Pros and cons of in-house vs. third-party payment reconciliation tools

Are you dreading the end of the month, with hectic schedules and time pressure building up for your finance team? When running month-end reconciliation, finance teams and business leaders often wonder whether there is a more straightforward way of making sure everything is matching up. 

We’ll give you an overview of the pros and cons of keeping the payment reconciliation largely in-house using Excel spreadsheets or custom development software compared to third-party tools built to speed up reconciliation process at scale.

Understanding payment reconciliation – a brief overview

Before diving into the in-house vs. third-party decision, it's helpful to establish what payment reconciliation actually means as a process.

At a very high level, payment reconciliation means matching a company's internal transaction records, such as invoices, with external records, such as bank statements, PSP statements, payment solutions documents, and credit card statements. 

The goal is to confirm that money leaving and entering the company's accounts aligns with the business's own financial records, ensuring that the accounting entries are correct and reflect the company's actual state. 

The reconciliation process enables your company to:

• Identify discrepancies or irregularities in payment flows.
• Resolve issues or inaccuracies with statements and entries.
• Verify that financial statements accurately reflect actual transactions.
• Correct and avoid fraudulent, unauthorized, or duplicate transactions.
• Maintain the integrity of financial reporting.
• Quickly resolve customer issues related to payment discrepancies, ensuring timely service delivery and customer satisfaction.

The payment reconciliation process thereby typically involves several key steps:

1. Gathering all relevant internal and external records.
2. Matching transaction dates, amounts, and references across these records.
3. Identifying any discrepancies or mismatches.
4. Researching and resolving discrepancies.
5. Recording adjustments to account for fees, interest, and errors.
6. Confirming reconciled balances match across records.

Different types of transactions often require specialized reconciliation processes:

• Bank reconciliation – matching bank statements with accounting system records.
• Accounts payable – matching supplier invoices to payments.
• Accounts receivable – matching customer invoices and payments.
• Payroll reconciliation – matching payroll disbursements, tax payments, and other records.
• Credit card reconciliation – matching credit card statements with transaction records.

Regular payment reconciliation, typically done at least each month's end or in more regular intervals, is necessary for your business to avoid errors, detect potential fraud, and maintain the integrity of your financial reporting. It is mandatory for public companies and organizations in regulated industries like financial services.

Now that we've covered the basics let's explore the pros, cons, and key considerations of handling reconciliation in-house vs. using third-party tools.

The pros and cons of in-house payment reconciliation

Most small and mid-sized businesses handle payment reconciliation internally using manual processes or basic accounting software. What are some potential advantages and drawbacks of this approach?

Pros of in-house reconciliation

• Greater control: With in-house reconciliation, your team owns the entire process and can customize it to your business's needs. You don't have to rely on or adapt to outside software, interface, API, etc. 
• Lower initial costs: Avoiding third-party software subscription fees can seem like a cost-saver, especially for businesses with simple needs. Developing internal processes does require staff time but no additional recurring fees.
• Familiarity and comfort: Your team understands your internal systems and records. This familiarity can make the reconciliation process feel more seamless.
• Data security: Keeping reconciliation in-house means your business maintains complete control over sensitive financial data. You don't have to share internal transaction records with a third party.

Cons of in-house reconciliation

• Time- and resource-intensive: Manual reconciliation is incredibly labor-intensive, occupying significant staff time that could be allocated to more strategic initiatives, particularly when relying on standard software such as Excel and SAP. 
• Higher long-term costs: While the software has upfront subscription costs, the long-term expenses can be substantial. This includes not only staff time and potential errors with manual processes but also the costs of maintaining custom in-house systems. 
• IT staff costs: Some businesses essentially run a small internal software development team to build and maintain their reconciliation tools, adding significant overhead to their operations.
• Process limitations: Basic accounting software and spreadsheets make automating complex reconciliation processes difficult. Growing businesses often outgrow manual processes.
• Data silos: Information trapped in spreadsheets and desktop applications creates data silos that limit the transparency and accessibility of records.
• Scalability challenges: Manual processes that work for a couple of thousand monthly transactions may buckle under tens or hundreds of thousands. High growth quickly strains in-house reconciliation.
• Security risks: Maintaining robust access controls, permissions, and data security with manual processes and desktop software requires rigorous IT oversight.
• The propensity for errors: Repeated manual data entry and reconciliation significantly increases the risk of human error, leading to inaccurate reporting.
• Lack of audit trail: Without automation, documenting the detailed steps and adjustments made during reconciliation can be arduous, making audits more difficult.
• Compliance risks: Adhering to evolving regulatory and compliance standards often requires software explicitly designed for those needs.

This is just a broad overview, but it illustrates that manual in-house reconciliation does offer some benefits but also comes with substantial long-term costs and risks businesses should carefully consider, especially as they scale.

Third-party payment reconciliation tools – advantages and potential drawbacks

Specialized payment reconciliation software such as Reiterate and, in some cases, outsourced services provide an alternative approach, which is often beneficial, particularly to high-growth businesses. 

So why do businesses use third-party payment reconciliation? To mention a few, but clearly not an exhaustive list of benefits:

• Improved efficiency: Automation handles tedious transaction matching, allowing your team to focus on high-value analysis and decision-making.
• Greater accuracy: Algorithmic matching can eliminate manual errors that lead to inaccurate financial statements.
• Data standardization and analytics: Advanced reconciliation software can automatically handle diverse data formats from multiple payment solution providers (e.g., Excel, PDF) and standardize elements like date formatting and column names.
• Enhanced reporting: Robust reconciliation software such as Reiterate provides real-time dashboards, analytics, and reporting for insights.
• More robust compliance: Many tools also offer to ensure your business adheres to constantly evolving regulatory compliance standards.
• Increased scalability: Sophisticated technology handles growing transaction volumes and complex reconciliation needs as your business expands.
• Regular updates: Reconciliation software providers continuously update their solutions to incorporate the latest features and functionality.
• Reduced reliance on IT: Cloud-based solutions ease the burden on internal IT resources for system maintenance and support.
• Tighter security: Leading solutions provide robust access controls, encryption, and security to safeguard your data.

Potential drawbacks of third-party reconciliation tools

Needless to say, there are also some considerations why businesses may be hesitant to employ third-party reconciliation tools, such as:

• Subscription costs: While third-party tools save time and resources, they come with monthly or annual licensing fees that can seem expensive upfront.
• Implementation hurdles: Integrating new software with your existing systems requires upfront effort and worker training.
• Reliance on the provider: You depend on the provider for reliable service and must trust them to securely handle your data.
• Customization limitations: You lose some ability to customize workflows and must adhere to how the software works best.
• Migration difficulties: Transitioning between reconciliation solutions later likely requires moving data and reconfiguring processes.
• Storing data externally: Even with security protections, some businesses are wary of storing financial data outside their own systems.

For many businesses, however, the depth of capabilities and efficiency gains far outweigh the drawbacks of third-party tools.

Key factors in the in-house vs. third-party decision

Determining the right reconciliation approach requires carefully evaluating your business's specific needs and priorities across a number of factors. Key elements to consider include:

• Transaction volume:  Are you reconciling dozens of transactions or thousands? Higher volumes make manual in-house processes impractical.
• Workflow complexity: Do you need to reconcile transactions across multiple payment types, currencies, and entities? Complexity demands automation.
• Growth trajectory: If experiencing rapid growth, will current processes scale gracefully or require constant changes?
• Compliance needs: Does your business operate in regulated industries with strict reconciliation and reporting standards?
• IT bandwidth: Do you have ample IT resources to manage security and software management in-house?
• Internal expertise: Does your finance team have specialized reconciliation expertise and capabilities?
• Accuracy requirements: How critical is precision in reconciliations and financial reporting to operations?
• Budget constraints: Are upfront software licensing costs affordable, even if long-term savings may outweigh these?
• Data privacy concerns: Do you have a significant reluctance to store financial data externally?

Before making a vendor decision, it is clearly a good practice to look at the above questions and compare vendors in terms of how they cater to the relevant needs. 

Fictional case study: Scaling payment reconciliation for a Forex broker

To make this decision process more concrete, let's walk through a fictional case study examining how a rapidly scaling Forex broker may automate payment reconciliation with Reiterate.

Company profile — ForexCo

ForexCo is a mid-size online forex and CFD trading broker serving active traders globally. They have:

• 75 employees across technology, trading, finance, compliance, and marketing.
• $50M in annual revenue, growing at 35% year-over-year.
• 500,000 trades per month across forex, crypto, commodities, and indices.
• Traders in 80+ countries depositing and withdrawing in 10+ currencies.

The challenge

With rapid user growth, ForexCo may struggle to efficiently reconcile client deposits and withdrawals across global bank accounts and payment methods using spreadsheet-based processes.

• High daily transaction volumes made manual reconciliation unfeasible.
• Traders disputed withdrawn amounts due to reconciliation errors.
• Identifying duplicate transactions was increasingly difficult.
• The finance team spent a significant amount of time on reconciliation.

It became imperative for ForexCo to implement automated reconciliation to support its growing client base.

The solution

After reviewing the options, ForexCo may use Reiterate to reconcile its global payments.

Reiterate’s intelligent matching engine automates the reconciliation of client deposits and withdrawals, reconciling transactions across forex trading accounts, payment methods, and reporting currencies.

Within months of implementing Reiterate, the business can expect to see the following benefits:

• Near zero disputes thanks to reconciliation accuracy.
• Faster daily reconciliation processing.
• Significant cost savings from identifying previously lost payments.
• Improvement in match accuracy, eliminating reporting errors.
• Faster period closes thanks to automated reconciliations.
• Regulatory reporting is becoming more time-efficient. 

Automating reconciliation may help ForexCo scale efficiently while providing clients with reliable and secure service.

Key takeaways

The case study above provides one example of how third-party reconciliation tools can offer transformative benefits to growing businesses. As a business leader:

• Don’t wait to optimize reconciliation: Outdated processes create avoidable risks and costs you may not initially notice. Continuously evaluate tools to improve reconciliation.
• Automate early to enable growth: If transaction volumes grow over 10-20% annually, automation will likely be essential to scaling smoothly.
• Find specialized expertise:  Seek solutions purpose-built for reconciliation by providers focused solely on perfecting this process.

Ready to kick-start automation in your reconciliation process? Speak to us now to schedule a demo to see who Reiterate speeds up your processes and improves accuracy and customer satisfaction.