Credit Card Reconciliation: Types, Challenges and Strategies

Credit card reconciliation is becoming more pressing as companies across all industries make organizational purchases with credit cards.

Credit cards are becoming the dominant way to spend money, whether you’re an individual paying for an Uber ride to work or a business purchasing software. 

The Federal Reserve reports credit card usage has been eclipsing other payment methods since the beginning of the millennium, experiencing its highest annual growth rate at 8.0% over that period.

As online payments are surging and the world slowly transitions into a cashless economy, businesses everywhere enjoy better ease of payments than ever before. However, they also must prepare for more complicated financial management, specifically reconciling credit card transactions.

What is Credit Card Reconciliation?

Credit card reconciliation is the process of comparing the transactions in a credit card statement to the company’s ledger to ensure and support accurate bookkeeping. 

The process of credit card payment reconciliation occurs before each monthly close, as well as before the close of each quarter and financial year.

B2B Payment Trends Driving the Need for Credit Card Reconciliation

Here’s what we know: in 2021, 55% of CFOs said their use of virtual cards increased since the start of the pandemic. Meanwhile, ACH and credit card adoption spiked by 68% and 64% respectively.

All of these numbers point to a singular trend that’s taking the B2B world by storm — a trend best described as the rise of customer-centric payment options.

Here are a few key trends that support the shift to customer-centric payment solutions.

Flexible Digital Payments Grow in Popularity

Digital payments are nothing new. They’ve existed for decades at this point. However, more and more companies are turning to flexible digital payments to support their AR and AP processes.

What’s driving this trend? According to Mastercard, 76% of SMEs claimed the global pandemic rapidly accelerated this shift.

Today, some of the most popular forms of digital payments include automated clearing houses (ACHs), credit cards, payment gateways, virtual cards, and more.

Customers Want Fast Payment Options

Customer demand is another key catalyst driving the adoption of credit cards in the B2B space. As digital continues to become the standard — cumbersome manual payment processes are losing favor with the vendors and partners companies rely on to stay competitive.

Customers want fast, accessible, and real-time payment methods — something credit card technology is well suited to provide. They also want to use payment technologies that are integration-friendly and capable of providing deep insights into purchasing behavior and trends.

Integration Takes the Spotlight

Integration is a must-have for companies in all industries. With so many options available, customers want payment solutions capable of integrating with their favorite platforms. 

The push for integration provides a whole host of benefits, including promoting more collaborative financial processes, giving companies access to data-rich insights, and ensuring all companies have a strong digital foundation to expand from.

It’s All About the Efficiency

The biggest advantage of digital payment solutions like credit cards is the efficiencies they unlock. 

Looking at credit cards specifically, companies can reduce their costs, simplify both expense tracking and the credit card reconciliation process, and combat fraud with more control over transactions.

What about vendors? Payments are instantly received and clear much faster than traditional manual payment methods, resulting in rapid and consistent cash flow. Credit cards also offer better remittance data than traditional ACHs.

What Does Credit Card Reconciliation Involve?

At the end of every financial period, accountants are responsible for ensuring that the company’s general ledger accurately records any credit card transactions the business made. They must verify that these transactions are both complete and correct according to credit card statements that period.

Reconciliation is part of the closing process, a bookkeeping procedure that ensures integrity in a business’s financial management. If any discrepancies exist, the financial closers must find out how the problem occurred, who made the payments, and what remedial actions are necessary.

The frequency of credit card reconciliation is generally month-end, with additional closing processes at the end of every financial quarter or year. Expense management automation can speed up this entire process.

Why Do Businesses Use Credit Cards?

One might wonder why companies continue to use credit cards for business-to-business transactions when additional steps are involved in reconciliation.

Compared to other available payment methods, credit cards fulfill an irreplaceable role. Invoices work well for large purchases. Direct debits are more convenient for specific recurring fees. But credit cards truly thrive in one of the most common purchases businesses make: “day-to-day” spending that typically comes from employees.

Instead of paying out-of-pocket for essential purchases like advertising services and travel expenses, employees are more likely to use company credit cards. Not only are they more familiar to most people, but credit cards make business purchases much more convenient; you don’t have to head to the bank every time or go through an entire purchase order process just to make a basic payment.

Types of Credit Card Reconciliation

Payments with credit cards can go both ways: in terms of expenses and in terms of income. There are two types of credit card reconciliation that companies should be aware of:

Credit Card Statements

Reconciliation can occur over credit card statements. Whenever your organization pays for goods and services with credit cards, your accountants must compare those transactions with monthly credit card statements to verify the integrity of your records. It’s likely necessary to look at individual statements for all credit cards you issue to staff.

Credit Card Merchant Services

Reconciliation can also occur whenever customers pay you using credit cards. The payment, in this case, goes through your merchant account provider, an intermediary in these transactions, before reaching your corporate bank account.

We’re mostly going to focus on credit card statement reconciliation in this article, particularly in the case of B2B transactions.

Reconciling Credit Cards vs. Other Payment Types

Reconciliation is necessary for almost any business transaction, even outside of credit cards. For example, bank reconciliation compares your records against those of your bank. Even digital wallet reconciliation is an emerging practice for some businesses.

An entirely separate process known as operational reconciliation looks at inventory items instead of funds. It compares your recorded inventory amounts with your actual amounts and attempts to identify discrepancies that could point to human error or theft.

Why Credit Card Reconciliation Deserves Your Attention

The general ledger, your organization’s primary record keeping tool for financial data, lists every transaction anybody in your company made in the last period. An accurate ledger helps finance teams determine the financial health of the business.

Payment reconciliation ensures the accuracy of these ledgers by cross-checking their entries with bank statements, credit card statements, receipts, and other documents. Reconciliation for credit cards matters because:

• Mistakes can happen: Even banks and credit card merchant services might get things wrong, and genuine mistakes like misplaced receipts can still happen. Address any discrepancies between your records, or you might end up paying more than what you owe.
• Preventing fraud: Financial auditors expect businesses to have a robust reconciliation system for credit cards, primarily to prevent fraud. Any tax office or financial auditor uses reconciliation as proof of compliance, and you could face legal trouble for an inaccurate ledger.
• Keeping track of spending: Credit cards make purchases a lot easier but can also be a challenge for financial managers who need to deal with many cards issued to various employees and departments around the company.

Credit card reconciliation is also more complicated than just comparing two spreadsheets.

Potential Credit Card Reconciliation Challenges

Most methods companies use to reconcile credit card payments are inefficient or inaccurate. On top of data entry errors, reconciliation is a challenge due to multiple factors.

• Shared company cards: Companies tend to issue relatively few cards to employees to keep spending under control. One consequence, however, is that staff tend to pass them around, making it harder to pin down who paid for what. And if the financial closing process finds any incorrect amounts in the ledger, it can be challenging to track down the source of the transactions.
• Too many company cards: Conversely, handing out credit cards to everybody results in more credit card statements to reconcile. It also results in operational bottlenecks, as employees face a slower, less efficient approval process for credit card spending.
• High transaction volume: Since corporate credit cards have made payments much more accessible, businesses themselves have been buying more things. Especially as a starting business grows, finance teams need to juggle more transactions over time, leaving more room for potential mistakes.
• Paper documents: Paper receipts and invoices are easy to lose and inefficient to process through all of them.
• Disparate sources of data: Think about a typical B2B transaction. The supplier hands you an invoice; your accounts payable system must process it; you pay with a credit card; and you collect a receipt to complete the transaction. With so many documents, accountants can struggle to dig through all of them.
• Investigation for discrepancies: Should the closing process find any mistakes, finance teams must desperately search for the cause while on the clock to close the books. Issues can occur anywhere, even externally such as in the case of a dispute by the credit card payment processor.
• Multiple points of contact: Many individuals contribute to a single credit card transaction. An employee pays for the goods or services; a manager must approve the purchase; and a finance team member oversees all the payments in a department. The closing process stalls if the accountant responsible for closing the books can’t contact any of these people.
• Statement timing: Credit card statements seldom arrive “on time.” It takes several days after the month, and the entire reconciliation effort must halt until your credit card service provider sends over the documents.

Solving these challenges is thankfully possible with the right tools and policies. Let’s go into how credit card reconciliation should work.

How to Perform Credit Card Reconciliation

Performing a credit card reconciliation is a critical financial task that involves matching your business expenses with credit card statements to ensure accuracy and completeness. It starts with getting organized and ensuring all of your documents are in one place. If you have accounting software, the rest is pretty simple. You enter the transactions into your program (or scan them) and the system typically does the rest. If the tool integrates with your ERP, the entire process can be automated.

Ultimately, it’s about verifying if the ending balances match. However, there are some best practices and key steps in the reconciliation process.

Steps in the Reconciliation Process

The following steps outline a typical credit card reconciliation process for a business. For auditing purposes, finance teams often record everything they do here.

Step #1) Collect All Documents and Statements

Gather all statements, invoices, and receipts (which act as proof of expenses) associated with all credit card accounts in the organization. Doing so may require you to chase down employees individually unless you have a centralized way to collect the data in an accounting system. This also includes digital copies of financial statements.

Step #2) Organize Data

We recommend digitizing your documents to facilitate organizing and searching through financial information. Employees can use receipt scanners or expense management software for this purpose.

Step #3) Cross-Checking Transactions

Record everything in the general ledger, including credit card fees and interest charges. Cross-check your transactions with your recorded expenses to account for all items on your credit card statements. Some fintech platforms will automate this process, including verifying amounts, dates, and descriptions.

Step #4) Identify and Fix Errors

If there are any errors between your journal entry and the credit card statement, investigate and resolve them. Discrepancies often arise from refunded purchases, failed transactions, and duplicate charges.

Step #5) Reconcile the Outstanding

Part of matching transactions is to ensure any outstanding transactions from the previous reconciliation period are accounted for in the current account reconciliation. This includes anything that may have been pending or in transit.

Step #6) Verify Ending Balances

Confirm that the ending balance on the credit card statement matches your financial records. If there are any discrepancies, investigate and resolve them.

Step #7) Record Reconciliation

The accounting team should also consider documenting the reconciliation process, including any adjustments made. This serves as a record of the accounting process in the event of an audit.

Step #8) Obtain Approval

Once all credit card expenses match, it’s time to obtain a sign-off from the responsible parties. This may include controllers, finance managers, or other designated personnel.

Step #9) Organize and File

Organize and file all documentation related to the credit card reconciliation. This facilitates financial reporting and streamlines workflows for future audits.

These 9 steps in the reconciliation process will help you maintain an accurate audit trail. It all sounds complicated, and the daunting nature of going through all those statement entries has made finance teams search for better solutions. That’s where AP automation software and expense management solutions come in. Automation improves credit card reconciliation in a myriad of ways.

How Software Accelerates Credit Card Reconciliation

Whenever businesses struggle with credit card reconciliation, the primary issue is typically the manual nature of the process. The steps outlined above are time-consuming and prone to human error. They take up working hours that your teams could be using for more strategic roles in the business.

While digital spreadsheets have fixed most of the problems with paper-based reconciliation, they’re still not enough for the high volume of transactions businesses today undergo. So software instead has taken center stage in financial reconciliation efforts.

Credit card reconciliation tools, available as part of any procurement, or procurement automation platform, perform several functions:

• Automating data entry: Manual data entry from receipts and statements is a common source of human error. The software can import data directly from credit card accounts into the general ledger and automatically scan for potential discrepancies.
• Centralized dashboards: Even if credit card transactions come from multiple sources, accounting software today collects all transactions into a centralized dashboard for easy reference. The result is a detailed audit trail and better visibility for your finance teams.
• Scaling up reconciliation efforts: Regardless of how many purchases your business makes this quarter, the software accelerates reconciliation so employees can more easily purchase the goods and services they need.

A more efficient credit reconciliation process, in general, helps you track spending and identify savings opportunities. For instance, you might notice that you’re still paying for software subscriptions you haven’t used in a while and could save money by canceling. Or your business trips might lead your teams to the same locations every year, and there’s a chance to negotiate a corporate account with nearby hotels for better rates.

Even after closing the books, software-based reconciliation facilitates forecasting the upcoming financial year thanks to spend analysis, reporting, and dashboard features.

Reconciliation is all about generating visibility into the company’s financial posture. Gaining awareness of overspending or potential fraud goes a long way to promoting better cash flow and financial business decisions in the future.

Interested in automating your expense processes today? Learn more about Tipalti Expenses Automation.