How to automate payment reconciliation with virtual IBANs

Our Thinking

Posted on March 14, 2023
How to automate payment reconciliation with virtual IBANs
Manual payment reconciliation is giving your Ops team nightmares. Virtual IBANs could offer a better way.
OpenPayd Editorial Team
OpenPayd Editorial Team
March 14, 2023

Most people will have parts of their job that they like less than the rest of it. Particularly tasks that are draining because they’re repetitive, difficult or simply because they prevent us from doing more interesting work.

Manual payment reconciliation ticks all three boxes. Funds need to be reconciled accurately for a business to run smoothly and remain financially compliant, but clunky payment infrastructure can make this a painstaking task.

But this article is about good news. Improvements in payments infrastructure are not only helping to ease this problem, they’re eliminating it.

Under the hood of payment reconciliation

Let’s say your business is a remittance service, enabling people to send funds to family members across the world in various currencies. Perhaps you have an investment platform, which customers use to buy stocks, crypto or exchange currencies. Or maybe your online marketplace lets customers put money in an eWallet for subsequent purchases.

What unites these businesses? Their customers all need to send money to the business, and then track pay-outs using that client balance. There are thousands of companies like this across different industries, each with their own nuances and quirks.

However, all of these businesses need to reconcile the payments that come in from their clients and the standard approach to reconciliation will probably look something like this:

  1. The company has a single master account for all incoming customer payments.

  2. When a customer wants to add funds to their account via bank transfer, they need to include specific reference information to differentiate it from every other incoming payment.

  3. If the reference information is correct, the company’s back-end system will detect where funds should be allocated and update accordingly.

  4. If the information was incorrect or if their back-end system doesn’t automatically reconcile incoming payments, the operations team will have to manually assign the payment to the user.

Now, put yourself in the shoes of the operations (Ops) team member charged with fixing this. You have no idea where the payment should be allocated to. All you have is a sum sat in the company’s master account, an incorrect or missing payment reference, an irate customer wondering where their money has gone and a lot of questions.

That’s when the hunt begins to determine which customer the payment belongs to. This could involve opening investigations with service providers, downloading and reviewing transaction statements and back-and-forth conversations with the customer to receive proof of payments. All of this takes time and further complicates the process of settling the payment.

If this is painful for your Ops team, it’s infuriating for the customer. They will want to use their funds as quickly as possible and a missing payment will stop them in their tracks.

For a small business processing just a few incoming payments each month, reconciling them isn’t going to be a big job. But for businesses that are scaling rapidly, payment reconciliation becomes incredibly taxing for Ops teams.

Payout pains

Then there are payouts. For many services like remittance businesses, customers will be making a payment out every time they use the company’s services. But if the beneficiary’s account does not recognise where those funds are coming from, or labels the transaction as suspicious because the reference information, sender, details and ID data doesn’t match up, that transaction is likely to fail. In that situation, the funds will be sent back to the account it came from.

The tricky part is that when those funds come back, the returning payment may not have any reference information that could direct it to the right place. So more detective work ensues, with the Ops team manually trying to determine exactly which customer the failed payment belongs to, so they can allocate the funds as quickly as possible back to them and the customer can attempt the payment again. This can involve more difficult conversations with beneficiary banks, more back-and-forth with customers and more laborious reconciliation work in an endless CSV file.

Two big issues jump out here. Firstly, reconciling these failed payments involves a huge amount of work from a business’s Ops team. It’s not uncommon for employees to not only spend a portion of their working day trying to resolve failed payments, but to spend their entire job handling them. Even when they find where a failed payment has probably come from, there’s still a lot of guesswork involved.

Many Ops teams will be up against the clock. Segregated master accounts are the gold standard for keeping client balances separate from a business’s corporate accounts. But that extra protection for customers comes with additional scrutiny: depending on their licence, companies will have to reconcile the funds held in their client safeguarded account within a certain timeframe – they are legally required to ensure there’s no residual balance that can’t be accounted for.

Secondly, it’s an abysmal customer experience for the end user. Their payment has failed, and their funds are missing while the Ops team investigates. And of course, there’s still a risk of human error – if funds are then sent to the wrong user by mistake – which creates another set of problems for Ops teams.

Virtual IBANs – a better way to pay

If you work in Ops and you found the previous section triggering, we’re sorry. But there is a much better way of reconciling payments that’s possible with virtual IBANs.

By issuing virtual IBANs (vIBANs) to every single user, they will each have distinct payment information for every payment in and out that is associated with them. Because the IBAN is unique to the customer, when they make a bank transfer to your company, there’s no need for additional reference information, as the payment is routed directly to that vIBAN and automatically allocated to the client account.

This basically addresses the payment reconciliation issue at the source. With unique payment information for each customer, there’s no room for human error when making a payment to the business. That in turn means Ops teams don’t have to dedicate hours or days every week to reconciling payments with incorrect reference information.

For payouts, transactions are again being sent out via the same vIBAN. If that payment fails, the Ops team doesn’t have to bust out their deerstalker and pipe: the payment returns via the same user-specific vIBAN it came from, allowing for the return to be instantly allocated back to the customer.

In terms of both operational overhead and customer experience, the difference is night and day. Ops teams are able to focus on solving other business challenges and growing the business, while customers aren’t left wondering what happened to their payments.

If you’re interested in using vIBANs for your business, contact our team today. Once set up with OpenPayd you can issue hundreds of thousands of vIBANs, fast. Your Ops team can finally get a good night’s sleep.