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Drew Edmond

Merchant Payments Operations: Accounting and Reconciliation

October 19 2020

A core component of Glenbrook’s methodology for assessing a merchant’s payments operations includes review of certain processes managed by the business’s accounting team, particularly the level of effort required to reconcile payment activity. 

The business’s accounting team is responsible for a variety of fundamental financial activities, including record keeping and reporting, accounts payable and receivable, payroll, and financial audits and controls. 

Among the team’s responsibilities that are affected by payments operations is payment reconciliation, a key function that helps ensure the general ledger is complete and ready to produce timely and accurate financial statements. Reconciliation is a necessary task across all of the payment systems that the business connects to: cards, ACH, digital wallets, and more. Reconciliation is also critical for financial, compliance, and risk audits, especially for merchants and businesses with money transmitter licenses. Fintechs, take note!

Reconciliation is a complex job that calls for automation. Variations in cutoff times, inconsistent currency conversions, uneven support of data formatting and naming conventions across banks/PSP/acquirers are all challenges that the business’s money team must address.

We’ll examine each of these challenges in more detail below, and highlight some best practices that we recommend to our clients. 

Rethinking Reconciliation Strengthens Operations and Positions Teams for Broader Contributions

Reconciliation is the process of comparing the status and amount of authorized transactions to the settled funds received. This generally involves three data sources: the business’s own order system, transaction data from the acquirer or PSP, and bank statements. To accomplish this, the business has a few reconciliation methods to choose from:

  • 2-Way Reconciliation: The merchant compares only 2 of the 3 data sources, orders against transaction data for example. This is a sub-optimal path for obvious reasons, as it is an incomplete reconciliation. 
  • 3-Way Reconciliation: The merchant compares transactions logged in their internal system to reports generated by its payment providers, and then to the bank accounts where settled transactions are ultimately deposited. This improves visibility but data shortcomings inhibit total transparency.
  • Transaction Level Reconciliation – This path produces the clearest picture but is difficult to do as bank statements generally do not support transaction level data, instead providing aggregate data to match to the sum on the order and payments reports. Further, PSPs and acquirers do not all support transaction level reporting, particularly for non-card transactions.
  • Aggregate Level Reconciliation – This path is the most common but without the underlying numeric detail it is hard to produce crisp reconciliation results. Variations in cutoff times for processing and reporting, reporting of chargebacks and reversals, currency exchange, and simple time zone differences add further complexity.

When discrepancies between any of these data sources exist, exceptions are generated and an investigation is required to determine the discrepancy’s cause. This can be a daily task requiring that each day is used to investigate the prior day’s exceptions. If the business operates globally, even the definition of a “day” becomes less clear.

Depending upon merchant size and sophistication, the reconciliation process can be highly manual. We continue to find even very large merchants using spreadsheets to identify exceptions and generate accurate reports. Smaller merchants operating in the point of sale and remote commerce or online domains face similar challenges, especially when using multiple payment service providers. 

Not only is this repetitive manual work tedious and demoralizing, it is impossible to manage and control. If you were to ask a CFO, they will be the first to say that manual processes and spreadsheets in financial operations are disasters waiting to happen.

Daily manual processes like these:

  • Take too much time to accomplish
  • Introduce user errors from data entry, data import and report generation mistakes
  • Lower the accounting team’s morale because it is routine, boring, and unproductive

Further, manual processes and spreadsheets are impossible to manage from a controls and process perspective:

  • How do you track changes? 
  • How well can you secure access to spreadsheet-based financial data? 
  • What happens if the person who manages the spreadsheet process leaves or is out of the office for a period of time?

With a workflow redesign, the increased efficiency can even improve the accounting team’s morale, allowing members to focus on strategic or other high-value activities. We all want to contribute to the success of the business and not to be saddled with tasks that should be automated end-to-end.

Key Areas of Consideration

Processes and Software in Use

Reconciliation processes vary by merchant size, organizational structure, and technical maturity. Table 1 illustrates the impact across the merchant categories.

Business Category Description Challenge
Startup to Mid-Market Process improvement is a complex and all-too-infrequent job given the press of today’s business. But the impact can be profound on the organization’s financials as well as its personnel. Automation of paper-based processes are often challenged by data integration. Excel, Tableau and Looker tools may bridge the gaps but opportunities for end-to-end integration and visibility should be evaluated. What is the level of effort required to achieve automated end-to-end integration of process reports into the general ledger?
Mid-market to High Growth Reconciliation is not a priority for the business as engineering effort focus on product, sales, marketing, and scaling globally. Manual processes become more automated, staffing levels increase or may be outsourced to low cost BPOs, aggregated reconciliation starts to show “cracks” Processes designed for an earlier business stage require significant manual effort when business volume and complexity increase. Automation of reconciliation tasks, among others, may require reevaluation of core accounting software. What is needed to support future growth?
Multinational
Multi-subsidiary
Complexity makes manual processes untenable, increases time spent on investigations, the time to close the monthly books expands, audits are difficult and overly time consuming to support Integration of multiple domestic payment systems, new acquirer/PSP data formats, operation of multiple ERP systems, all complicate transaction reconciliation, local compliance, and audit requirements. What is the enterprise strategy to speed reporting and optimize headcount?
University  A major university may have dozens of merchant accounts as well as vendors operating under it. Reporting and governance of multiple small “businesses” under its purview is an ongoing challenge. Reconciliation of reports, even on a monthly basis, from dozens to hundreds of merchants and their payment service providers is painful. Where are the biggest inefficiencies and what is the best path to improve them?

Payment Provider Reporting

A critical input into the reconciliation process are the daily reports generated by payment providers. The format and transactional data included in these reports differ across providers, payment systems, and countries. These differences can stymie the integration and reconciliation task before the Accounting team. It is important to leverage the payment provider’s support team and relationship managers if the reports cause frequent reconciliation issues. Timely report delivery is also critical to ensure no time-sensitive processes are affected. As we describe in our post about Data and Analytics, report generation should be tracked for accuracy, timeliness, and, ideally measured against a metric enforced through a Service Level Agreement. 

Overview of Processes and Policies

Accounting departments, especially at more established merchants, can be limited through a reliance on tradition – that is, doing things the way they’ve always been done. Of course, such historic processes and policies can become outdated and inefficient. 

All too many merchants continue to use Excel spreadsheets to manage their accounting processes.  They are more prone to user error and must perform far more manual steps to complete what can often be automated. For example, during a monthly close, the Accounting team must manage spreadsheet version control, the storage of files in shared internal folders, and manage approvals, steps that become increasingly unsustainable as an organization grows and becomes more complex. 

When we undertake a payment operations assessment for a merchant or biller, we often find the reconciliation process to be rich with opportunity for improvement. Our review measures how well each Accounting process supports the team’s ability to complete key responsibilities and supports the broader business objectives. 

Centralize for Team Visibility

A centralized solution that standardizes accounting processes provides visibility into these processes across organizational stakeholders. Centralization helps ensure that other team members are able to access critical information when they need it, creating further efficiencies across the organization.

Optimize for Your Organization

All merchants have unique characteristics that lead to nuanced challenges. These challenges often stem from decisions made under circumstances that no longer apply. As merchants grow and evolve, decisions made across business units can interact unexpectedly and result in lower efficiency, higher costs, and lower team morale. Accounting processes are disproportionately exposed to this as they are developed in response to vendors chosen by other teams. Accounting is then left to fill the capability gaps. Periodic reassessment of existing processes and mapping the results to any new capabilities offered by vendors provides an opportunity to improve critical performance metrics. 

Process improvement is a complex and all-too-infrequent job given the press of today’s business. But the impact can be profound on the organization’s financials as well as its personnel.

How is your Accounting team performing? Are you taking advantage of the latest technology? We would love to help enable your team’s future success. Get in touch to discuss how your organization could benefit from Glenbrook’s Merchant Payments Assessment. 

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