Reconciliation: an increasingly critical process in payment companies and how we solve it at Simetrik.

Last week it turned public on the news that several leading global companies had suffered significant losses due to some incidents in their operations. While the initial explanation was that these losses took place due to fraud-related issues, in the particular case of a well-known European fintech that reported losing around $20 million in its debit card program in the United States, we clearly understand that the underlying reason why this went “unnoticed” for a long time was the lack of a timely and detailed reconciliation process.

This leads us to a first conclusion: Reconciliation is one of the most underestimated processes with very few investments around resources in new payment companies (where there is a clearing and settlement function). Too often, operational finance departments lack the tools to automate this process as much as possible because it is the last thing companies want to spend technical resources on. They tend to focus on customer service capabilities, the end-user experience, expanding their network, and revenue generation, rather than allocating resources to the back office, which only internal users see. On the other hand, shifting the attention of development teams to generate RPAs is not a long-term solution and diverts focus from financial teams (who need to generate technology requirements) and development teams (who must maintain suboptimal products).

Most payment fintech models, whether wallets or PSPs, generate revenue based on a fraction of the processed value (and/or the number of processed transactions). If we consider it in basis points, a mature fintech company often generates between 50 and 100 basis points (0.5%-1%) of the total value of payments processed through its platform.

At the same time, many payment fintech companies manage the gross value of all funds processed through their platform (if they are in the flow of funds, they are usually liable and can suffer losses for the full nominal value). If a fintech processes, for example, one billion dollars per month in total value, theoretically, it is at risk of losing the entire billion, even if its revenue is only around 5 to 10 million dollars according to the previous example (a metric commonly referred to as “value at risk” or “VaR”).

Therefore, if this company operates at 0.5/1% of the total processed value when proper, timely, and thorough reconciliation is not performed, there is a risk of losing between 100 and 200 times the generated revenue when processing the same value.

Usually, reconciliation issues arise due to some exception or failure in the process. It could be a problem between the central/endpoint processor and the fintech platform, disputes over transactions (e.g., unauthorized ones), chargebacks (e.g., insufficient funds), failure to process certain transactions (e.g., unprocessed batches), or double processing (duplicate transactions), among others. When we talk about companies operating globally and processing millions of transactions daily, the probability of these events occurring increases, while the ability to control them with typical tools decreases.

In the recent cases that went public, like the fintech company that lost over $20 million, a risky business decision was combined with a technical error: somehow converting rejected transactions into refunds. And, after all, it was the bank that alerted them about the deficit in the program’s bank account, rather than the company’s own internal reconciliation process. This situation should not have happened. On the contrary, as soon as discrepancies started accumulating due to the problem, the company could (and should) have detected them. It is more likely that the $20 million loss didn’t occur in one specific day instead it was a repeated situation, however, it took quite some time to be detected.

This event, which appears to be an accident, is an issue that we at Simetrik have been obsessed with solving since our inception. And that unfortunately we see it happening repeatedly in all industries, but mainly in the financial sector.

In recent years, we have seen how global business ecosystems (and therefore payment ecosystems) become increasingly complex with more volume, more participants, and more regulations, while margins are squeezed due to governmental pressure to reduce interchange fees, increased competitive intensity in the merchant solutions market, higher costs of AML and compliance, taxes on cross-border operations.

In a nutshell, to address this challenge, Simetrik empowers FinOps and accounting teams with Big Data-driven, no-code technology software that simplifies operational and financial reconciliations and provides a single source of truth. With our tool, FinOps teams can have full control over financial operations and achieve higher levels of automation, resulting in improved visibility, increased productivity, and greater confidence in financial data. Additionally, our secure and scalable platform ensures regulatory compliance and transaction accuracy without geographic limitations.

Our solution is the only one capable of:

• Managing risks and controlling end-to-end all operational, financial, and compliance processes.
• Centralizing multiple use cases (including payment flows, merchant dispersals, and internal control) into a single source of truth.
• Centralizing multiple use cases (including payment flows, merchant dispersals, and internal control) into a single source of truth.

With Simetrik, the example provided here and made public this week could have been avoided. The company could have, implemented a series of controls to quickly detect discrepancies between the two sources of information and trigger an alarm alerting the differences. In this case, it involved rejected transactions generating debits in bank accounts without their corresponding counterpart.

Written by: Juan Pablo Boccardi Head of Fintech & Banking Industry