Payment reconciliation 101: How it works and best practices for businesses

Every year business loses a part of their revenue and time because of mismatched payments, missing records and manual errors. The lack of a process to track and match the payments you receive is often the culprit. 

Payment reconciliation solves this problem for you. It’s a process that helps review and match all the payments you receive across various systems and confirms that what your customer paid, what you received and what you have recorded in your systems all match.

This article covers what payment reconciliation is, what are its benefits, and how it can help your company grow.

• Payment reconciliation means checking if company payment records from various rails match details in bank statements. This makes sure every payment is recorded correctly, prevents mistakes or missing entries, and ensures financial data is accurate for better decision-making.

• Automated payment reconciliation saves time, reduces human errors, and makes finding issues easier. 

• Payment reconciliation comes with challenges  like mismatched data, payment settlement delays, and handling multiple currencies. 

• Automating reconciliation works best with clear payment matching rules, timely alerts for mismatches, and real-time reporting.

Payment reconciliation is used to match payment records in a company’s general ledgers with documents such as bank statements. Every single payment has to be properly recorded in your financial statements to help spot mistakes, prevent missed payments, and ensure that the financial data is correct. It allows your to make well-informed financial decisions.

Payment reconciliation is extremely important for business transactions. The process includes collecting all the data, matching transactions ,identifying mistakes and resolving them, and final verification. 

Here’s how it works:

Step 1: Collect all the data

All important documents, such as bank statements, invoices, and receipts, should be gathered into one location. Physical documents should also be included using Optical Character Recognition or OCR technology. This helps during the verification process.

Step 2: Match transactions

All the details in the compiled documents should be compared to the details in the bank statements and general ledger. For manual reconciliation, the line-by-line comparison can be a tiring task, but automated reconciliation compares transaction details easily.

Step 3: Identify mistakes and then resolve them

If some details appear to be different in the bank statements and compiled documents, then the root cause of the mismatch should be identified. It could have occurred due to human error, delays in payments, or something serious such as fraud.

This should be resolved immediately, either by looking into the old documents or by contacting your bank. After the mistake has been settled, the records should be updated.

Step 4: Final verification

To make sure that the details of the internal documents match the bank statements, a final verification should be done and a reconciliation report must be generated. This allows for an accurate, compliant, and clear audit trail. 

Automated payment reconciliation has multiple benefits such as error detection, faster resolution, adaptability to digital payments, and fraud prevention. Some of them are listed below:

1. Error detection

An automated payment reconciliation system can spot a mismatch between your records and bank statements immediately even when documents are formatted differently or have to be sourced from multiple systems. This reduces costly mistakes.

2. Faster resolution

Automated reconciliation uses rule-based logic or AI-powered matching to match millions of transactions in just a few minutes. It can also match payments as they happen in real-time. This means you don’t have to depend on month-end reconciliations which can be time-consuming and error-prone. 

3. Adaptability to digital payments

Automated payment reconciliation works well with most digital payment systems, such as e-wallets, UPI, and cryptocurrency. It can handle the different compliance standards, such as PCI DSS, fees, and challenges that each method brings. 

Each payment rail also has different fees and settlement times, automated reconciliation platforms can take these nuances into their algorithms for accurate matching.  

4. Fraud prevention

Fraud and unauthorized activities can be noticed faster through an automated payment reconciliation system. Through immediate resolution, suspicious or unusual transaction risks can be lowered.

5. Better financial insights

Having updated information can help you make strategic decisions and build a strong trust with your investors, auditors, and stakeholders.

Payment reconciliation is a widely used process in SaaS, fintech, marketplaces, and accounting firms. Some use cases are mentioned below:

1. SaaS

SaaS companies require more than just the simple matching of an invoice to a transaction. Due to their subscription-based model, a payment reconciliation system also has to look into any upgrades, downgrades, refunds, chargebacks, FX fees, and taxes. 

2. Fintech

Fintech platforms either facilitate payments or hold accounts on behalf of their customers. Hundreds of payments go through them on a day-to-day basis, which means that even a small error in the reconciliation can cause a big loss. Every single transaction has to be reconciled properly, to build trust with customers and protect a company’s reputation. 

3. Marketplaces

Marketplaces should use automated payment reconciliation to not only ensure that sellers are being paid correctly, but also to confirm that each commission matches their internal records.

4. Accounting firms

Accounting firms need an automated payment reconciliation tool to verify their clients’ financial records. An accounts receivable reconciliation matches customer payments to invoices, and accounts payable reconciliation matches supplier invoices with payments made. This helps in preventing underpayment or overpayment.

Both manual and automated payment reconciliation have their pros and cons. The differences between the two, regarding accuracy, efficiency, consistency, scalability and resource utilization, are mentioned below:

Payment reconciliation can be carried out through various methods, such as bank statement matching, ERP syncing, and gateway-level reconciliation:

1. Bank statement matching

Bank statement matching means comparing the company’s general ledger with the bank balance reports. It allows early detection of errors, omissions, and fraud.

2. ERP sync

Enterprise Resource Planning or ERP software, such as NetSuite, owned by Oracle, compiles your finance, sales, HR, and operations data. Syncing ERP into your business workflow helps simplify reconciliation. This decreases manual effort and also ensures that the data is accurate across all departments.

3. Gateway-level reconciliation

A payment gateway, such as Stripe, allows customers, merchants, and banks to conduct transactions safely. Gateway-level reconciliation is a method of comparing data retrieved from the gateway reports with your own bank records. This allows you to track delays, resolve mistakes, and prevent fraud easily.

Payment reconciliation has multiple challenges such as data discrepancies, delayed settlements, and multicurrency issues. Let’s look at these issues in details: 

1. Data discrepancies

Financial information can be disorganized because of different providers, chargebacks, and refunds. Manual reconciliation of the information can be time-consuming and cause more errors.

2. Delayed settlements

Delayed settlements are another setback. Incoming funds cannot be matched to the correct transaction immediately, which can lead to slower cash flow. Additionally different payment rails have different settlement speed which causes the reconciliation process to get more complicated.  By increasing settlement speed, they reduce operational inefficiencies and service delays.

3. Multi-currency issues

Having global payments in multiple currencies has a different set of problems that include changes in exchange rates, different local compliance rules, and cross-entity challenges. This ensures that there are accurate settlements in different countries and that the compliance needs are met.

1. HighRadius

HighRadius offers AI-driven reconciliation that automates transaction matching, exception handling, and reporting. It integrates with ERPs like SAP and Oracle and is a great choice for large enterprises managing global payment volumes.

2. BlackLine

BlackLine specializes in financial close and reconciliation automation. Its payment reconciliation features are part of a broader accounting automation suite. 

3. QuickBooks

QuickBooks provides simple, user-friendly reconciliation features tailored to SMEs. It automatically syncs with bank feeds, matches transactions, and flags discrepancies, making reconciliation easier for smaller businesses without complex finance teams.

Automating reconciliation can be a simple task if best practices, such as payment matching rules, automated alerts, and real-time reporting  are followed:

1. Payment Matching Rules

Clear payment matching rules help in aligning purchase orders with the correct invoices. By standardizing the payment amount, reference number, and due dates, you can automate the matching process easily. This reduces manual labour as well as any errors. 

2. Automated Alerts

These serve as an early-warning system that instantly notifies when a mistake, delay, or unmatched payment occurs. This saves valuable time by reducing manual search. It also helps maintain compliance by flagging any unusual activity immediately.

3. Real-Time Reporting

By using an AI-based matching system, finance teams can view real-time cash flows and settlements. Since the company does not need to wait for the month to end before they receive reconciliation insights, they can make better decisions. 

The integration of payment reconciliation tools with core business tools like ERP, accounting software, CRM, and payment gateways has various benefits, some of which are mentioned below:

1. ERP (Enterprise Resource Planning)

ERP systems, such as SAP, compile data from different areas such as finance and HR. All this data is compiled onto one platform, which helps in reducing manual effort and ensures that the data matching is accurate.

2. Accounting software

Accounting software helps in maintaining the General Ledger, which contains information about all your transactions. By using statement import automation and bank feed integration software, financial data, such as bank statements, can also be matched with the general ledger. Through automation of reconciliation, the general ledger can be updated in real-time. This helps in reducing any errors, maintaining compliance, and providing complete transparency for audits.

3. CRM (Customer Relationship Management)

CRM software, such as Zoho, manages customer interactions. By integrating it with automated reconciliation, the CRM can show the latest payment settlements, including refunds or disputes.

4. Payment gateways

A payment gateway, such as Razorpay or PayPal, enables customer transactions and helps in transferring the money to your bank account. Automation reconciliation makes sure that every transaction is recorded and matches your internal records.

Payment reconciliation can be a simple task with Xflow’s purpose-built API that is powerful, supports fast integration with your reconciliation software. Xflow is white-labelled, ensuring that customers never abandon your platform. Additionally, Xflow offers these features: 

• Collections of funds in INR accounts within one business day, ensuring timely and accurate reconciliation.

• Transparent fees eliminate hidden charges and FX surprises, reducing mismatched entries during reconciliation.

• Unlimited transaction size with RBI-authorized FIRA ensures compliant records that simplify audits and financial reporting.

• All-in-one API automates onboarding, settlements, and notifications, reducing manual reconciliation efforts.

• Deep bank integrations and robust fraud monitoring guarantee compliance, accuracy, and secure reconciliation.

• Quick developer-friendly integration (under 2 weeks) ensures payment reconciliation infrastructure is up and running without delays.

Sign up with Xflow and start collecting cross-border payments quickly and easily!