Identify the challenges behind ATM/EFT products reconciliation. Understand the reasons for the financial industry’s inability to own a workable solution since inception.
The sail of the financial world’s search for a workable solution to ATM and EFT products reconciliation has not been that smooth despite very frantic efforts by various fintech firms, including the financial institutions, to master the game.
The question is: Why is the search for workable solution lulling? Is it really a monstrous problem as the various narratives in the industry would have us believe? How much longer may the financial world wait for the necessary panacea to this knotty pain to the financial institutions?
Let us set the background right.
Accounting 101 teaches accounts reconciliation in school. In a very elementary understanding, account reconciliation refers to the process that ensures that a two set of similar records or transactions that ought to mirror each other, kept by two independent parties for a similar period are compared to ascertain that they are actually similar in transactional amounts and balances. It goes further to identify any disparities in transactions amounts and balances with the intention to investigate and resolve the differences.
The above is to be basically understood in the type of relationship between a customer’s independent records of his banking deposits against the bank’s own records of the customers transactions with the bank, typically called the customer’s bank account statement.
The financial technology industry has since found seamless solution that allows any bank to reconcile their books involving various categories of customers personal bank account transactions, interbank accounts transactions, and other forms of regular accounts reconciliation scenarios almost at no efforts.
However, the tale about ATM and EFT products reconciliation has not been that smooth. This is why PFS took it upon itself, in her characteristic manner, to explore the possibilities that can lead the financial world to the light at the end of the tunnel. What discoveries were made and what hopes are available?
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Imagine a single EFT account created by a financial institution, in one of its branches, to warehouse transactions from several POS, acquired from different POS Issuers and assigned to different merchants.
The first undoing of the financial institution above is the failure to understand that the POS or any other EFT product could not be treated as a normal account or personal account. Hence, It sets out designing their financial chart of accounts to accommodate these electronic products in the similar manner they do for customers personal accounts. They missed the revolutionary mindset change that must precede any attempt to own a workable solution. This is the mindset that acknowledges the fact that each ATM or EFT type is not an account but a product. So, what did the financial institution do? It made each ATM or EFT product to own an account without taking cognizance of the need to maintain what we call “transaction type parity” with counter party records against which the accounts shall be reconciled.
The second rule that the financial institution broke and dampened the opportunity for a workable solution is the requirement of transaction type parity in the reconciliation process. Maintaining transaction type parity between two set of records for reconciliation is an ancient rule, which significance was suppressed by the evenly compliant nature of the types of transactions that are processed in regular accounts over the years before the advent of ATM and EFT products. Transaction type parity requires that each account warehouses homogeneous transactions that would mirror the counter party records. In the above scenario of the POS account, you will find that the counter record to reconcile that singular POS account would be multifarious, not just in number but also in sources.
Thirdly, the challenge to effectively reconcile the POS account would be so enormous that many financial institutions are forced to ignore another critical requirement in efficient reconciliation exercise. That is the balance control mechanism. The POS account in the bank’s general ledger will typically have a balance that cannot be tallied with any single source of counter party record. The efforts required to combine the records and balances from the various issuers of the various POS in order to arrive at a single agreeable balance that should tally with the GL balance of the bank is onerous. Therefore, the bank resorts to only transaction matching, what we call transaction proofing, and ignores balance control mechanism that ensures that similar periodic and complete set of transactions from counter records are reconciled against each other.
A fourth challenge for our POS account transaction would arise from inconsistencies and inadequacies of transaction description patterns pooled from various POS Issuers, who adopt disparate transaction narration conventions. The more the sources of transactions, the more complicated the situation becomes and the more difficult it is to craft an effective matching criterion for reconciling the account.
The POS account reconciliation will face a fifth and very technical challenge. There is what is called settlement cycle for electronic channels like ATM and other EFT products. This refers to the beginning and the ending cut-off time for determining financial settlements between the banks and the POS Issuers. Typically, each issuer determines its cut-off time. By implication, the challenge of drawing and even cut-off time for all the issuers’ settlement statements and matching that against the general ledger cut-off time is almost impossible. By extension, arriving at a single reliable balance that can be matched against the general ledger balance for the reconciliation cycle is doubtful.
The direct consequence of the settlement cycle conflict is the sixth reason why workable solution to ATM and EFT reconciliation lulls. That is the inability to secure complete sets of similar transactions for reconciliation between the ledger and the settlement statements. Cases of missing transactions or overlapping set of transactions across reconciliation cycles due to inconsistencies in cut-off times from multiple sources of settlement statement transactions pooled together to reconcile against the POS general ledger account abound in the industry.
Another very technical but seemingly overlooked challenge by undiscerning minds in the industry comes from the need to ensure that some particular types of transactions that do not impact on the general ledger, though captured by E-journals or Front End Processors of ATMs and other EFT machines are consolidated together to ensure that the financial institution has a complete set of ledger transactions to reconcile against the settlement reports of the Issuers. This is what gave birth to the concept of a 3-way reconciliation model being canvassed by the company to the industry.
Even though, a number of sources site increasing volumes as one other reason there are challenges in ATM and EFT reconciliation, PFS believes that would be a no issue if all the above highlighted bottlenecks are removed or reduced to the barest minimum to pave way for an effective solution to this global pain in the financial world.
Are there any hopes in sight?
PFS believes that going by the extensive work that the financial technology firms globally are embarking on, in conjunction with the financial institutions, there will be a breakthrough in the nearest feature. The Chief Technology Officer of the company, Seyi Osifalujo, was quoted recently as saying that “PFS will soon announce to the industry a major breakthrough it has achieved in what we consider to be the First Step to Demystifying ATM and EFT Products Reconciliation.” He said the effort will help the global financial industry to rethink and simplify ATM and EFT reconciliation in a revolutionary manner.
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