Automated payment reconciliation explained

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Seb Putman
June 13, 2023
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Automated payment reconciliation explained

Ask any financial professional what their most dreaded job is, and nine out of ten times, you'll likely get the same answer: reconciliation.

It's no surprise why. Reconciliation is seen as an essential but mundane task that adds little value in many businesses: a box-checking exercise to close the books. As a result, the reconciliation process has received very little attention or investment. In fact, it's not uncommon for the reconciliation process to have gone unchanged for decades; in other words, it's still manual, arduous and error-prone.

Yet this is a legacy way of thinking and it results in a miscalculation of the impact an automated and effective reconciliation process can have within a modern business.

Here we take a look at the importance of reconciliation and why you should optimize it.

What is automated payment reconciliation?

Every transaction that a business makes typically has to be backed up by at least two forms of documentation. One is the internal company records and the other is an external statement which is usually from a bank or credit card company. Using these records of the transaction, company account balances can be verified. This is a vital part of the accounting process and is what we call payment reconciliation.

This might seem like a straightforward process but in reality, because of the complexities of a large business and the huge number of sources where payments can come from, it is not. Because of the complexity of the process, it can become a costly exercise for a business.

Research from Aberdeen Group finds businesses that manually reconcile spend eight working days a month on the process. With an accounts receivable manager in the UK earning £30,000 a year on average, that time equates to nearly £10,000 per annum in resource cost. And that's just for one full-time employee. If there's a team, which often there is, the cost of this process can easily creep into the hundreds of thousands of dollars.

The same research also shows that companies can easily reduce the time teams spend on reconciliation by half, if not more—generating significant cost savings—by automating the process.

But there's more to the story than cost savings. Looking at payments reconciliation through the narrow lens of cost savings alone misses the broader impact an optimized process can have on a business's profitability and financial health.

Types of payment reconciliation

The complicated nature of reconciliation comes down to the growing number of ways that there are for customers to pay—credit cards, digital wallets, payment links and even cryptocurrency are only a few examples of the different payment methods available. All these payment methods mean different types of payment reconciliation. Here are a few of them:

  • Bank reconciliation
  • Credit card reconciliation
  • Debit card reconciliation
  • Digital wallet reconciliation
  • Real-time automatic payment  reconciliation

How does automated payment reconciliation work?

As suggested in the name, automatic payment reconciliation allows businesses to automate the payments reconciliation tasks. By automating the process, your business can cut down on costs and tasks. Additionally, you should be able to reduce the errors in the process.

While many of the reconciliation tools that boast automation do in fact require some manual intervention, automating any part of the process will still have advantages. And, in a lot of cases, reconciliation is just a matter of confirming what the accounting team has already known from internal information. So, getting rid of any inefficiencies will save you time and, importantly, money.

Benefits of automated payment reconciliation

Here are five key benefits we typically see when working with businesses to optimize their payments reconciliation process:

1. Increased straight-through processing

Streamlining payments reconciliation saves time and frees up resources. Process efficiency means cost savings for the business and allows staff to focus on more value-adding activities. This is achieved by automating and digitizing reconciliation, facilitating straight-through processing and reducing human intervention.

2. Improved accuracy

Manual payments reconciliation is fraught with error. Even the most diligent reconciliation manager is prone to their finger accidentally hitting the wrong key and many other mistakes that humans can make. At best, these errors take time to identify and resolve. At worst, they can cause businesses to report incorrectly or make decisions with inaccurate data—both actions that have negative consequences. Automation doesn't remove the risk of errors occurring, but it significantly reduces it. As a result, businesses have more certainty in their reporting numbers and confidence in using the data to inform strategic decisions.

3. Enhanced fraud detection

Moving fast is the hallmark of a modern business, and nowhere is moving quickly more critical than when it comes to protecting the business from fraud and financial loss. While automated payments reconciliation is not a silver bullet, it does help businesses spot instances of foul play faster. That's because reconciliation only happens monthly in the manual world, whereas in the automated world, businesses can reconcile daily or even intra-day.

4. Better tracking and cash flow

Timely and accurate reconciliation helps businesses stay on top of payments and promote better cash flow, which is essential for the financial health of any business. Many businesses operate with fine margins, so it's vital to ensure that money flows in when due. Accurate and timely reconciliations—perhaps once a week or even more often—can place a business in a stronger position and help avoid potential problems.

5. A granular and strategic view of payments

Meaningful data is the foundation for business intelligence and smart decision-making. Because effective reconciliation is based on how data is recorded and shared, it can provide many insights about performance—what's working and what's not—and lead to more efficient payments. This is where reconciliation can be turned into a strategic advantage, revealing payment trends, customer preferences and habits and risk factors. When payment reconciliation is built on legacy systems and dated practices, key information may be lost. But when reconciliation is optimized, information is brought to the surface and data analytics can unlock the value.

Why are businesses not automating their reconciliation process?

If there's so much benefit from automating payments reconciliation, it begs the question: why isn't it an area of focus for every business? And it's a good question. There are a few reasons businesses still work with a manual reconciliation process.  

A lack of awareness and a fear of change are the first obstacles to overcome. Internal teams across finance, IT, accounts and other departments may be set in their ways and tied to manual processing and spreadsheets. Because they've always done reconciliation in a certain way, many people believe it's the only route for their organizations. Others may lack the will to change because they feel it will be too challenging and costly or don't know who to turn to for help.

A belief that technology isn't up to handling their reconciliation requirements is another interesting block in some businesses. Some 44% of executives interviewed by Aberdeen Group believe the complexity and scale of their data would not be able to work in an automated system. Similarly, 44% say changing systems does not outweigh the risk of disrupting existing processes.

Of course, these are misapprehensions, as optimizing reconciliation will boost operational and financial efficiency. Technology also isn't the barrier to adoption it once was. The technology built by modern payments providers is more than capable of handling the data of the most complex business and presenting it in whatever way a business requires. Also, with the ability to code to APIs, these payments solutions make it easier and more cost-effective to achieve significant performance gains. And, automating your reconciliation process allows you to unlock insightful payment data and reporting.

Make automated payment reconciliation a priority area for modernization

Reconciliation is too often dismissed as a low-value bookkeeping task: something every business must do, but few see as a way to boost the bottom line. This is a mistake. As we've seen, payments reconciliation is a critical business function that can be hugely beneficial if performed diligently and with a strategic view of payments data. Instead, businesses should get ahead, modernize the process and use it as another tool to reduce costs, mitigate risk and drive growth.

Get our exclusive guide to see how leading businesses use payments to modernize.

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June 13, 2023 10:03
June 13, 2023 10:03