Payment Reconciliation is often overlooked, but it is one of the most important parts of the payments process.
What Is Payment Reconciliation?
Payment Reconciliation ensures all financial transactions are accurately recorded. It compares a company’s internal records with those of the external bank or payment service provider. By doing this, discrepancies can be spotted early and dealt with.
Such discrepancies can include:
Missing transactions
Incorrect amounts
Data entry errors
System errors
Fraudulent activities
Why Is Payment Reconciliation Important?
The key purpose of payment reconciliation is to spot discrepancies early and act upon them. Not only does this help business planning and maintain business health, but it could also be an issue of legal and regulatory compliance.
Payment reconciliation can act as a safeguard against genuine errors and mistakes, as well as combat potential fraud.
Another advantage is it can aid business planning as it’s a key way of ensuring effective cash flow management. Reconciliation can give real-time insights into the financial health of a company, improving forecasting and operational efficiency.
The Main Steps in Payment Reconciliation
1. Compare Transactions – Match the internal data with the external data, particularly focusing on the correct transaction dates, payment amounts, and payee/payer information.
2. Spot Discrepancies – Note down all discrepancies, no matter how small.
3. Resolve Discrepancies – Investigate and resolve all discrepancies. Correct the ones you can and contact relevant parties where necessary to sort out the rest.
4. Document – It’s important to provide a report of all the discrepancies found and the resolutions that have been made. This could be useful for future reconciliations, while it also provides an audit trail.
Payment Reconciliation Best Practices
There are a number of best practices you should adopt when it comes to payment reconciliation.
1. Perform Regular Audits – Payment Reconciliation should be conducted regularly as this allows for the swift detection of issues. It should be a monthly process at the very least, but ideally weekly or even daily.
2. Use Specialized Software – Automating payment reconciliation can save time and boost accuracy. It can also ensure scalability, particularly if you have a significant number of transactions to audit. Specialized software works by leveraging rule-based matching and algorithms to ensure consistency.
3. Keep Thorough Documentation – Having clear and comprehensive information smooths the reconciliation process and enables easier accountability and transparency. It also provides an audit trail, aiding legal compliance. This also makes it easier to train other members of your team where necessary.
4. Segregating the Process – Ensure different members of staff are involved in different parts of the process. This will reduce the likelihood of both errors and fraud. In doing this, ensure you have a documented guide to the process.
5. Don’t Overlook Small Discrepancies – It is tempting to ignore small issues, but these can grow into bigger ones if not addressed. It may also be due to underlying issues in the reconciliation process. Automated software will help you deal with this more efficiently.
The Benefits of Automation
There are many benefits to automating your reconciliation process, particularly if you have a large number of transactions.
1. Save Time – Automated processing saves time by automatically matching transactions, highlighting discrepancies, and generating reports.
2. Improved Accuracy – Rule-based matching and advanced algorithms are employed to ensure reconciliation that is both consistent and accurate. This reduces the chance of human error.
3. Increased Fraud Detection – Machine learning and AI can be utilized alongside fraud detection algorithms to identify anomalies and patterns that could be associated with fraud.
Conclusion
Payment Reconciliation is a vital yet often overlooked part of the payment process. By insuring your internal records match external transactions, you can spot discrepancies quickly, including possible cases of fraud. Having a robust payment reconciliation process also ensures you are regulatory compliant.
There are a number of best practices when it comes to payment reconciliation, while automating the process can help. PayLab offers Payment Reconciliation as part of its wider offering and is perfect for high-volume business in high-risk sectors.
Contact us today to view our 30-minute demo or to have a chat to see how PayLab can help your business grow.
