation — also known as transaction reconciliation or billing reconciliation — refers to the process of comparing and matching financial records across different accounts or systems to verify their accuracy and consistency. Merchants often receive payments through multiple channels, such as credit card transactions, online payments and other types of payment gateways. Payments reconciliation enables merchants to match these various transactions with corresponding records in their internal accounting systems, bank statements and payment processor reports.
Should a merchant’s accountant or bookkeeper identify any discrepancies, errors or missing transactions, they will conduct a full investigation, reviewing internal records, verifying documentation and consulting stakeholders to pinpoint the root cause. From there, they will make any necessary adjustments to correct financial records. Payments reconciliation is essential to the financial health of any business, preserves the integrity of financial reporting and helps merchants comply with various laws and regulations.
What are the different types of payments reconciliation?
There are many different forms of payments reconciliation, including:
Bank reconciliation, which involves comparing a merchant’s recorded transactions against its bank statements
Credit and debit card reconciliation, which focuses on matching any credit or debit card transactions recorded in a merchant’s accounting system to its credit or debit card statements
Cash reconciliation, which involves balancing a merchant’s cash-based transactions by comparing cash receipts and disbursements recorded internally to either physical cash-on-hand or bank statements
Digital wallet reconciliation, which entails validating transactions conducted through digital payment platforms to ensure that internal records align with statements from digital wallet providers
Real-time payments reconciliation, which refers to the immediate verification of transactions as they occur, ensuring that internal records match real-time payments data
Global currency reconciliation,which deals with verifying financial transactions made in different currencies and aligning records with exchange rates and international transaction statements
Accounts receivable reconciliation, which involves matching internal records amounts owed by customers with external records, such as invoices and receipts, to confirm outstanding balances
Accounts payable reconciliation, which focuses on verifying amounts that a merchant owes to its vendors and suppliers, aligning internal records with invoices and payment statements
Payroll reconciliation, which requires validating salary payments and deductions and comparing internal payroll records to bank statements and tax documents to ensure accurate compensation
General ledger reconciliation, which is a comprehensive analysis of all financial transactions recorded in the general ledger and comparison against external statements and records to ensure the integrity of financial reporting
What is the difference between reconciliation and settlement?
Reconciliation and settlement are both important — but separate — parts of the payments process.
Settlement refers to the actual transfer of funds between two parties to complete a financial transaction. For example, when a customer makes a retail purchase, the acquiring bank validates and authorizes the transaction, and the issuing bank verifies the customer’s account details. Once this process is complete, the approved funds are transferred from the customer’s account to the merchant’s account for settlement.
Then, the payments reconciliation process begins. The merchant reviews any records associated with the settled transaction — such as invoices, receipts or account statements — to ensure that they align with the company’s sales records.
How does payments reconciliation work?
Payments reconciliation is a four-step process:
Record retrieval: The payments reconciliation process begins with a merchant’s accountant or bookkeeper gathering all financial records from a specific time for comparison. These records come from various sources, such as bank statements, point-of-sale systems, payment processors, internal accounting systems and invoicing systems.
Matching: Once they’ve gathered the necessary records, the accountant or bookkeeper will systematically compare them, looking for corresponding transactions across different sources. This involves aligning entries based on transaction amounts, dates, reference numbers or other identifying information and ensuring that all transactions are accounted for in each set of records.
Reconciliation: The accountant or bookkeeper will then conduct a thorough examination of all matched records to identify and address any discrepancies. Examples of discrepancies include missing transactions, errors in recording amounts or variations in transaction details. Should the accountant or bookkeeper discover any discrepancies, they’ll conduct a thorough investigation, reviewing documentation and communication with relevant stakeholders.
Finalization: Finally, the accountant or merchant makes the necessary adjustments to records to bring them into alignment. Once all discrepancies are resolved, the reconciled records are considered final.Finalizing records may require updating internal accounting systems and preparing financial reports.
What challenges are inherent to payments reconciliation?
Although the payments reconciliation process may seem straightforward, there are obstacles to overcome, such as:
Payment processing complexity
Consumer demand for alternative payment methods has added complexity to the payments reconciliation process, creating an ever-growing list of sources that merchants need to pull records from to reconcile transactions. Not only is this challenging, it’s also wasteful.
When you look at most merchants, especially most merchants of a certain size — even those who have one acquirer — they really tend to struggle,” said Dan Coates, principal solution evangelist at ACI Worldwide, in an interview for the PaymentsJournal podcast. “They may have one acquirer, but they’ll have multiple channels. They have a web channel, an app channel and an in-store channel.”
Lack of standardization
Speaking of diverse systems and formats, without integrated systems and standardized financial records, merchants struggle to develop uniform criteria for accurate comparison and matching. This slows down the payments reconciliation process and prevents the timely detection and resolution of transaction leaks.
No single source of truth
When there is no single, verifiable source of truth for financial data — as is often the case when working with multiple partners across multiple channels — discrepancies are more likely to occur. Even internally, different departments or systems may maintain separate records, leading to challenges when reconciling conflicting transaction details and preventing merchants from achieving a unified view of all financial records.
Delays in closing
A prolonged payments reconciliation process can delay month-end and year-end closing, preventing merchants from generating accurate financial reports, meeting reporting deadlines, effectively managing cash flow and making informed financial decisions. These delays and the potential for inaccurate financial records can cause crises of confidence amongst stakeholders, including creditors, investors and regulatory bodies, threatening a merchant’s reputational standing.
Delays in payouts
Without a reliable view into their finances, merchants may need to delay payments to suppliers, vendors and other contractors, which can damage professional relationships.
Multiple payment partners
With support for alternative payment methods comes additional channels and partnerships to manage — sometimes across multiple regions. These partners — payment processors, gateways, providers and more — use diverse systems and formats, making it challenging for merchants to seamlessly consolidate and reconcile rapidly growing volumes of transactions.
I have more channels, so I have to reconcile more things,” said Coates. “It becomes a scalability limiter because I can’t expand to more regions until I get more people to reconcile things. In the end, more money, more problems. It’s that simple. When you look at it, we have revenue leakage because we’re getting in more money from more sources.”
Why do businesses need payments reconciliation?
Payments reconciliation is vital to ensuring the accuracy and integrity of financial records, which prevents reporting errors, mitigates fraud risk and provides a reliable view into a company’s financial health. In addition to supporting internal decision-making, effective and efficient payments reconciliation also enables merchants to meet external obligations, including regulatory requirements and accounting standards. Ultimately, by maintaining accurate financial records, merchants can foster trust amongst stakeholders and establish a solid foundation for sustainable growth and financial success.
How can businesses benefit from automated payments reconciliation?
By using a flexible payments reconciliation solution with automation capabilities, merchants can unlock a range of benefits that not only save time and resources but also significantly improve accuracy and decision-making — benefits such as:
Reduced administrative burden Payment reconciliation solutions can integrate with a company’s accounting software, invoicing system and other various systems, streamlining the financial records retrieval and matching stages of the payments reconciliation process. This saves accountants the time and effort of manually pulling information and instead dedicating their focus to what’s really important: identifying, investigating and rectifying discrepancies.
Faster error and fraud detection Every aspect of the payments reconciliation process is eligible for automation, including flagging discrepancies and updating records to correct them. Automated workflows can work at a much faster rate and with greater accuracy than accountants alone, expediting payments reconciliation and strengthening fraud prevention and detection efforts.
Increased accuracy By automating records matching, verification and adjustment, merchants eliminate the need for manual data entry, which both saves time and reduces the risk of human error. The end result is more reliable financial records and accurate reporting.
Faster financial closing With faster reconciliation comes faster closing, enabling merchants to promptly assess their performance, optimize resource allocation, make on-time payments, meet deadlines and effectively respond to emerging challenges and opportunities within the market.
Increased scalability Automated payments reconciliation enables merchants to efficiently handle increasing transaction volumes without proportional manual effort. A payments reconciliation solution can easily process large datasets, matching and verifying financial records across multiple sources with speed and precision. This enables merchants to supplement their existing accounting teams, without having to add headcount, allowing for more sustainable long-term growth.
Regulatory compliance Automation plays a pivotal role in supporting regulatory compliance by systematically applying predefined rules and parameters to the payments reconciliation process. Merchants can set up automated workflows to verify transactions against compliance requirements, reducing the risk of errors and oversights. A payments reconciliation solution can also help merchants create detailed audit trails for financial transactions, thereby demonstrating their due diligence and commitment to regulatory and accounting standards.
Improved cash flow management By automating the matching and reconciliation of transactions, merchants gain real-time visibility into available funds, enabling more accurate forecasting and planning. A payments reconciliation solution also supports the swift identification of overdue payments or other discrepancies, enabling merchants to promptly address liquidity challenges and optimize working capital.
Optimized customer experience Streamlining payments reconciliation with automated workflows to track, manage and account for money end-to-end significantly reduces the burden of manual reconciliation. This frees up valuable team resources to focus on improving customer-facing areas of the business and a delivering a better overall customer experience.
What best practices for payments reconciliation should businesses follow?
To make your payments reconciliation process as efficient and effective as possible, be sure to observe the following best practices:
Create a well-organized bookkeeping system. A streamlined payments reconciliation process begins with well-maintained and organized financial records. The more organized your bookkeeping systems, the easier it will be to categorize and track transactions and then, at a later date, retrieve and match records.
Establish a clear payments reconciliation process. Define and document what needs to happen at every stage of the payments reconciliation process so that finance teams have a clear understanding of procedure. Consistently following this established process will enhance and reduce the likelihood of oversights during reconciliation.
Automate wherever possible. As discussed, automation not only improves efficiency in reconciliation but also minimizes the risk of errors associated with manual data entry.
Set thresholds for unreconciled differences. Define acceptable thresholds for unreconciled differences, beyond which further investigation is required. This practice will help accountants and bookkeepers determine which discrepancies require immediate attention and prioritize accordingly, streamlining the payments reconciliation process.
Reconcile payments on a regular basis. Payments reconciliation shouldn’t be a one-time event, but an ongoing process. Routine reconciliation prevents backlogs from forming, reduces the risk of fraud and ensures that financial records are up-to-date and accurate.
Invest in the right payments reconciliation solution. The right tools and technology can support automation, provide robust reporting capabilities and offer the scalability to accommodate growing transaction volumes and other payment processing complexities.
How does ACI Worldwide support automated payments reconciliation?
Every merchant must reconcile transactions, but not every transaction reconciliation tool is made the same.
Bolt-on reconciliation platforms are often slow, outdated and struggle to keep pace with businesses as they grow, evolve and expand. This can lead to delayed and inaccurate financial reporting and resource inefficiency, which erode revenue, reduce profit and cause merchants to miss out on performance gains.
ACI’s revenue optimizer takes an automated, orchestrated approach to payments reconciliation, enabling merchants to consolidate data, automate workflows and perform multiway reconciliation across all payment channels. By harmonizing and orchestrating your business’ financial data, you can make the payments reconciliation process more accurate, efficient and scalable, fixing revenue leakage, mitigating payment incidents and ensuring complete audit-readiness.
To see revenue optimizer in action, request a free demo from the ACI Worldwide team today.
