Key takeaways
- Three-way reconciliation matches three independent records of the same money: the firm's ledger, a third party's record such as a processor or partner report, and the bank statement.
- A two-way match can show that something is wrong; a three-way match shows where it went wrong.
- It is the standard method for payment, remittance and e-money firms, and the basis of most customer-money controls.
- The method needs a common cut-off time and consistent references across all three records.
What three-way reconciliation is
Three-way reconciliation compares three separate records of the same money. For a payment company, they are usually the firm's own ledger of customer transactions and balances, the report from the processor, scheme or payout partner that handled the payments, and the statement from the bank where the money actually moved. If all three agree, the firm can be confident the transaction happened as recorded. If one disagrees, the method shows which record is out of line.
The term is also used in other industries, for example law firms and property agents reconciling client trust accounts, where the three records are the client ledger, the cash book and the bank statement. The principle is the same: three independent views that should tell one story.
Why three records rather than two
A two-way reconciliation, such as ledger against bank, tells you whether two records agree. When they do not, you know there is a problem but not where it started. Was the ledger wrong, or did the bank receive less than expected because the processor deducted something? The third record answers that question. If the processor report agrees with the bank but not with the ledger, the ledger is the problem. If the ledger agrees with the processor but not with the bank, the issue lies in settlement.
For regulated firms, locating the source quickly matters. Under the UK's CASS 15, a shortfall must be corrected on the day it is found, and the firm must know why it happened. In the US, permissible investment calculations depend on knowing which obligations are real.
Worked example
A remittance company records £250,000.00 of customer payments collected by card on Monday. The processor's report shows £249,600.00 processed and the bank receives £245,108.00 on Tuesday. The three-way view separates the differences.
The £400.00 between ledger and processor is a payment the ledger recorded but the processor declined. The customer's balance must be reversed. The £4,492.00 between processor and bank is the processor's fees, which match the contract. Without the processor report, the firm would have seen a single difference of £4,892.00 and would have had to investigate it from scratch.
| Record | Amount (GBP) | Difference to next record | Cause |
|---|---|---|---|
| Ledger: customer payments recorded | 250,000.00 | 400.00 | Payment declined at processor, still shown in ledger |
| Processor: payments processed | 249,600.00 | 4,492.00 | Processing fees deducted from settlement |
| Bank: settlement received | 245,108.00 |
Making it work at scale
Three conditions make three-way reconciliation reliable. All three records must be taken at the same cut-off time, or timing differences will appear everywhere. Each record must carry a reference that links it to the others, such as a transaction identifier that the ledger, processor and bank all retain. And every record must be loaded from source, not retyped, so the comparison is between real data.
At payment volumes, this cannot be done by hand. Safeheld loads ledger, processor, scheme, partner and bank records in their native formats, matches all three, and classifies each difference by where it arose. See PSP reconciliation, settlement reconciliation and what payment reconciliation is.
Frequently asked questions
What is three-way reconciliation?
Matching three independent records of the same money, typically the ledger, a processor or partner report and the bank statement.
Why is three-way reconciliation better than two-way?
Two-way matching shows a difference exists; three-way matching shows which record caused it.
Who uses three-way reconciliation?
Payment, remittance and e-money firms, and also law firms and property agents reconciling client trust accounts.
What does three-way reconciliation need to work?
A common cut-off time, shared references across the records and data loaded from source.
References
- FCA, PS25/12: Changes to the safeguarding regime for payments and e-money firms
- FCA Handbook, CASS 15.8 Records, accounts and reconciliations
About Safeheld
Safeheld reconciles client money every day, resolves every difference and prepares every regulatory return for sign-off, for regulated firms in the United States, the United Kingdom, the European Union, Canada, Australia, Singapore and Hong Kong. To discuss your operations, contact us at safeheld.com/contact.
This article is for general information and does not constitute legal or regulatory advice.