How to automate your payment reconciliation system to plug profit leaks

Platforms such as Amazon, Flipkart, eBay, etc. are significant marketplaces to sell your products because of their reach and customers. More entrants have registered multi marketplace sales, with Amazon continuing to remain the preferred marketplace for B2B sellers. From a financial standpoint, however, the absence of a payment reconciliation system can impact the bottom line by miscalculating or misrepresenting critical information pertaining to charges, taxes and revenue.

There are cases of deductions, returns, etc. are also other leaks that eCommerce retailers often fail to plug.
Let’s look at different aspects of Payment Reconciliation and other common profit leaks in your eCommerce business. Before that, here is a quick description of what payment reconciliation is.

What is Payment Reconciliation?

Payment reconciliation is a bookkeeping method that compares internal financial sales records with bank statements to ensure that accounting data is accurate. It uncovers errors and roots out unpaid invoices and bills, with automation handling the lion's share of the reconciliation process. With the estimate that 95% of all purchases will be made via eCommerce stores by 2040, it is expected that the rise in online payment modes, digital wallets and crypto coins will add a layer of complexity to process.

Aspects of Payment Reconciliation

Most often, online retailers do not have a practical accounting and reconciliation process in place, and hence are completely reliant on online marketplaces. This makes the payments and reimbursements hard to track. The main aspects of payment reconciliation are:

1. Timing: In a typical non-COD (Cash On Delivery) order, the eCommerce sites will ship your money within 7-8 days. Although COD orders can take as long as fifteen days, the problem retailers face here is that the payment they receive might not be in the same chronology as the dispatched orders. Manually, it is difficult to match the amount received to its corresponding order, and it poses a challenging problem to verify and validate the payments.
2. Deductions: Deductions are one of the significant profit leaks in eCommerce. Although some deductions are fixed for all eCommerce sites like taxes, some vary from platform to platform like discounts and shipping. These are some of the standard marketplace deductions on every purchase:

• Commission: The online marketplace charges a commission on every purchase of your product owing to marketing, website hosting, etc. The commissions are not fixed and vary on the cost of your product.
• Payment/Closing fee: These are additional charges levied by the marketplace.
• Shipping charges: Most eCommerce platforms undertake shipping services for your products. These charges are deducted from the payment by considering the weight and other factors. Sometimes, wrongful recording of weight may lead to overcharges and increases your shipping fee.
• Storage/Warehousing fee: The retailer also has the option to choose the warehouse or store the online marketplace. These charges will also be deducted from the payment. There are cases where extra charges for picking and packing will be levied, which is another cause for profit leaks.
• Discounts: There are two types of discounts. The first is the discount offered by the sellers themselves. In this case, the eStore can deduct the discount amount before making the final payment. Second, is the discount offered by the marketplace during promotional events. In this case, the sales channel can not deduct a discount from the final payment.
• Statutory Taxes: These taxes are common to all platforms and depend from country to country. In India, taxes such as GST will be applied to the product and cut from the seller's payment.

3. Unremitted orders: At times, the marketplace misses out on paying for some orders. For short durations, unremitted orders aren't that big a concern. Sometimes, the platform's orders might not be paid for more than one or two months. It is essential to follow up in such cases and, if forgotten, may lead to a loss in profits.

4. Returns: On very few occasions, the buyer might have purchased wrong or defective orders. In such a case, the payment done to the retailer is reversed, and the order is sent back. If the order is not shipped back to the retailer or the retailer forgot to account for the purchase, there is a significant loss faced by the seller as he loses out on the money and the product.

It is vital to notice the pain points of traditional payment reconciliation, or what happens when you do not have a proper payment reconciliation tool in place:

• Reconciliation will be a time-consuming and complex task when transaction volume is high.
• In the case of multiple listings, it becomes further difficult to account for payment, price difference, and inventory.
• Deductions vary with policy changes, and it becomes challenging to track these and account for them.
• Lack of transparency in the online marketplace payment accounting and reconciliation process.

All things aside, there is a straightforward way of solving these pain points of payment reconciliation.

How To Automate Your Payment Reconciliation?

Online retailers can automate their omnichannel reconciliation process by investing in a robust automated payment reconciliation system. This helps in further streamlining the reconciliation process and ensures complete payment transparency.

Key advantages are:

• Allowing you to easily reconcile your accounts.
• Ensuring the accuracy of your eCommerce transactions.
• Giving you a better understanding of your online and offline payments.
• Get your historical data reconciled with the retro reconciliation tool to give you a better understanding of your P&L.
• More insight and visibility into every payment by matching the orders and the payments
• All your payments are done through a central channel and hence save you a lot of time.
• Track the extra marketplace deductions through the platform so that you face minimal loss.

These are just the basic benefits of the online reconciliation tool. Automation also brings a lot of powerful features to the table to streamline payment handling.

Ecommerce Payment Reconciliation: How To Handle Payments And Payments Discrepancies

An automated payment reconciliation tool helps you better manage payments and identify discrepancies by providing the following features:

• Identify extra marketplace deductions: Payment reconciliation tools help you track marketplace deductions at the order level. This helps you timely identify marketplace deduction amounts and ensure that corrective measures are taken to avoid extra deductions in the future.

• Generate reports to minimize loss: Automation helps in generating reports which help you track non-sell-able and damaged returns. Check the return reconciliation report on the go and take action to keep the losses to a minimum. You can also use data analytics to your advantage in auditing and payment reconciliation.

• Accurate Legally Compliance Taxation Report: When the tax report is generated on a monthly basis, the automated tax engine provides the exact amount to be paid as tax on sales and also the amount to be claimed as sales returns. The breakup also helps in filing for the tax for that particular time frame.

The Best Practices to Adopt to Streamline eCommerce Payment Reconciliation

1) Standardize Processes

Make it compulsory to reconcile payments on a weekly, monthly, quarterly and bi-annual basis which involves

1. Extracting data
2. Compiling it
3. Storing it
4. Tallying it
5. Reconciling it. 

These steps make it easier on finance teams to spot and lift discrepancies for scrutiny, thereby preventing the mistake from propagating forward.

Pro-tip: Use a template to document the steps for uniformity! 

2) Set and Deploy Internal Controls

Internal controls are critical to eCommerce payment reconciliation processes because they establish stage gates or checkpoints to reconfirm the nature and risk level of errors found. As you induct more members into the finance and operations side of things, these new hires should also be briefed through the internal controls to ensure consistent adoption of processes. You can have your Chartered Accountant train account managers, business development executives and junior accountants for the series of internal checks applicable to your business, making it a unique blueprint.

3) Embrace the Power of Automation

A 2020 Forrester study surveying 700 payment decision makers found that 65% struggled with matching payments to invoices. This is where automated payment reconciliation systems come to the rescue  for it can reconcile large volumes of complex transactions, getting twice the work done while recording manual efforts that can be compared for veracity.

An APS deep-embedded into your existing eCommerce enabler can save considerable hours with trigger-driven workflows that catch discrepancies more easily. It generates reports that capture sales performance from multiple channels, warehouse location, customer details and shipping partners, ensuring granularity in the details before you. 

The time factor and hours you stand to save make a compelling case for automating payment reconciliation. As you upscale and expand, you need a solution that can adapt to the growth seamlessly without leaving data behind. 

4) Analyze Key Performance Indicators

KPIs are vital to closing and preventing gaps from reopening at a later time.  A few KPIs to set for observation are;

• Average reconciliation completion time.
• Reconciliation accuracy,i..e the number of reconciliation that are performed correctly the first time.
• Error rate per reconciliation.

Over time, the gap between manual and automated efforts narrow down to the point where the dependency on labor is completely taken off

5. Integrated Solutions

Data analytics is the toughest part of reconciliation because it hinges on your data interpretation skills which prevent errors from repeating or moving forward. It also demands maximum effort from the F&A team who will need to clean and upload data to make sense of the financial statements.For example, the EasyEcom system provisions for atomic details of each report such as the tax report which segregates costs into different categories to understand the break down and see slip ups.  What’s more, the system can import data from several ERP systems or marketplaces directly through APIs that ensure there’s a synchrony in what platforms are displaying versus what you’re seeing.

6) Upskilling Teams

A component of eCommerce often considered as an afterthought, best-in-breed or world class system offerings are useless if they are incomprehensible to your teams. It is therefore important that your employees receive complete training to use the system and execute the practices discussed successfully.  

Company wide adoption should be immediately followed up with scheduled training that helps concerned teams to gain the requisite knowledge to make accounting and payment reconciliation a meaningful migration. 

Automating your payment reconciliation can help you gain visibility of your cash flow and payments. Having a robust reconciliation system in place provides you with a lot of features and insights. With strong data-backed reports and tracking, you can breakdown every payment down to the atomic level without having to face any problems.

FAQs

1. What are the different types of payment reconciliation?

The 4 common types of reconciling payments are

1. Bank: The majority of reconciliations occur against bank records, which need to be matched against company books.
2. Credit cards: Credit card reconciliations entail matching transactions to monthly card statements to uncover deposits and withdrawals
3. Cash reconciliation: Cash reconciliations occur at offline locations by tallying the amount collected throughout the day at cash registers
4. Digital wallet reconciliation: Digital wallets can be topped up by the spender where they can view the balance online and combine a mix of other payment options and wallets, which again add complexity to the payment reconciliation process.

1. What are the differences between payment reconciliation and settlement?

Every payment gateway has a settlement cycle which refers to the time frame between a customer paying through a gateway and the merchant's account getting credited with funds. The minute the payment is deposited into the seller's account, payment settlement is said to have happened. Payment reconciliation is the step following settlement, which closely examines transactions and verifies that records from multiple payment modes match and correspond to order, location, marketplace and customer details.