Accurate payment reconciliation is essential for maintaining the financial and operational integrity of an online retail business. Finance departments must match and reconcile all payments to ensure every transaction is accounted for, revenue is accurately reported, and potential discrepancies or fraudulent activities are promptly identified. Reconciling payments is not just a book-keeping exercise; it is a fundamental practice that underpins the company's financial health, compliance, and decision-making processes. For large enterprise merchants, payment reconciliation is a critical task that often presents significant challenges. As the gatekeeper of financial data, Finance and Operations teams play a pivotal role in ensuring accurate and timely reconciliation of payments received from various payment service providers (PSPs).

Why is reconciliation so difficult?

 While the concept of payment reconciliation may seem straightforward, the reality is far more complex, especially in the online retail space. Here are some key reasons why reconciliation can be a daunting task:

• Multiple Payment Service Providers (PSPs): Online retailers often work with multiple PSPs to cater to diverse customer preferences and geographical regions. Each PSP has its own unique data formats, reporting structures, and reconciliation processes, making it challenging to consolidate and reconcile data from various sources.  
• High Transaction Volumes: Successful online retailers can process thousands or even millions of transactions daily, making it nearly impossible to manually reconcile each payment individually.   
• Data Inconsistencies: Inconsistencies in data formats, naming conventions, and transaction identifiers between the retailer's internal systems and PSP reports can lead to mismatches and reconciliation errors.
• Data Integrity and Exceptions: Missing data fields, un-linked order IDs, payments abandoned mid-process, and other exceptions create reconciliation gaps that require investigation.
• Exceptions: Customer refunds, payment disputes and chargebacks from banks, and various other reversal scenarios create a constant stream of payment adjustments flowing in the opposite direction that must be meticulously matched.
• Net funding: Most PSPs deduct their processing fees net of payouts, they may also hold rolling reserves against potential refunds/chargebacks, and handle currency conversions - all of which need to be accounted for properly.
• Currency Conversions: For online retailers operating globally, currency conversions can introduce discrepancies due to fluctuating exchange rates and varying conversion methodologies used by PSPs.
• Reconciliation Timeframes: PSPs may have different cut-off times or settlement schedules, making it challenging to align reconciliation processes and ensure timely reporting. 

Organising payment data

To effectively address the challenges of payment reconciliation, finance leaders should consider implementing an operational data store (ODS) that consolidates internal and external data sources. An ODS serves as a centralised repository for structured data, enabling efficient data integration, transformation, and reconciliation processes. Below outlines the key characteristics of a Payments ODS.

• Data Normalisation: The ODS can normalise and standardise data formats, naming conventions, and transaction identifiers, ensuring consistent data representation across all sources.    
• Single view of data: An ODS can integrate data from various sources, including the retailer's internal systems, PSP reports, and third-party data providers, creating a single source of truth for payment data.
• Automated Reconciliation: By leveraging the consolidated and normalised data in the ODS, finance directors can implement automated reconciliation processes, significantly reducing manual effort and minimising human error.
• Real-time Monitoring: An ODS can facilitate real-time monitoring of payment transactions, enabling finance directors to identify and address discrepancies promptly, minimising financial risks and improving operational efficiency.
• Reporting and Analytics: With a centralised data repository, finance directors can generate comprehensive reports, perform in-depth analysis, and gain valuable insights into payment trends, revenue streams, and reconciliation processes.
• Scalability and Flexibility: As the online retail business grows and evolves, an ODS can be easily scaled and adapted to accommodate new data sources, payment methods, or reconciliation requirements. 

Business benefits

If correctly designed and implemented, a payment operational data-store  can deliver significant benefits to merchants as follows;

Reduced Reconciliation Costs

An automated reconciliation solution streamlines and accelerates the payment reconciliation process, reducing manual effort and associated staffing costs. By automating labour-intensive tasks, the solution can deliver substantial cost savings through reduced headcount requirements.

Improved Cost and Profitability Analysis

Providing a centralised repository of reconciled payment transaction data, enables accurate and granular cost analysis across payment methods, PSPs, and customer segments. Detailed cost analysis can help merchants optimise their payment mix, identify cost-saving opportunities, and make data-driven decisions to improve profitability.

Optimised Payment Processing

By consolidating and reconciling payment data from multiple PSPs, the solution enables merchants to identify and address inefficiencies or bottlenecks in their payment processing workflows. Optimising payment processing can lead to faster settlement times, reduced transaction fees and reduced foreign exchange risk.

Improved Monitoring of Partner Performance

Provides merchants a comprehensive view of PSP performance, enabling identification of opportunities to optimise internal system and partner performance, and negotiate better terms or rates. Effective partner management can lead to cost savings, improved service levels, and improved alignment with business objectives.

Reduced Time to Market for New Payment Capabilities

An automated reconciliation solution can be designed to seamlessly integrate with new PSPs or payment methods, enabling merchants to quickly adapt to meet changing business needs. Faster time to market for new payment capabilities can provide a competitive advantage, drive customer acquisition and retention, and increase revenue potential. For a merchant in a highly competitive market, being the first to offer a popular new payment method could result in a significant increase in market share and revenue.

Improved Management of Foreign Exchange (FX) Risk and Opportunity

A consolidated view of payment transactions across multiple currencies, enables merchants to better monitor and manage FX exposure and identify potential opportunities for cost savings or revenue optimisation. Effective FX risk management can protect merchants from currency fluctuations, while identifying opportunities for revenue optimisation through strategic pricing or hedging strategies.

Enhanced Data-Driven Decision-Making

By providing a single source of truth for payment data, the automated reconciliation solution empowers merchants with accurate and comprehensive data for informed decision-making across various business areas, such as pricing, marketing, and product development. Data-driven decision-making can lead to better resource allocation, improved customer targeting, and ultimately, increased revenue and profitability.

Enhanced Financial Reporting and Compliance

An automated reconciliation solution provides a single source of truth for payment data, enabling accurate financial reporting and ensuring compliance with regulatory requirements and accounting standards. Accurate financial reporting and compliance can mitigate the risk of penalties, fines, and reputational damage. For a publicly traded merchant, a single material misstatement could result in millions of dollars in legal fees, fines, and lost market capitalisation.

Scalability and Future-Proofing

If designed correctly, a payment operational data store can scale to handle increasing transaction volumes, accommodate new payment methods, PSP integrations or other value-added information as the merchant's business grows. By future-proofing reconciliation processes, merchants can avoid the cost and disruption associated with overhauling systems and processes as the needs of the business expands. Implementing a scalable solution can provide long-term cost savings and facilitate seamless business growth.

Final thoughts

By implementing an automated PSP payment reconciliation solution, large enterprise merchants can realise substantial cost savings, improve operational efficiency, optimise payment processing, enhance partner management, accelerate time to market for new payment capabilities, mitigate foreign exchange risks, and make more informed, data-driven decisions to drive business growth and profitability.

Together with our partners, Nual Léargas help enterprise merchant clients design, implement and or run payments operational data stores to transform financial and operational control over payments.

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