Financial reconciliation is crucial for every successful organization. And if it's a financial institution, the stakes are even higher. With massive volumes of transactions pouring in from across various systems daily, the margin for error disappears, and the consequence of a slip is exponential.
In this high-pressure scenario, relying on outdated or manual reconciliation methods is akin to navigating a financial minefield blindfolded. Errors multiply. Audit trails vanish into spreadsheet chaos. And what should have been a routine financial control spirals into a full-blown crisis.
While your operations team is buried in cross-checks and chasing anomalies, risk quietly stacks up in the background, undetected, unaddressed, and ready to explode in the form of fraudulent activities, inaccurate reports, compliance breaches, and hefty penalties. In such cases, the need to automate routine reconciliation processes has become even more pronounced.
Among the various reconciliation processes your financial institution has to perform, one is three-way reconciliation. In this article, we'll explore what it is and how you can automate it for your financial institution.
What is Three-Way Reconciliation?
3-way reconciliation is a financial verification process through which financial institutions like banks, fintechs and credit unions can validate a transaction by comparing three separate data sources to ensure that all records are consistent and accurate.
The method is commonly used in banking and financial services to match records from the core banking system (CBS) or Internal Database, intermediary systems like switches or gateways, and external sources such as card networks.
For instance, if you are doing a card reconciliation, you'll have to reconcile transaction data from your CBS, Switch, and payment networks like Visa, Mastercard, or Amex. And if all three data sources do not tell you the same thing, the goal is to promptly detect and resolve discrepancies such as missing entries, duplicate transactions, or settlement mismatches to ensure accurate financial reporting and compliance.
What are Some Common Use Cases of Three-Way Reconciliation?
Dealing with a large volume of transactions on a daily basis is business as usual for any financial institution. From loan disbursements and repayments to card settlements, ACH transfers, and digital payments, they have to process an immense number of financial activities daily.
With data flowing across from multiple systems such as the core banking system (CBS), payment gateways, switches, and settlement accounts, it becomes crucial to have proper reconciliation mechanisms in place. Let's understand some of the common 3-way reconciliation processes.
1. ATM Reconciliation
ATM reconciliation is the process by which your financial institution can verify that the cash transactions initiated at Automated Teller Machines align with the records in your core banking system and the actual cash settlements done by payment processors.
Data Sources:
- Records from Core Banking System
- Raw transaction files from ATM Switch including data like ATM ID, transaction reference number, timestamp, response codes, trace ID, etc.
- Settlement files from payment processors
However, platforms like Osfin.ai can even perform a 4-way ATM reconciliation between four distinct data sources that includes data from the CBS, ATM Switch, payment processors, and electronic journal files from the ATM.
2. Loan Collection Reconciliation
Loan collection reconciliation involves validating and matching records related to loan collection, interest accruals, loan asset ownerships, and borrower repayments. It's basically done to ensure consistency between the loan servicing systems, collection accounts, and payment gateway statements.
Data Sources:
- Files from loan management system (LMS) and loan origination system (LOS).
- Transaction reports and settlement files from payment gateways.
- Transaction records from the bank accounts in which loan is disbursed.
3. Credit Card Reconciliation
Credit card reconciliation refers to the verification of cardholder transactions, repayments, and settlement files received from card networks. The objective is to ensure that all transactions recorded in the bank's systems are consistent with payment network or processor records.
Data Sources:
- Internal records from the core banking system.
- Authorization log files, transaction files, and settlement files from switch providers.
- Clearing and settlement files from payment networks.
4. Internet Banking Reconciliation
Internet banking reconciliation is the process of validating transactions initiated via online banking platforms against the bank's core system and third-party payment intermediaries. It ensures that customer-initiated transfers are successfully completed and settled.
Data Sources:
- Records of customer-initiated transactions from internet banking platforms.
- Logs of actual transactions from core banking systems.
- Transaction files from switch systems.
How to Perform 3-Way Reconciliation?
Here’s a structured step-by-step process that your financial operations team can follow to perform 3-way reconciliation:
Step 1: Extract Data from All Data Sources
The very first step is to pull data from all independent sources involved in the transaction and accurately input it in a 3-way reconciliation worksheet, which serves as a central repository for all data sources. The data often includes transaction logs, settlement files, account statements, and external records from the core banking system, switch vendor and payment gateway partners.
Step 2: Standardize the Data
Since each third party eco-system partner shares files in different file formats, the next step in the process is data standardization. It's essential for the data to be converted in a consistent, readable format like CSV, JSON, Excel, etc., with well-structured identifiers, transaction IDs, timestamps, reference numbers, and status codes to create a uniform 3-way reconciliation worksheet.
Step 3: Match Records Across the Sources
Now comes the core of 3-way reconciliation, which is cross-referencing all records. You need to match all the three sources against each other. Only when a record appears consistently across all three systems with the same transaction ID, amount, and timestamp can it be considered reconciled. Additionally, any mismatch between the sources results in an exception.
Step 4:Identify and Classify Exceptions
Common exception types include missing transactions in one system, amount mismatch, and status inconsistency, such as success in one, and failure in another. All of these exceptions must be flagged and logged. You can also classify exceptions by severity, such as critical, moderate, or low-impact, and track them for efficient resolution.
Step 5: Investigate and Resolve Exceptions
This is the most time-intensive part of the 3-way reconciliation accounting process, which involves identifying exceptions, including manual errors, system delays, data sync issues, or fraudulent activities.
Once identification is done, it's time to take some corrective measures to resolve those exceptions and make sure all resolved entries are corrected in the relevant systems.
Osfin.ai is a financial operations platform that has built a world class anomaly detection and ML-based exception handling module to eliminate discrepancies with unmatched accuracy.
In fact, it has helped over 20+ Banks achieve 100% reconciliation accuracy. Visit Osfin’s website and discover how!
Step 5: Generate Reports for Audit and Compliance
The final step of the process is to generate a reconciliation audit log report that includes details like exceptions, reason behind them, how they were handled, and total transactions successfully reconciled. This is a critical step for internal auditing, compliance reporting, executive insights, and informed decision-making.
How to Automate Three-Way Reconciliation?
Manual reconciliation is error-prone and slow, which often leads to delayed settlements, missed discrepancies, and increased operational risk. Moreover, it consumes valuable time and resources of your operations team that could be better utilized for strategic initiatives and growth opportunities.
However, if you choose a reconciliation tool that can automate this entire process, it can significantly reduce errors, speed up settlement cycles, and ensure data accuracy across systems, along with freeing up your team to focus on higher-value tasks.
With a reconciliation software like Osfin.ai, your financial institution can reach new heights of operational efficiency and accuracy. It can completely automate your end-to-end 3-way reconciliation process with utmost accuracy and efficiency with its lightning-fast and real-time data processing.
Don’t let manual errors hold you back. Experience seamless, real-time reconciliation for your financial institution with Osfin.ai now!
Best Practices for Implementing 3-Way Reconciliation
Implementing effective 3-way reconciliation accounting requires more than just understanding the process, it demands strategic application of best practices and modern technologies. Here's how your financial institutions can optimize its approach:
- Standardize data formats: Establish consistent data formats across all systems to facilitate comparison. This ensures seamless comparison and automated matching and improves the accuracy and speed of reconciliation. Platforms like Osfin, auto standardize files in any format and make them reconciliation ready within minutes.
- Establish frequency protocols: Determine optimal reconciliation cycle frequency based on risk, volume, and regulatory requirements. It’s recommended for financial institutions to perform daily reconciliation for better accuracy and resolution of discrepancies.
- Automate the process: Use a scalable and configurable reconciliation software with pre-built connectors that can streamline the process by leveraging intelligent technologies like AI, ML, and data analytics.
- Review regularly: Once you have automated the reconciliation process, periodically review the mechanisms based on key performance metrics to ensure the software remains relevant and scalable with your financial institution as well as to suggest improvements in the face of changing regulations and evolving market conditions.
- Train your operations team: Keep your reconciliation team sharp by offering regular training on evolving tools, processes, and industry best practices. Continuous learning will ensure a more competent team which makes fewer errors.
How Does Osfin.ai Automate Three-Way Reconciliation?
Osfin.ai is a financial operations platform that can simplify reconciliation for your financial institution like never before. With its transaction-level reconciliation, you can achieve exceptional accuracy at a granular level. Its highly intuitive and customizable dashboards provide real-time visibility into operations and can seamlessly accommodate your every reconciliation requirement.
With Osfin.ai, you get a low-code platform which enables your operations team to modify reconciliation rules without IT dependency and fosters quick adaption to new products and regulations. It also offers multi-source data ingestion with pre-integrated connectors that can consolidate fragmented financial data into a single, streamlined format, ready for any three-way reconciliation.
Ready to automate your financial operations? Let Osfin.ai handle your reconciliation now!
FAQs
1. What is a 3-way reconciliation?
3-way reconciliation is a critical financial process used by financial institutions to validate their transaction records by comparing and matching three distinct data sources, which include records from the core banking system, payment networks, and switch providers.
2. How can you automate the 3-way reconciliation process?
To automate the 3-way reconciliation process, your financial institution must leverage a reconciliation platform that utilizes advanced technologies like AI, ML, and real-time data processing to ensure unmatched accuracy, speed, and scalability.
3. Why is it important to perform reconciliation?
Performing regular reconciliation can lead to several benefits such as enhanced financial reporting, better fraud detection and prevention, improved cash management, and increased confidence and trust of stakeholders in the reliability of your data.
4. What types of exceptions might be found during 3-way reconciliation?
The exceptions that your financial operations team may encounter during the process include incorrect or missed amounts, wrong dates, duplicate records, timing differences between transactions, or unauthorized transactions.
5. How does Osfin.ai help in reconciliation?
Osfin.ai can significantly streamline reconciliation for your financial operations time. It can deploy multi-source data ingestion, sophisticated systems to standardize that data, and real-time dashboards that increase visibility. Additionally, to handle any discrepancies, it also uses ML-powered algorithms.
