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Insights and Expertise

Balancing act: Exception item transactions must

The high stakes be monitored daily to ensure any

item that was debited is either
of ISO settlement merchant or rejected back to the
correspondingly assessed to a

reconciliation issuer ... and within the prescribed

time frames.

If you walk around with an extra $20 million in your bank
account, you won't bounce a check until that $20 million
is withdrawn even if you do not balance your checkbook.
That issue caused some ISOs difficulties over the years.

If you think about an ISO's settlement account, it is typi-
cally funded on day-one and then the merchant is paid
on day-two less fees, returns, chargebacks and reserves.
Because of the delay in merchant payout and the accumu-
lation of reserves, the merchant processor will typically
have a positive net settlement account. (If the portfolio is
all set to month-end discount, there will be a deficit to-
ward the latter half of the month.)

Regardless, this work in process, needs to be reconciled
daily or else the settlement account will not properly re-
flect the available balance. This very oversight is what has
By Ken Musante been so costly to so many merchant processors and ISOs.
Napa Payments and Consulting To further illustrate the complexity, merchant processors

isa and Mastercard recognize an acquir- have many card types: Visa, Mastercard, American Ex-
er based on its Bank Identification Number press, Discover and every available PIN debit network.
Each has its own set of reconciliation reports.
(BIN) and Interbank Card Association Number
V (ICA). Money is moved between the issuer and Typically, a merchant processor won't consume the recon-
acquirer through each card network's bank in accordance
with the instructions from their respective processors. ciliation reports from each card network but will instead
rely on the reporting as provided by its processor. Some
details will, however, still need to be researched directly
Wholesale ISOs and processors receive funds deposited with the associated card network if billing items are not
daily via a wire from the respective card network's bank,
net of fees, returns and chargebacks. Reconciliation occurs routed through the processor.
daily and ideally without incidence, but when you consid- It was my understanding there would be no math
er the number of card brands and the myriad GOESIN-
TOs and GOESOUTSOFs, it's impressive that there are not In addition to complexities associated with each card net-
more out of balance incidences. work, most processors will allow their merchants to re-
ceive funding at different time periods. Large merchants
How can I be overdrawn when with quality credit may have no delay on their funds.
my debit card is still valid? Smaller merchants may have a one-day delay, and higher
risk merchants may have a three- or five-day delay.
Many ISOs have lost fortunes—and their businesses—be-
cause they did not properly reconcile their settlement or Moreover, some merchants may have a percentage of their
reserve accounts. Wholesale ISOs and processors are par- processing earmarked to a specific merchant reserve. Both
ticularly vulnerable because they often hold excess cash the work-in-process funds and merchant-specific reserves
due to the timing difference between when their settle- need to be reconciled.
ment accounts are funded by the card networks and when
their merchants are paid.

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