Payment Reconciliation Guide [2023]

Although complex, payment reconciliation is crucial for maintaining the accuracy and integrity of your financial transactions.

Keep reading to learn more about why payment reconciliation matters and how it works.

Does Your Business Need A Payment Reconciliation Process?

Definitely yes! 

Payment reconciliation is central to maintaining accurate financial reports for your business, as well as identifying discrepancies and preventing fraud.

It’s no exaggeration to say that payment reconciliation is the lifeblood of financial management.

Businesses large, small, and in between need a robust and routine payment reconciliation process.

» MORE: Why merchants should review their monthly processing limits

How Does Payment Reconciliation Work?

The payment reconciliation process can be divided into internal and external stages.

Internal 

During this stage, businesses gather all relevant financial documents, such as sales records, invoices, and internal account statements. Their accounting teams then cross-check these documents to ensure that no internal discrepancies exist.

External

In the external stage, internally validated records are compared with external statements from banks or payment gateways. Any inconsistencies between transaction dates, amounts, and other transaction details are flagged for further investigation.

Reconciliation Process Steps

Now that we’ve provided a basic explanation of the internal and external stages, let’s look into the steps involved in the payment reconciliation process.

Record Retrieval

This is the first step in the reconciliation process, where all necessary records, such as bank statements, invoices, and other records, are gathered for reconciliation.

Matching

This is the phase where transactions recorded in your company’s books are compared with external records. Here is where discrepancies between the recorded transactions and the actual transactions are identified.

Reconciliation 

In this critical phase, discrepancies between your internal records and any external records are thoroughly investigated. The reasons for these discrepancies range from simple data entry errors to potential fraud. 

Finalization

Once all discrepancies are identified and resolved, the payment reconciliation process is concluded. This means your business has updated its records and possibly taken steps to prevent future discrepancies.

Payment Reconciliation Example

An example of payment reconciliation would be an online retailer cross-checking their sales records with the payment records from their payment gateway and bank.

Any discrepancies would then be investigated and resolved, ensuring that the financial records accurately reflect the sales.

What Are The Types of Payment Reconciliation?

Payment reconciliation takes on different forms depending on the type of financial transactions involved.

Here are a few key types of payment reconciliation.

Bank Account Reconciliation

Bank account reconciliation means comparing a company’s internal record of transactions and balances with the bank’s record.

Credit Card Reconciliation

This type of reconciliation matches credit card statements with transaction records to ensure all charges, refunds, and payments are accounted for.

Debit Card Reconciliation

Similar to credit card reconciliation, this process compares debit card transactions recorded by a business with their bank’s records.

Digital Wallet Reconciliation

Digital wallet reconciliation compares a business’s transaction records with its digital wallet provider to ensure the information aligns.

Payment Gateway Reconciliation

This type of reconciliation is important for businesses that receive payments through different payment gateways. It ensures that all records from the payment gateway providers align with the business’s own records.

Online Payment Reconciliation

Primarily applicable to e-commerce businesses, online payment reconciliation verifies online transaction records with bank statements or payment gateway reports.

Automated Payment Reconciliation

This type of payment reconciliation uses software to automate the process of comparing financial records, reducing manual errors and increasing efficiency.

Benefits of Payment Reconciliation

Payment reconciliation offers several benefits. These include the following.

Accuracy in Financial Records

As discussed, one of the chief benefits of payment reconciliation is maintaining accurate financial records.

Fraud Detection

Unusual transactions, discrepancies, or unrecorded transactions are red flags that can indicate potential fraud.

In this respect, payment reconciliation serves as a helpful tool for detecting fraudulent activities.

Insightful Payment Metrics

Payment reconciliation offers insights into your business’s financial health, as it allows you to track your cash flow and general payment trends. It also helps you make informed decisions about budgeting.

Reduction of Errors

Errors in data entry, timing discrepancies, and other issues can lead to imbalances in financial records. Fortunately, regular payment reconciliation helps detect and correct these errors.

Improved Cash Flow Management

Regular payment reconciliation gives businesses an up-to-date and accurate understanding of their cash position, which is crucial for effective cash flow management.

All transactions are accurately accounted for, and this means businesses can avoid unexpected cash shortfalls or discrepancies.

In addition, with a clear view of cash flow, businesses can make more accurate financial forecasts.

Regulatory Compliance

Depending on the industry, some businesses are required to conduct regular payment reconciliation to remain compliant with financial reporting standards and regulations.

With this in mind, regular reconciliation could help your business avoid potential fines or penalties.

Stakeholder Confidence

Regular and accurate payment reconciliation may help build confidence among your investors, creditors, and employees, as it green flags the financial integrity of your business.

Effective Dispute Resolution

In the event of customer payment disputes, having well-reconciled records can help businesses swiftly and accurately address the concerns.

» MORE: For 5-star customer service, work with Pixxles

Potential Downsides of Payment Reconciliation

Despite its numerous advantages, payment reconciliation comes with its own set of challenges.

Here are some potential downsides.

Time-Consuming Process

Manual payment reconciliation can be a time-consuming process, especially for businesses with a high volume of transactions. This can divert resources away from other critical business operations.

Risk of Human Error

Despite best efforts, the manual process of reconciliation is subject to human error. Miscalculations, oversights, or misinterpretations can lead to inaccuracies in financial records.

Complex Transactions

Certain transactions can be complex and difficult to reconcile. For instance, transactions involving multiple currencies and/or cross-border payments can complicate the reconciliation process.

Inadequate Reconciliation

Incomplete or inaccurate reconciliation could potentially mislead company management in their decision-making process and result in poor strategic choices.

Potential Legal Consequences

In certain industries, regular payment reconciliation is a regulatory requirement. Failing to conduct adequate reconciliation can lead to non-compliance, resulting in potential fines.

Cost Implication

Whether you employ staff for the reconciliation process or invest in automated reconciliation tools, you will have additional operational costs. For small businesses, this can be financially burdensome.

Data Security Concerns

The reconciliation process often requires access to sensitive financial data. If not managed properly, this can lead to potential data breaches or unauthorized access.

Failed or Delayed Detection of Discrepancies

Although payment reconciliation aids in detecting discrepancies, in some cases, errors or fraud may go unnoticed.

Quick Recap: Payment Terms

To understand payment reconciliation, it’s necessary to understand the most commonly used related terms. Here they are in condensed form.

Payment Reconciliation – This involves cross-verifying transaction records against bank or payment gateway statements.

Bank Reconciliation – Bank reconciliation compares your business’s internal cash records with your bank statements.

Operational Reconciliation – This form of reconciliation ensures that physical assets match your business’s bookkeeping records. Operational reconciliation is crucial for businesses dealing with physical products, as it helps identify losses due to theft, damage, or administrative errors.

Financial Reconciliation – Financial reconciliation encompasses all financial data, ensuring that it aligns across different internal and external sources.

» MORE: History of online payments and common payment terms

Best Practices for Payment Reconciliation

Ensuring successful payment reconciliation requires implementing best practices, such as—

Rigorous and Accurate Bookkeeping

Effective payment reconciliation starts with rigorous bookkeeping. Every transaction, regardless of its size, should be recorded promptly and accurately. This includes sales, purchases, bank fees, refunds, and any other transactions.

Regular Reconciliation Events

Payment reconciliation should be a regular event. The frequency depends on the volume and complexity of the transactions, but regular reconciliation ensures discrepancies are identified and rectified promptly.

Routine Audits

In addition to regular reconciliation, routine audits provide an extra layer of assurance to businesses. Audits offer a more in-depth look into a business’s financial operations.

Clearly Defined Reconciliation Process

A well-defined reconciliation process is crucial for successful payment reconciliation. The process should outline who is responsible for reconciliation, what steps they need to follow, and how discrepancies should be handled. The process should also include a review and approval mechanism to ensure accountability and transparency.

Adoption of Technology

Automated payment reconciliation tools can significantly streamline the reconciliation process. Specific benefits include quickly matching transactions, reducing human error, increasing accuracy, and generating meaningful reports.

Ongoing Training 

As payment methods and reconciliation tools evolve, it’s important to provide ongoing training to the staff involved in the reconciliation process. This maintains the effectiveness of the process.

Escalation Mechanism

Despite best efforts, there may b instances where discrepancies cannot be resolved through reconciliation.

In such cases, an escalation mechanism should be in place, outlining how unresolved issues are escalated to higher management or a specialized team for resolution.

Contact Pixxles

To learn more about Pixxles payment processing, visit our Payment Processing Solutions page or call us at +44 208 126 4154.