Key takeaways
- Payment reconciliation is the process of confirming that every payment recorded in a business's own ledger matches what the payment processor reported and what the bank actually received or paid.
- Most payment businesses reconcile three records: the internal ledger, processor or scheme reports, and bank statements.
- The main types are bank reconciliation, settlement reconciliation, PSP reconciliation, card scheme reconciliation and three-way reconciliation.
- Differences, called breaks, usually come from fees, refunds, chargebacks, timing and currency conversion.
- For regulated firms, payment reconciliation feeds directly into customer-money obligations such as safeguarding in the UK and permissible investments in the United States.
What payment reconciliation means
Payment reconciliation is the process of confirming that every payment a business has recorded matches the records of the other parties involved, and explaining every difference. A card payment, for example, appears in three places: the business's own ledger, the payment processor's settlement report and the bank statement. Reconciliation checks that all three agree on the amount, the date and the fees.
For a retailer, reconciliation protects revenue. For a payment company, it does more: it proves that the money it holds for customers is complete and correct. That is why regulators in the UK, the US, Canada and elsewhere build their customer-money rules on top of it.
The three records being matched
The internal ledger is the business's own record of what each customer paid, is owed or has sent. Processor and scheme reports are what the payment processor, acquirer or card scheme says it processed, deducted and settled. Bank statements show what actually arrived in, or left, each bank account.
Matching the ledger to the bank is a two-way reconciliation. Matching all three is a three-way reconciliation, which is the standard for payment businesses because it shows where a difference started. Our guide to three-way reconciliation covers the method.
The main types of payment reconciliation
Payment businesses usually run several reconciliations at once, each answering a different question.
| Type | What it matches | Question it answers |
|---|---|---|
| Bank reconciliation | Ledger against bank statements | Does our cash record agree with the bank? |
| Settlement reconciliation | Processor settlement reports against bank receipts | Did we receive what the processor said it paid? |
| PSP reconciliation | Processor transaction reports against the ledger | Did the processor handle every transaction we recorded? |
| Card scheme reconciliation | Scheme settlement files against issuer or acquirer records | Do scheme settlement amounts agree with our records? |
| Three-way reconciliation | Ledger, processor reports and bank together | Where exactly did a difference start? |
| Customer-money reconciliation | Customer balances owed against funds held | Do we hold enough for every customer? |
Worked example: a daily card settlement
A payment company records £100,000.00 of card payments on Monday. The processor's settlement report for the same day shows processing fees of £1,450.00, refunds of £2,300.00 and a chargeback of £400.00. The expected net settlement is therefore £95,850.00.
On Tuesday the bank statement shows a receipt of £95,850.00. The ledger, the processor and the bank agree, and the day is reconciled. If the bank had shown £95,450.00, the £400.00 difference would point to a second chargeback in the processor's next file or a fee the business had not recorded. The reconciliation does not fix the difference; it locates it, so the right team can.
| Line | Amount (GBP) |
|---|---|
| Card payments recorded in the ledger | 100,000.00 |
| Less processing fees | (1,450.00) |
| Less refunds | (2,300.00) |
| Less chargebacks | (400.00) |
| Expected net settlement | 95,850.00 |
| Received per bank statement | 95,850.00 |
| Difference | 0.00 |
Why breaks happen
Breaks, the differences a reconciliation finds, come from a small set of causes. Fees deducted at source mean the processor pays less than the gross amount recorded. Refunds and chargebacks can appear in a later processor file than the original payment. Timing means a payment recorded on Monday may settle on Wednesday. Currency conversion means the amount received differs from the amount recorded if rates or conversion times differ. Data quality issues, such as missing references or duplicated records, make matching harder.
The measure that matters is not the match rate on a good day but the number and age of open breaks. A business that matches 99.9% of transactions but leaves the remaining breaks open for weeks has a larger problem than one that matches 98% and clears every break the same day.
Why it matters more for regulated payment firms
For licensed payment businesses, reconciliation is the evidence behind customer-money rules. In the UK, payment and e-money firms must reconcile safeguarded funds on every reconciliation day under CASS 15. In the United States, money transmitters must hold permissible investments at least equal to their outstanding obligations at all times. In Canada, payment service providers must safeguard end-user funds under the RPAA. Each of these depends on an accurate, daily payment reconciliation.
Safeheld reads bank statement files and figures sent through its integration API, reconciles each entity's position, and proposes the likely cause of every break with its evidence for a person to decide. See Safeheld reconciliation and payment reconciliation software.
Frequently asked questions
What is payment reconciliation?
Payment reconciliation is the process of matching a business's own payment records with processor reports and bank statements, and explaining every difference.
What is three-way reconciliation in payments?
Three-way reconciliation matches the internal ledger, the processor or scheme reports and the bank statement together, so a difference can be traced to the record where it started.
How often should payments be reconciled?
Payment businesses typically reconcile daily. Regulated firms are often required to: UK safeguarding firms must reconcile on every reconciliation day.
What causes reconciliation breaks?
The most common causes are fees deducted at source, refunds and chargebacks, settlement timing, currency conversion and poor data quality.
What is the difference between bank and settlement reconciliation?
Bank reconciliation matches the ledger to the bank. Settlement reconciliation matches what the processor said it paid to what the bank received.
References
- FCA Handbook, CASS 15.8 Records, accounts and reconciliations
- Massachusetts General Laws c.169B §9: permissible investments
- Bank of Canada, Retail payment supervision: safeguarding end-user funds
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.