Reconciliation in the Payments Industry: When Money is the Commodity

Reconciliation is, of course, an absolutely essential process in any business. If the accounts don’t balance then there is a serious problem somewhere that could cost a business its customers and could even be the death knell of the business itself.

The payments industry arguably has more challenges, in this regard, particularly following a decade of significant change. Reconciliation is more important than ever now that such businesses are dealing with huge volumes, numerous data sources and ever more participants involved in each transaction.

On the other hand, one thing has remained the same throughout the evolution of the payments industry and that is the simple fact that payments are still about transactions — the fair exchange of value between participants, with the focus on making sure that all participants get what is owed to them in a timely manner.

Incoming and outgoing

One of the challenges with reconciliation in the payments industry that does not come from any recent developments is the simple fact that such businesses must reconcile both outgoing and incoming payments in comparable quantities. Most people (let alone businesses) are used to reconciling outgoing payments, comparing bank statements against receipts and ensuring that the two match. Incoming payments, however, are comparatively rare and are themselves challenging to deal with.

The problem businesses face when it comes to reconciling incoming payments is that banks rarely carry significant details about incoming transactions. Some money appears in your account and you’ll generally have the date it cleared and the name of the person who sent it, if you are lucky. In some cases, it might only be an account number.

That’s not too much of a problem if you only get a few incoming payments per month, but what if you are getting them in bulk and needing to reconcile them almost instantaneously, as payment companies do? How do you match payments to transactions to ensure that all participants of each transaction are satisfied? Correctly matching these details is key to financial reconciliation.

When the movement of money on behalf of others is your company’s principal service, as is the case in the payments industry, reconciliation becomes less of a financial necessity — merely making sure that your accounts are balanced to ensure that there is no money leaking out the business where there shouldn’t be — and more of an operational one. Losing track of your own money can be expensive, but losing track of someone else’s has the ability to ruin your relationship with your clients and, from there, your entire business.

A question of balance

Payments are increasingly being viewed as a commodity service, and it’s not hard to see why. You are effectively moving a commodity from a place where supply is greater than demand to one where the opposite is true. It just so happens that the commodity, in this case, is money. The problem that payment businesses face is that there are scant profits to be had in such a model. Clients have an ever-lengthening list of trustworthy providers they can obtain this service from, so the fees businesses can apply must be kept low for them to remain competitive. That being the case, transactions must be made in bulk for payment businesses to make any meaningful profits.

We’ve already talked about the problem this creates — with greater volume of transactions comes greater risk of error. The risks are amplified when there is a delay in incoming settlements, caused by a delay in reconciliation of such payments. In order to maintain neutral cash flow, payments should not be released until cleared funds are available from the incoming payment, but this can only happen once reconciliation is complete.

The ideal situation is for incoming payments to be reconciled as they arrive. Tools able to allocate incoming funds to specific transactions make the difference between the commodity service of payments being a near-instant one compared to it taking hours to process and complete. Given the aforementioned amount of competition in the industry, such a delay could be the difference between a loyal client and a lost one.

When it comes to handling money as a commodity, payment businesses inevitably see money as inventory. That being the case, reconciliation takes on a profoundly significant importance as it ensures that “inventory logistics” is handled smoothly, swiftly and accurately. Given the volume of transactions being handled, reconciliation must be handled on an intraday level to enable accurate inventory management. The last thing a payments business wants is to send out a payment thinking that they have sufficient ‘stock’ (cash) to cover it, only to discover that their accounts had not been properly updated, leading to the payment failing or putting the company in debt.

A global scale

Operating on a global scale, as is generally the case for payments businesses, adds its own share of problems. Realistically, if such a business wants to work at the sort of scale that will deliver meaningful profits, worldwide coverage is the only way to go, especially when there is so much competition in the industry. However, working with multiple currencies and a list of bank accounts around the world measured in the hundreds and maybe even thousands makes effective and efficient reconciliation that much more challenging, yet all the more necessary.

Adding to the issues is the fact that, among those hundreds of different bank accounts, you may encounter hundreds of different approaches to sharing data on account activity. There may be different protocols required just to get hold of bank statements, let alone differences in how transaction details are recorded and shared, differences in how quickly statements are updated and so on, all of which can slow down or even prevent accurate and reliable reconciliation. Again, a good toolset is the key to success here — especially one that makes working with multiple different banking partners quick and easy.

It’s not just banks that payment businesses will need to work with when it comes to global money transfers, either. They will even have to deal with themselves. A single company with often need to have numerous legal entities spread around the globe in order for them to operate in different regions, necessitating a large amount of inter-company transfers. For a single transaction with a client, there may need to be several internal transactions, pushing money between those entities, all of which will also need to be properly and swiftly reconciled. As ever, the proper tools and processes make this Herculean effort possible.

Still more challenges

As if this laundry list of challenges facing payment business was not mountainous enough, there are plenty of others. Payment businesses are often targeted by fraudsters seeking easy wealth. There are also multiple different regional regulations that must be abided by, with different types of report required by each. In either of these cases, failure can easily spell the end of your business. In both, robust reconciliation is the only way to survive.

For what little comfort it may offer, it is worth noting that the challenges faced by payment businesses are not unique. Indeed, all businesses must make and receive payments since that is the nature of business. The only difference is one of scale. The number of transactions a retail business may handle in a month may be handled by a payments business in a day or less. That being the case, there is naturally more at stake when it comes to reconciliation and the need for it to be both quick and reliable. However, it is clear that having the right toolset for the job is just as important in any and all businesses — at least, all of those that intend to endure and prosper.

This article is provided to you by DeeMoney. Thailand's money transfer solutions provider licensed by the Bank of Thailand. Interested in transferring money from Thailand to the world? Download the app from the Google PlayStore or the Appstore to get started.