Reconciliation is an essential aspect of the accounting process that improves transparency, maximizes decision-making, and ensures regulatory compliance. However, many merchants and payments organizations still rely on inefficient processes that can result in errors, financial losses, or violations.

In a recent PaymentsJournal podcast, Nick Botha, Global Payments Sales Manager at Autorek, and Don Apgar, Director of Merchant Payments at Javelin Strategy & Research, discussed the importance of optimizing the payments reconciliation process and explored the influence of automation on its efficiency.

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An End-to-End Process

The reconciliation process is often fragmented among business divisions, which can lead to inaccurate reporting.   

“It should be viewed as an end-to-end process,” Botha said. “That includes financial controls, operational processes, payment flows, the whole of financial operations. Reconciliation has become integral to the success or failure of a middle and back office these days, and it must be a single, continuous process.”

Another pain point is the reliance on legacy-based processes or manual workarounds to process complex financial data. As a business scales, inefficient methods increase the potential for a costly reconciliation error.

“A function of paying money out is reconciling it,” Apgar said. “There’s been so much growth in the fintech space, and so many companies have stepped in that don’t realize how complex it is. They don’t understand the sheer number of data sources there are, the number of categories, and how many feed types to apply.”

The move to faster payments is likely to compound reconciliation challenges. As instant payments rails like FedNow and RTP gain traction, companies will be compelled to adopt reconciliation processes capable of operating in real-time environments.

Fit for Purpose

Mastercard and Visa recently settled with merchants, agreeing to relax certain restrictions and reduce credit card interchange fees. The settlement is expected to save merchants $30 billion over the next three years.

“It’s a splashy headline,” Apgar said. “It boils down to a four-basis-point rate reduction for merchants, which is not much. The big news was the rules changes that allowed large enterprise merchants to negotiate their own interchange fee deals with large issuers. For example, Target could cut a deal with Chase for a lower interchange fee in exchange for ‘We Prefer Chase’ signage at the point of sale.”

The settlement also allows merchants to charge customers more to accept rewards cards that often have higher fees, such as airlines rewards cards.

“It will only be effective if merchant operations are improved,” Botha said. “A large, global merchant that’s still processing manually with spreadsheets and a team of 40 or 50 people, the new rules won’t have much of an impact because they aren’t efficient enough to take advantage of them. They’re using methods that are no longer fit for purpose.”

Though the settlement may provide short-term relief, many merchants and payments companies are operating on thin margins. If volume increases, they’re not prepared to scale accordingly and keep their margins secure.

Safeguarding Regime

In the interest of protecting consumers, regulators have established requirements stipulating that clients will receive 100% of their funds back in the event of liquidation by the payment services firm. In addition, the safeguarding regime ensures payment companies aren’t allowed to commingle their operational funds with their clients’ funds.

According to Botha, safeguarding extends beyond individual businesses. Partnerships are critical to the reconciliation process, necessitating collaboration with acquiring and technology partners that share the same values as your business.

Internal and external audits are another critical tool often overlooked by businesses. Regulators are intensifying scrutiny of merchant-bank relationships and payment ecosystems. With regulatory inquiries from the FTC, the CFPB, and the FDIC becoming more common, businesses should conduct self-audits to precisely assess their standing.

“For those companies that are still using legacy processes, creating even a basic report for regulators could be a nightmare,” Apgar said. “Automating the settlement function and having the data organized and accessible is crucial for accurate reporting. It’s not just about organizing your daily functions; it’s about preparing yourself for compliance inquiries so you can respond without manual intervention.”

Internal and external reconciliation are the biggest issues regulators have identified in organizations.

“It’s not just the manual processes,” Botha said. “There’s not enough control around these functions. Businesses must know what their workflows are, how they’re managed, and the tools used, simply to produce accurate reports. Many times, regulators aren’t just looking for data, they’re looking for insights into a company’s operations.”

A Single Source of Truth

Many reconciliation issues could be resolved by improving the communications between business segments.

“In today’s world, a data team might be handling day-to-day financial data,” Botha said. “You might have one team dedicated to reconciliation and month-end functions, and then a different team that’s handling stakeholder reporting. Even though there’s all these different business units, it’s one process. Companies must fold all those functions into a single source of truth.”

Every business has its own culture, but gaining an understanding of how competitors or similar organizations operate can provide valuable insights. Companies should also consider macroeconomic factors beyond their own geography, given the increasingly global payments economy.

When a business is fragmented, automation can do more harm than good because it’s based on inaccurate information. However, once a company has centralized its data, automation can have a substantial impact, especially as the company scales.

“Businesses spend so much money on customer acquisition and experience,” Botha said. “I would strongly suggest allocating an effective budget to your technology stack over the next few years. Funds rarely go to the back office, but that’s the piece that ensures you can scale as you acquire customers.”

Apgar added: “At some point you have to step back and build infrastructure. Often, if it’s not visible to the customer today then the money doesn’t get allocated toward it. But those processes will become visible to the customer when they don’t work.”

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