Efficient Charge Reconciliation: Steps, Challenges & Automation

Today, digital payments have become a standard practice. But along with the convenience also comes the added responsibility for financial institutions to maintain transparency in transaction costs. A small discrepancy between your internal ledger records and the payment processor’s report, and you could be looking at falling profits and messy audits. 

But when you're managing hundreds of transactions every day, it's easy for things to slip through the cracks. Think hidden network fees, payout mismatches, or wrong interchange charges.

This is why you can't afford to treat charge reconciliation as an afterthought. It helps you match bank statements and internal records against payment gateways and card networks like Mastercard and Visa to ensure every rupee is accounted for.

But what is charge reconciliation, who is responsible, and how do you report it? We'll answer all these and more in this article.

What this blog covers:

• Definition: What is charge reconciliation and why it matters
• The risks and consequences of not reconciling charges
• Step-by-step process of charge reconciliation
• Key roles and responsibilities in the reconciliation workflow
• Important metrics & KPIs to monitor
• Challenges of manual reconciliation and common pitfalls
• Use-cases & scenarios where charge reconciliation becomes critical
• How Osfin automates charge reconciliation to improve speed, accuracy, and audit-readiness
• FAQs and best practices to implement a robust charge reconciliation process

What is Charge Reconciliation?

Simply put, the charge reconciliation definition is ensuring that the fees and settlements your internal records show actually match what payment partners had charged. It involves comparing all key documents, such as merchant statements, bank records, and settlement reports, against your internal transaction data.

This helps identify:

• Overcharges
• Incorrect interchange fees
• Compliance gaps

This helps prevent revenue leakage, reducing the risk of surprises during audits.

Why Charge Reconciliation is Crucial?

Charge reconciliation is an important process for any organization. Look at it this way: when your internal financial records don't match what the payment processor actually charged, you risk overpaying, impacting revenue, or worse, risking compliance issues. As such, you won't just be taking a financial hit but also a legal one.

Effective charge reconciliation helps you avoid issues like:

• Revenue leakage: It helps detect differences in processor charges early, keeping your revenue intact.
• Inaccurate P&L: It helps verify that all fees and charges match your internal records, so your P&L figures are backed by solid data.
• Overcharges: If the payment gateway or network processor has overcharged you, charge reconciliation can help you raise a dispute timely.
• Tax and audit complications: Every fee and charge affects your final revenue figures and audit trails. Charge reconciliation ensures your calculations are accurate.

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Step-by-Step Charge Reconciliation Process

Charge reconciliation serves as a safety net for your revenue. It helps you verify that the amount noted in your internal documents matches the payment gateway’s records. Here's how the process works:

Step 1: Recording the Transaction

The reconciliation process begins the moment a payment is captured in your POS or payment gateway. The transaction should clearly reflect the amount, merchant ID, and applicable discounts or refunds. If any detail is missing or incorrect, it will make downstream reconciliation a lot more difficult.

Step 2: Comparing Records

Next comes the double-check. Once you've recorded a transaction, you need to compare it against gateway reports. For this, you'll have to review transaction IDs, timestamps, and fee breakdowns. The goal is simple: you need to ensure that whatever charge you’ve paid is exactly what the payment provider has levied.

Step 3: Checking for Accuracy

Make sure all network rates, currency conversion charges, and processor markups are accurate. If there's any discrepancy, rectify and adjust it immediately. Automating this step can help you minimize these risks and run real-time checks before submission.

Step 4: Fixing Issues

If, during the process, you find any errors or mismatches, you need to fix them before raising a dispute. This can include updating transaction details, correcting ledger entries, or clarifying notes with the provider.

Step 5: Tracking and Improving

The last step in the process includes tracking and reporting your reconciliation. Track metrics like charge lag, fee variance, or dispute recovery rate to identify common patterns and make improvements.

Key Roles Involved in Charge Reconciliation

The charge reconciliation process isn't restricted to just one person or department. It requires a seamless collaboration between teams that capture transactions and the teams that process settlements. An oversight or error by any party can lead to revenue leakage and compliance issues. Here's a more detailed breakdown of their roles in the reconciliation process:

1. Frontline team

The frontline team comprises members who record the transaction. They are responsible for carefully documenting the services delivered, as these entries form the foundation for reconciliation. Hence, accuracy is non-negotiable. Many organizations typically have at least two staff members who are trained specifically to handle these entries. Their key responsibilities include:

• Recording transactions in the POS with accurate details
• Tagging refunds or other adjustments correctly
• Flagging any unusual payments for review

2. Finance Team

Once the frontline team captures the charges, the finance or accounting department comes in. They make sure every information in the system is coded correctly, reconciled against relevant documents, and charged appropriately. Their responsibilities typically include:

• Updating the ledger with accurate fees and settlements
• Comparing internal records with payment gateway data
• Prepare audit trails

Seamless daily collaboration between the two teams is essential to keep the reconciliation process running smoothly. This ensures all issues are resolved timely before they escalate to impact revenue.

Reporting and KPIs for Charge Reconciliation

You can't perform charge reconciliation without proper reporting. After all, a clear record of charges levied by the payment and network processors provides transparency, ensuring your organization doesn't risk revenue leakage or compliance issues. It also helps the frontline and finance teams keep a daily tab on the revenue cycle.

However, simply maintaining reports isn't enough. You must also measure the effectiveness of your reconciliation process through relevant, well-defined KPIs. These metrics are important to flag gaps and identify areas of improvement across departments. Here are some common KPIs to look out for:

1. Charge Capture Accuracy Rate

This metric shows the percentage of charges that were recorded and billed correctly. Simply put, it tells you if your records align with the payment gateway’s reports. A high accuracy rate of over 95% means your team is doing a solid job of preventing revenue leakage. However, a low rate can highlight issues with documentation or staff training.

2. Mismatched Transactions

Sometimes, it might happen that your internal records show a certain charge for a transaction, but the processor reports show a different number. Too many of these mismatches can complicate the reconciliation process and impact your revenue. Therefore, it's important to keep this number as low as possible, ideally below 1%.

3. Overcharge Rate

Wrongly overcharged by the payment gateway or network? This metric helps you detect a pattern and put a number on the instances. Measuring overcharge rate is extremely important as even a small amount can significantly impact your margins over time.

4. Charge Compliance Rate

This KPI helps determine if you're documenting charges in line with the organization’s internal policies and external regulations. Aim for a high compliance rate, ideally above 99%, to avoid penalties and disputes.

5. Charge Reconciliation Rate

This metric measures how often you reconcile charges against processor reports. A high rate of 95% to 98% shows your records accurately reflect the charges paid. On the other hand, a weaker rate highlights incorrect charges or inefficiencies in the reconciliation process.

6. Charge Reconciliation Cycle Time

The charge reconciliation cycle time tracks how long it takes to close the loop from processing a digital payment to reconciling charges with the processor. Aim for a cycle time of one to three days, as anything longer can make it harder to catch discrepancies.

7. Percentage of Charges with Errors in Reconciliation

This KPI helps determine the number of charges that reflect errors during the reconciliation process. It's best to maintain this metric below 2%. But if the error rate is higher, there might be a communication gap between your internal team and the payment provider, or you're relying heavily on manual processes that could be causing human error.

Challenges in Manual Charge Reconciliation

Reconciling charges manually may seem manageable at first. But as your operations scale, the manual process will quickly reveal its flaws. Some common challenges include:

1. High Risk of Errors

Manual reconciliation depends on human entry and cross-checking. Even a small oversight like recording an incorrect amount or missing a transaction can snowball into discrepancies across reports. These mistakes leave you with incorrect financial data, making it difficult to spot issues on time.

2. Incomplete and Fragmented Data

When working manually, most finance teams don't get access to the complete picture. As such, they need to rely on guesswork for missing entries, incorrect charges, or mismatched records. This can lead to issues being unresolved for long periods.

3. Strain on Internal Teams

Manual reconciliation can be time-consuming and, frankly, quite mundane. You surely don't want your team to spend time sorting incorrect data instead of focusing on more strategic tasks. It will only add to their frustration, increasing employee turnover.

4. Lack of Efficiency

A manual reconciliation process can lead to longer closing cycles and delayed reporting. This can make it difficult for you to raise disputes on time or make timely financial decisions.

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Charge Reconciliation Use Cases

Organizations can use charge reconciliation for the following purposes:

• Preventing Revenue Leakage: Verifying internal records against provider data ensures every rupee you pay aligns with the agreed amount, preventing gaps in revenue.
• Smoother Disputes: Verifying all information reduces the risk of denials and streamlines dispute management.
• Audit and Compliance Readiness: Accurate, clear records help organizations stay compliant and avoid penalties during audits.

How Osfin Automates Charge Reconciliation?

Osfin helps you streamline reconciliation by automating the entire process. Here's how it helps:

• Data Import (Ingestion): Osfin is a file format-agnostic platform. This means it can pull data from more than 170 different sources, regardless of the format. And before it even begins reconciliation, it uses custom tolerance checks to filter out bad data and detect duplicates.
• Reconciliation Process: Osfin uses advanced logic to match transactions with speed and accuracy. Whether it's one-to-many or many-to-one records, the platform can reconcile 30 million entries in just 15 minutes.
• Exception Handling: Not every transaction matches the first time. Osfin automatically flags these exceptions, assigns reasons for the mismatch, and routes them to the right team member through its built-in ticketing system.
• Audit-Ready Output: At the end of the process, Osfin generates detailed compliance reports and maintains full traceability of every transaction. With enterprise-grade encryption, role-based access, and global compliance certifications like SOC 2, PCI DSS, ISO 27001, and GDPR, it ensures your data is secure and audit-ready at all times.

The End Note

Missed, duplicate, or incorrect charges don't just impact revenue but also lead to compliance risks that organizations can't afford to overlook. Reconciling all charges daily and tracking the right KPIs can help you ensure every fee paid is accurately reflected in your records.

But that said, relying on manual processes can make reconciliations a lot slower and prone to errors. With platforms like Osfin, you can automate the process to reduce manual workload and reconcile millions of records in minutes. All of this without compromising on compliance and security.

Book a demo with Osfin today to see how automation can improve your reconciliation process.

FAQs on Charge Reconciliation

1. What is charge reconciliation?

Charge reconciliation is the process of verifying that every fee you pay for processing digital payments matches what the payment provider has actually charged. It ensures you’re not overcharged for any transaction.

2. What do you mean by reconciliation?

Reconciliation means comparing two sets of records to verify if they match. Charge reconciliation involves checking internal organization records against the payment gateway reports to ensure every fee is accurate and accounted for.

3. What is the purpose of a reconciliation?

The purpose of reconciliation is to ensure all financial information is recorded accurately and there are no mistakes, missed entries, or duplications.

4. What is the reconciliation process?

The reconciliation process involves matching charges documented in the POS with the charges specified in the payment gateway’s report. It helps identify gaps and inaccuracies to avoid revenue leakage.

5. Who is responsible for charge reconciliation?

The frontline and finance teams are responsible for charge reconciliation.

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