Financial Reconciliation for Fintechs

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Introduction

Building fintech products require not just speed in launching new features but also a keen understanding of the complexities involved. It's not just about integrating payment processors, ledgers, and banking partners for a seamless user experience; it's also about setting up a back-office infrastructure that's both robust and adaptable. This infrastructure is key in launching and supporting financial products. In this post, we're diving into an essential component of this back office infrastructure: financial reconciliation.

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Reconciliation: A Core Function of Fintech

In fintech, financial reconciliation is much more than an accounting exercise. It's a critical product and business operations function, ensuring that customers' funds are accurately represented. This is integral to the entire transaction flow—from initiation to posting, to settlement—impacting not just the end-user's experience but also for proper accounting and reporting. It's an indispensable part of robust financial operations in fintech companies.

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The Essential Role of Reconciliation

Simply put, reconciliation is about ensuring your internal records align with those of your banking and payment partners. This agreement is the foundation of money movement services. Though this might sound straightforward, the interplay of technical, regulatory, and business factors in fintech elevates its importance. Accurate financial data across various platforms is essential to maintain the integrity of your financial operations.

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Reconciliation serves several critical roles in fintech companies, from startups to established institutions:

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• Ensuring Accurate Financial Reporting: Reconciliation is crucial for accurate bookkeeping and financial reporting, laying the groundwork for all financial activities. These processes ensure that revenue, liabilities, and assets are properly accounted for.
• Handling Unexpected Money Movements: The unpredictable nature of payments means that surprises are common. Reconciliation helps detect and correct discrepancies, ensuring accurate funds allocation. For fintech companies, it is a critical extension of monitoring and improving technical systems that orchestrate money movement. It's a critical step to identifying whether issues are systemic in nature, or one off.
• Facilitating Financial and Regulatory Audits: With the regular scrutiny of banks, processors, and regulators, accurate transaction data and customer balances are imperative. Effective reconciliation not only ensures accuracy but also reflects your commitment to operational transparency and controls. By having strong payment and finance operations, fintechs can more easily uphold the standards required of them by regulators.
• Empowering Teams for Informed Decision-Making: A robust reconciliation process is vital for finance and product teams to understand cash positions and close books efficiently, avoiding significant delays in projects. By understanding funds flows and cash impacts across the business, fintech product and finance leaders can make strategic decisions around the product roadmap.
• Maintaining Stellar Customer Experience: Any missteps in payment processes can significantly impact customers, regardless of transaction size. A dependable reconciliation process is key to minimizing these risks and ensuring issues are resolved before having a negative customer impact.

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Key Types of Reconciliation

Transaction Reconciliation: The transaction reconciliation process ensures that transaction events are consistent across all services. It involves verifying records transactions recorded in your system and those in your payment processors and banks - covering aspects like amounts, dates, and statuses. Transaction reconciliation systems ingest journals from across different sources and automate the matching of these records. Transaction matching is rule-based, verifying that your expectations for how transactions are represented are accurately represented and agreed upon across the various sources of record.

Bank Reconciliation: In the high-volume, complex transaction environment of fintech, bank reconciliation is vital. It involves matching your company's records with your bank statements, identifying discrepancies due to timing, fees, or unrecorded transactions. This process is crucial for compliance, audit purposes, and ensuring all transactions are accounted for. It often leverages automated tools for efficient matching, playing a significant role in maintaining financial health and transparency. Because funds are often moved across bank accounts in batches, it's important to set up a bank reconciliation process that can properly handle the many-to-one nature of transactions to cash movements.

Balance Reconciliation: This process is crucial for verifying the accuracy of customer balances and ensuring correct account codes are applied. It matches the total balance in your ledger against individual customer account balances, particularly vital for managing complex transactions in fintech. Balance reconciliation is often the other side of the coin of transaction reconciliation and leverages double-entry accounting to verify balances and determine accurate funds allocation. Often balance discrepancies are identified via a balance reconciliation process, but finding where the discrepancy originated leverages a transaction reconciliation process.

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Conclusion

Mastering the process of reconciliation and its nuances in fintech's financial operations is both challenging and crucial. But when done well, it creates a strategic advantage for fintech companies, allowing them to move quickly, prototype new financial services offerings, and maintain great customer experiences at scale. In upcoming posts will delve into the details of how to set the different types of reconciliation processes (transaction, bank, & balance recon) for some of the common use cases in fintech.

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For fintechs looking to refine their reconciliation processes, Proper offers specialized financial data infrastructure - integrating to your financial data sources & providing you the tools essential for reconciliation and financial operations. With Proper, you can focus more on innovation and customer engagement while simplifying your back-office operations.

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