Reconciliation is the process of verifying that the numbers are correct. In accounting, this has typically meant matching expenses against the bank statement. If a line on the bank statement can’t be matched against an accounting entry, you have a break in your reconciliation. The accountant would then ask whoever is in charge of the expense to provide the receipt, or why an invoice hasn’t been paid.
This process is generally automated in most companies, and live data from bank accounts means reconciling bank accounts against income and expenses can be done in real time.
In a fintech, there are lots of other things that need reconciling besides the bank account:
- Safeguarded funds
- Payment initiation and settlement
- FX conversions
- Card settlement
- Payment floats
There are three general ways to manage reconciliation
- Bank account level
- Customer level
- Transaction level
At the bank account level, we make sure that the amount sent to a bank account and the amount spent from the same account, matches the end-of-period balance.
At the customer level, an EMI or API checks that the amounts provided by a customer and the amounts spent by a customer, matches what is being reported to the customer as their end-of-period balance.
At the transaction level, we verify that individual transactions that have been initiated by a customer or the company have been settled, and that any payment failures have been either retried or returned to the customer or to the company.
For a Fintech, there are typically several systems and payment providers involved, which complicates the reconciliation task.
The company might offer payment services to its clients, that are executed by a different party. Either a local bank, an overseas bank, or by a different payment institution.
These payments will be recorded on the transaction statements of each financial institution, and in the company’s own IT systems. Bank account, customer, and transaction level reconciliation means bringing these data sources into a single place, and ensuring that they all match.
Successful bank account level reconciliation relies on getting an account confirmation from the bank or Fintech in question, and comparing that to what the company’s IT systems have recorded.
Customer level reconciliation requires matching a specific payment in the bank’s transaction statement against the company’s systems. If there is a customer ID associated with each transaction, the process is relatively straightforward. Lacking a unique user ID, the reconciliation process will have to rely on payment references, sender and beneficiary name, timestamp, amount and currency, which creates space for errors.
Transaction level reconciliation requires a unique transaction ID that is available in both the company’s systems and in the bank’s transaction statement.
Any unreconciled payments are handled through a manual process, where the reconciliation team of the company reviews the transaction and reaches out to internal and external stakeholders to confirm the payment. For example, the reconciliation team might investigate why the payment does not appear in in-house systems, and find that the payment has been processed manually. They might reach out the customer to get confirmation that a payment has been settled. Additional information may also be requested from the financial institution that is responsible for settling the transaction.
In many cases, this process can be largely automated with a data warehouse. Internal data sources are pooled into a single location with an ETL job. Transaction statements and other data points are added from an API, an SFTP server, or manually uploading spreadsheets.
At the end of the process, the reconciliation team reports back any discrepancies to the stakeholders.
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