The Green Sheet Online Edition
October 26, 2015 • Issue 15:10:02
Reconciliation and settlement systems
As the world of payments gets more and more complex, the demand for robust reconciliation and settlement is also growing. Without proper implementation of reconciliation and settlement processes and solutions, no payment solution can succeed.
Errors and omissions in the reconciliation processes may delay settlement or render it inaccurate. And these errors and omissions then lead to complex manual processes wasting both time and money for all parties.
What is the reconciliation process? And what is settlement? Does a one-size-fits-all strategy work? What are the options? How can a gateway operator decide which reconciliation and settlement process is optimal for its needs?
To answer these questions, this article describes some of the aspects of a generic reconciliation and settlement system.
The reconciliation process
Whenever there are transactions between two entities, it is important that the transactions on both sides match perfectly. The process of reconciliation is the process of matching the transaction records of one entity (generally, the upstream system, like a processor) with the other entity (generally, the downstream system, like the gateway) in the transaction processing sequence.
For example, a processor may send a transaction detail file to a gateway. The gateway utilizes this file to compare against the transactions from its own systems to validate the accuracy of the transactions in the stated time period.
During the reconciliation process, the discrepancies are identified and analyzed. Some transactions are flagged as disputed if one of the entities does not find the right matching transaction. Some transactions may be put on hold if they require further investigation before processing.
Sometimes data is tweaked to allow for transactions to match. Optionally there may be manual overrides that allow for transactions to pass through without fully matching. Transactions that cannot be matched are handled manually via negotiation between the two entities.
The settlement process
All the matched transactions from the reconciliation process are settled. The process of settlement starts with analyzing the reconciled transactions, applying the right fees and rates, and sending automated clearing house (ACH) instructions to the bank for the exchange of funds.
Based on the transaction fee contracts, appropriate rates and fees are applied to the transactions. The transactions are sorted into buckets for each settlement entity and amounts are totaled. A settlement entity can be a merchant, third-party service provider, etc.
Once the total for each settlement entity is determined, ACH instruction files are created with amounts and banking information and so forth. The ACH instruction file is then sent to the bank for execution.
It is not necessary to include all the reconciled transaction in the immediate subsequent settlement. Based on the contractual obligations, some organizations may choose to withhold settlement with some of the merchants (as in pay them at a later date).
While ACH remains the most common method of settlement, it is not the only one. There are other ways to send funds to the participating entities; these include checks, original credit, and other business-to-business payment options.
Frequency of reconciliation and settlement
The most prevalent frequency for reconciliation and settlement is once a day. While that is very common, there are other frequencies that are quite common, too. Regardless of the frequency chosen, it is always based on the agreement or contract between the two parties.
It is also possible that reconciliation and settlement have different frequencies. It is not uncommon to see reconciliation being handled daily whereas settlement is done only once per week, fortnight or month.
Many organizations process international transactions. These transactions entail added complications for the reconciliation and settlement processes.
For the reconciliation process, it is important that the amounts match. This means care must be taken to match the amounts in appropriate currencies. If the currency does not match on either side, then an appropriate and accurate conversion rate must be applied.
For settlement, the settlement currency may be different than the transaction currency. For a given merchant, it is possible that banking instructions are sent on a per-currency basis. It is also possible that depending on the currency, the instructions are sent to different banks.
A robust reconciliation and settlement process requires an operational alerting system. Reconciliation and settlement processes are tightly coupled with contractual obligations and have huge financial implications.
The files are sent and received automatically using the secured File Transfer Protocol (FTP) process. These processes need to be closely monitored and alerts generated in case FTP fails. If the files received or transmitted get corrupted for any reason, alerts should be generated.
Other alerts may be set to include the amounts and totals for each settlement entity. If there are events where the amounts exceed preset thresholds, then the settlement process should be stopped and the root cause should be manually examined.
Like all the business systems, reconciliation and settlement are a big source of data for reporting. Managers seek information based on reconciled and non-reconciled transactions to make business decisions. Settlement systems have direct financial implications, and hence managers need accurate information about settlement amounts.
Reconciliation and settlement processes are core to any gateway or processor. These have significant impact on the operations, cash flows and profitability of the entities involved. A carefully crafted contract for reconciliation and settlement, along with a robust implementation of the reconciliation and settlement system, can bring huge advantage to a payment organization.
It is perhaps best suited to have a custom developed reconciliation and settlement system as it will adhere closely to a company's unique business needs and adapt itself to evolving changes in the payments world.
Chandan Mukherjee is the co-founder of PayCube Inc., which is a San Francisco Bay Area, Calif.-based payment consulting and information technology services company providing custom software solutions and custom gateways for acquirers, ISOs, retailers and varied organizations in the world of payments and consumer transaction acquiring and management. Clients include prepaid and gift card program, loyalty and promotion, payment startup, POS solution, mobile payment and e-commerce players. PayCube uses a blend of on-site and offshore delivery capabilities, with a focused staff of retail- and payment-focused software engineers, architects, project managers, tech leads and systems analysts. For more information, email firstname.lastname@example.org, call 510-545-6854 or visit www.paycubeinc.com.
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