Reconciliation process for merchants

Payment reconciliation.

It’s a term that can strike dread, boredom – even fear – into the heart of any merchant. Yet for all businesses (and individuals), account reconciliation is a crucial part of how you balance the books. Reconciliation can help your business prevent fraud, identify errors, forecast your financial future with confidence, and comply with regulatory requirements.

If, that is, you do it right.

So below, we’ll define payment reconciliation, explain how it works, and unpack its key benefits for merchants. We’ll unpack how this process differs for acquirers and merchants, respectively, and offer our top strategies for account reconciliation. Then, we’ll explore how frequently your business should be reconciling its accounts – and how Checkout.com can help.

What is payment reconciliation?

Payment reconciliation is, at its most basic, the process of comparing and verifying two sets of financial records to ensure the figures are correct – and that all the numbers make sense.

When you reconcile payments, you’re essentially comparing your accounting records (what you thought your business made or lost in a specific time period) with your bank statements (what your business actually made or lost). By verifying that the amounts and dates of payments your business made or received match the numbers in your financial records, you can identify discrepancies, and pinpoint the reasons – be they accidental or malicious – behind such errors.

Both individuals and businesses engage in payment reconciliation.

An individual, for example, might cross-reference their monthly credit card statement against the receipts of purchases they’ve made with that card – or with the spreadsheet or personal finance app they use to track their spending.

As for a merchant-focused example, a business might collect its financial records – including its monthly bank statement, plus sales records, purchase invoices, and receipts – and check these against the figures recorded in its accounting software to make sure they all match up.

How does reconciliation work?

Let’s run through the reconciliation process: in four quick, simple steps.

1. Gather your business’s external and internal financial records

Payment reconciliation involves cross-checking and comparing two sets of financial records: so the first step is to gather that data and get it ready for analysis. Broadly, you can split the information you’ll need to reconcile your business’s payments – records which are called payment reconciliation reports –  into two categories:

• External records come from sources outside your business. They include bank statements, credit card statements, and supplier statements.
• Internal records are those your business maintains. These include entries into your accounting software, receipts, expense reports, invoices, and ledgers.

2. Compare the two sets of records and look for discrepancies

Next, it’s time to compare the external and internal records with each other.

To do this, work your way through both sets of records: checking for matching details such as the date, amount, and description of each transaction. As you proceed, keep an eye out for anything that doesn’t look quite right. That might be missing transactions, unmatched amounts, duplicate entries, or inaccurate transaction details.

3. Investigate and correct the discrepancies

The third step? Zeroing in on those discrepancies to highlight why they’ve occurred.

Typically, discrepancies in internal records are a result of simple human error: a mistake in how the data has been entered or recorded, or a missed transaction. Other times, though, it can be due to more malicious intentions that might point to fraudulent activity, or – in severe cases – an employee attempting to “cook the books”.

As for external records, discrepancies could be a result of unauthorized transactions or errors on your financial institution’s part – so it’s vital to dig into these with your bank to learn more.

Once you’ve understood these discrepancies, you can resolve them in your internal records: adding missing transactions, correcting amounts, and removing duplicate entries. If the discrepancies are external, you can get in touch with your bank to resolve them.

4. Reconcile your payments

With all transactions accounted for and all errors addressed, it’s time to ensure your payments – in your business’s internal and external financial records – match, and that they reflect the same transaction history and balance. Be sure, too, to retain thorough documentation of the reconciliation process and outcome: this kind of transparency is important not only for your future reference (and for the sanity of your accountants!) but for keeping your auditors happy.

Why do merchants use reconciliation?

Merchants reconcile their payments to:

• Detect errors and discrepancies: Regular reconciliation ensures your financial statements accurately reflect your transactions and balances. Better still, by identifying these issues early, you can stop them compounding: and, therefore, affecting your financial reporting and decision making further down the line.  
• Prevent fraud: Through payment reconciliation, you can spot unauthorized transactions – a sure sign of fraud – promptly, and take immediate steps to mitigate. What’s more, accurate payment reconciliation can help you strengthen internal controls by acting as a powerful deterrent. Your employees, for example, will be less likely to risk committing fraud against your business if they know it reviews and verifies all its transactions.
• Ensure accurate financial reporting: By accurately reconciling your payments, you guarantee the reliability of your financial statements. This allows for better decision-making and operational management; and means you, your stakeholders, and any potential investors can all be sure that those numbers reflect your business’s true financial position. (Not one that’s been assumed or incorrectly extrapolated.)
• Comply with legal and regulatory reporting requirements: Reconciliation isn’t just good practice – it’s a legal obligation. As a merchant, you must comply with Generally Accepted Accounting Principles (GAAP) – if you’re in the US – or International Financial Reporting Standards (IFRS), which are used in many countries throughout the world: including the UK, Canada, Australia, and the European Union. Timely, error-free reconciliation is a key part of adhering to these standards, and can help you avoid the damaging penalties and fines that come with non-compliance.

What are the reconciliation processes for acquirers and merchants?

In the context of how card payments are processed, reconciliation can take a variety of shapes – and the process will vary for different businesses.

To demonstrate, let’s take a look at how the reconciliation process looks for two types of entity: the acquirer and the merchant.

The reconciliation process for acquirers

Acquirers play a delicate role.

These businesses – the ones, like Checkout.com, responsible for accepting card payments on a merchant’s behalf – must work with card schemes such as Visa and Mastercard to verify and authorize transactions: before settling the funds to the merchant’s account.

Reconciliation is a key part of this. And, for an acquirer, it comes in two key forms:

• Scheme reconciliation involves acquirers monitoring the movement of funds between them and the card scheme. The goal? Analyzing transaction payment messages to ensure they have been settled the correct amount of money.
• Merchant Payouts reconciliation is the process of ensuring that funds captured by the acquirer (on behalf of the merchant it’s working with) have been moved to said merchant’s account. To do this, acquirers monitor what is marked as a completed merchant settlement on their bank statements, and make sure the amount there matches what the merchant actually received.

The reconciliation process for merchants

For merchants, the reconciliation process is a little more straightforward. Essentially, it involves comparing your transaction data – which you can obtain online through your payment service provider’s dashboard, or via your Point of Sale (POS) system – with your bank statement.

In doing this, you can ensure the amount settled, by the acquirer, into your business’s bank account matches the amount your internal records specify. Just remember to take transaction fees imposed by your payment service provider into account when reconciling your payments – these should be clearly labeled, but can also be easy to miss!

Essential strategies for streamlined account reconciliation

So far, we’ve covered both the ‘what’ and the ‘why’ of reconciliation – now, let’s look at how you can implement a slick, streamlined account reconciliation process at your business.

• Automate the reconciliation process: Effective reconciliation doesn’t have to be a strain on your resources – nor does it have to be manual. Instead, invest in reliable accounting software that offers built-in reconciliation capabilities, which automatically match bank statements with transactions logged in the system.
• Integrate the different payment and transaction recording systems you use: A key part of effective account reconciliation is ensuring your POS system, your bank account, your accounting software, and your payment service provider are all on the same page. This enables the smooth, seamless transfer of data, and reduces the risk of errors.
• Standardize the reconciliation process procedure: To ensure the consistency and accuracy of your account reconciliation, create documentation and tools (such as checklists and templates) to standardize the process. By following the same formula each time, you can make sure you’ve followed all the steps – and overlooked nothing.
• Segregate duties of those involved in account reconciliation: By splitting up the responsibilities of reconciliation and divvying them out across your team, you can prevent errors and minimize opportunities for employee fraud. It’s vital, for example, to ensure that the person who records transactions isn’t the same person reconciling the accounts. Also, implement robust approval processes for an extra layer of oversight.
• Conduct regular audits: Auditing your reconciliation processes doesn’t have to be a job reserved for external companies – you can run them yourself. And actually, regular internal audits can ensure your systems and processes are compliant, while identifying areas for improvement – such as the need for more comprehensive training for your accounting team – before any external companies do. That said, you should also engage third-party auditors for an unbiased review of your reconciliation processes.

Want to know more about how to automate your business’s payment reconciliation process? 

Seb Putman, Associate Product Manager at Checkout.com, dives deep into the topic, and takes a peek at the untapped opportunity of automated payment reconciliation for merchants.

How often should businesses reconcile their accounts?

Many merchants reconcile their accounts monthly. However, the frequency at which your business should engage in payment reconciliation depends on the size and complexity of your operations – as well as on the volume of transactions you’re handling each day.

With that in mind, we recommend daily reconciliation for businesses with a high volume of transactions: such as ecommerce platforms, financial institutions, and retail stores. The latter, in particular – as a type of business that handles a lot of transactions each day – can benefit from the rapid detection of errors and discrepancies daily reconciliation allows for.

Merchants with a more moderate transaction volume may be better suited to weekly reconciliation. It’s less resource-intensive than daily reconciliation, but still allows for highly accurate cash flow management and forecasting.

Businesses with a lower transaction volume will find monthly reconciliation to be sufficient – and this is, indeed, standard practice for most merchants. Monthly reconciliation has an added practical benefit, too: because it aligns with your business’s monthly bank and credit card statements, it makes it even easier to reconcile your accounts.

If your business deals in an extremely low amount of transactions, quarterly reconciliation may suffice. Meanwhile, annual reconciliation is a must for all businesses, and is a crucial part of the year-end closing process: a precursor to the preparation of your annual financial statements and tax returns, and an important way to get ready for any pending external audits.

How does reconciliation work at Checkout.com?

When you choose Checkout.com as your business’s payment service provider, we don’t just make it easy for you to accept credit and debit payments.

We make it easier to reconcile them, too.

Here at Checkout.com, we know that understanding the exact payout amounts settled to you is a vital cog in your business’s bookkeeping process. Which is why our payout reports give you all the information you need – in a dynamic, yet digestible, format – to be confident that you’ve been settled the right amounts.

Our reports contain a unique 12-character ID, which will also be how payouts from us will appear on your bank statement. Then, it’s simply a matter of locating the payout on the report – which you can do quickly and easily by narrowing it down to a date range – then matching this with the corresponding transaction on your bank statement or transaction history.

With Checkout.com, it’s also simple to drill down into each payout to understand what fees came off the total amount; and learn, through our transparent fees and fully flat-rate pricing, not just what you’re paying – but why.

Want to find out more about reconciling payments with Checkout.com, or – better yet – experience its benefits for your business first hand? Get in touch with our team of payment reconciliation experts today to get things started with a no-obligation chat about how we can meet your business’s needs.