What Makes Reconciliation in Banking-as-a-Service Unique?

When a business or consumer logs into their bank account, they expect that the account balance they are shown is accurate. Every time money moves into or out of their account, these funds need to be tracked and the balance updated with the right dollar amount. 

This accuracy is necessary for people to have trust that their money is safe and accessible. As soon as this trust fades, people will begin looking for better places to hold their money.

In banking, accuracy is maintained through effective reconciliation. Reconciliation is the process of banks double checking that the transaction data they have in their core system matches with the data they get from the transaction source.

For banks, this means that every time a transaction occurs and is recorded on their ledger, the transaction must be matched against the data received from the transaction source. While the fundamentals of reconciliation are straightforward, in practice we see multiple data sources, file formats, and transaction codes that make this process increasingly complex as transactions scale. 

Recently, we’ve seen what can happen when reconciliation isn’t managed properly. In the worst case scenario, customers have lost access to their money and there was a dispute over the ownership of funds.

The bankruptcy of Synapse, and the lack of data integrity it unearthed, caused a spotlight to shine on how FinTechs and banks partnering together through Banking-as-a-Service (BaaS) manage reconciliation. While BaaS has enabled an influx of financial innovation that has expanded banking access and improved the way in which people manage money, it has also introduced new complexities to the reconciliation process for banks. 

Banks and FinTechs need to be aware of these complexities to effectively manage their customer’s funds and ensure reconciliation is at the forefront of their control processes. 

So what makes reconciliation in BaaS unique compared to how banks have historically managed this process? Let’s dive in.

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1. Introducing a third ledger

The majority of bank-FinTech partnerships leverage an FBO account structure. For each FinTech, the bank holds an FBO account that contains all of the program’s customer deposits.

Within the bank’s core they will only see the total dollar amount in each FBO account, without immediately knowing the allocation to customer A, customer B, and so on. 

The data of how much money is in each customer account is stored on a sub-ledger, which typically lives outside of the bank’s core. The sub-ledger operates as the source of truth for individual customer account balances and provides FinTechs with immediate visibility into that data. In the case of Synctera, the Synctera Platform contains a sub-ledger which is accessible by both the bank and their FinTech partner. In other instances a FinTech may use their card processor, leverage a standalone ledger provider, or even build a ledger themselves. 

While the FBO structure offers banks and their FinTech partners increased data accessibility and product flexibility, it also introduces new complexities to the reconciliation process. The sub-ledger not only needs to be reconciled to the transaction source data, it also needs to be reconciled against the bank’s core to make sure all ledgers are in agreement. This process requires not only reconciliation between two ledgers, but three.

Banks and FinTechs must work together to ensure that all three data sources are in sync. Any discrepancies that are discovered should be investigated until the cause of the difference is known and reconciled.

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2. Wider variety of transaction sources

For more traditional banks, especially community banks, there are generally only a few ways a customer can move money. Banks will typically offer ACH, wires, checks, and cards. This limits the number of transaction sources the bank will have to reconcile.

FinTechs, on the other hand, often rely on innovative ways to move money. As a banker once told me, “FinTechs are great at moving money in incredibly creative ways.” This creativity means banks that operate BaaS partnerships should expect, and be prepared for, a whole host of new payment methods. 

The challenge this brings is that now there are sometimes third parties involved in the payment flow and each transaction source will have unique file formats, data transfer mechanisms, and more. Additionally, the different payment rails might have several file types with each of them having wildly different structures. 

All of this adds up to banks needing to be prepared to ingest transaction data in a variety of different ways and have a system in place to be able to quickly make sense of that data. If the bank is not ready for this, they can be left trying to reconcile apples to oranges. And as expected, this can lead to errors and inaccurate data.

Banks need a way to ensure that all of their data is turned into the same structure, or the same type of fruit, so their system can recognize and reconcile it. 

This process is called data normalization. With each new data source added, banks will need to normalize that data to match the other transactions already flowing through their system. This provides banks with a simpler view of “apples to apples” transaction data, leading to more efficient and accurate reconciliation. 

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3. Partnership model of reconciliation

BaaS is all about partnerships. Banks and FinTechs must be able to work together, each with their own defined roles and responsibilities, in order to operate effectively. Reconciliation included. 

Traditionally, banks may have been used to operating their reconciliation process between the network and their in-house reconciliation team. The bank handles the payment investigations end-to-end and all transaction data is only visible in their internal core system. 

However, when forming BaaS partnerships banks need to be ready to collaborate on key operational processes with their FinTech partners. This necessitates banks having a system that enables them to deliver the right data at the right time to the necessary stakeholders, without exposing other sensitive information. 

Additionally, these partnerships need to be built on trust. There needs to be mutual trust that when issues arise, such as an incoming wire that the bank doesn’t see in their FinTech partner’s accounting, everyone knows they can rely on each other to investigate the problem together and bring it to resolution. 

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Unique, but not impossible

Banking-as-a-Service, FinTech banking, embedded finance, or whatever you want to call it is still just banking. Regardless of how new innovation changes the financial landscape, tracking money movement and having accurate customer account data are core banking principles that will never go out of style. 

For banks operating or planning to operate BaaS programs, they must recognize that shifts will need to take place in their standard reconciliation process to maintain accuracy across all parties. However, with the right infrastructure and procedures in place, these shifts can be managed. 

Synctera was built to provide banks with a platform that provides BaaS-specific reconciliation tooling, enabling them to:

1. Easily account for all FinTech transactions at a detailed level
2. Unify and manage a variety of unconventional transaction sources
3. Provide insights and data to FinTech partners

As FinTechs continue to grow their share of consumer bank accounts, effective reconciliation processes between sponsor banks and their FinTech partners will become increasingly critical to the health of the financial ecosystem. Understanding the nuances that come with this and planning ahead for them will enable the entire industry to thrive, and more importantly, protect the people that rely on it.