Financial compliance in payments – best practices for mitigating risks

While it’s probably not the most exciting aspect of working in finance, compliance is the backbone of every financial operation: ensuring the risks are suitably managed, three lines of defense exist, and operations are properly set up is the prerequisite for running a successful business.

We will examine best practice compliance practices, how to design and implement them, and some aspects, in particular, for companies involved in dealing with payment service providers and reconciling large amounts of transactions effectively while ensuring operational efficiency and cost optimization.

General best practices for financial compliance

First of all, let’s look at what needs to be done to implement a robust compliance framework:

1. Conduct comprehensive risk assessments

The foundation of a successful compliance program is identifying your specific risks through regular assessments. This involves:

• Mapping out all compliance requirements: Make a checklist of laws and regulations applicable to your business. Review licenses and memberships to understand your compliance responsibilities.
• Analyzing current policies, processes, and controls: Identify potential compliance gaps by auditing your existing compliance activities. Review organizational structure, reporting lines, and documentation.
• Evaluating the impact of new products and partnerships: Assess compliance implications of any new offerings or third-party relationships before launch.
• Prioritizing risks: Classify risks based on potential frequency and impact. Focus first on mitigating high-probability, high-impact risks.
• Continuous monitoring: Conduct assessments at least annually. Monitor for new regulations and emerging risks continuously.

Regular risk assessments enable you to allocate compliance resources effectively based on actual organizational vulnerabilities rather than making assumptions.

2. Develop clear policies and procedures

Well-defined policies and procedures form the backbone of a compliance program by establishing organizational expectations and standardizing processes. Key steps include:

• Document required controls: Detail activities required to comply with regulations, such as transaction monitoring, audits, due diligence, etc.
• Outline compliance workflow: Map procedures for managing compliance data, reporting issues, and taking corrective actions.
• Assign accountability: Designate owners responsible for compliance tasks, like approvals, reconciliation, monitoring, and training.
• Simplify language: Use clear, concise language that is easily understood by employees across the organization.
• Enable accessibility: Publish documentation on your intranet or company knowledge-management system and provide reference copies to employees.
• Regular review: Update policies and procedures to reflect regulatory changes at least annually.

Well-documented policies and procedures ensure consistency in compliance activities across the organization and provide a training resource for employees.

3. Implement robust internal controls

Internal controls are the policies, practices, and safeguards put in place to prevent, detect, and correct compliance violations. Key controls include:

• Segregation of duties: Ensure a single employee cannot initiate and conceal misconduct. Split responsibilities across multiple people, such as authorization, custody of assets, record keeping, and reconciliation.
• Transaction monitoring: Scrutinize transactions daily for suspicious activity patterns like spikes in payments, frequent international transfers, or dealings with sanctioned entities.
• Reconciliations: Perform regular account reconciliations to match internal transaction records against third-party statements, investigating any variances.
• Approval workflows: For transactions exceeding set limits, like payments above $10,000, multi-level signoffs and four-eye reviews are required.
• Access controls: Restrict access to compliance data and high-risk transactions based on roles.
• Compliance testing:  Conduct control testing periodically to verify operating effectiveness.

Robust controls act as safeguards across the compliance program by preventing issues, detecting problems early, and enabling timely remediation.

Best compliance practices in payments and reconciliation

In particular, if your company is dealing with a large number of client payments in different currencies, varying jurisdictions, and with multiple payment service providers, make sure you implement the following best compliance practices:

1. Payment reconciliation

With large transaction volumes across multiple payment channels, reconciliation is highly susceptible to error and manipulation if conducted manually. Automation and stringent controls are essential for compliant payment reconciliation.

2. Automate matching and confirmation

Automated matching tools integrate data from payment systems and ledgers to compare transaction details like date, amount, and reference IDs to identify mismatches. Advanced tools can reconcile millions of transactions in seconds with much higher accuracy compared to manual methods, which are time-intensive and error-prone.

3. Daily reconciliation

Leading practices recommend automating reconciliation on a daily rather than monthly basis. Identifying and investigating discrepancies promptly minimizes financial risk and enables root cause analysis while events are recent.

4. Restrict payment system access

To prevent fraudulent transactions from being concealed during reconciliation, limit access to payment systems to select authorized personnel and segment payment initiation and reconciliation duties.

5. Maintain detailed audit trails

Retain time-stamped activity logs with user ID details for all payment transactions and reconciliation tasks. The complete audit trail facilitates internal and external audits of the reconciliation process.

6. Reconciliation oversight and approvals

Require a four-eye reconciliation review before completion, ideally by segregated functions. Implement approval workflows for identified reconciliation discrepancies before resolution.

By automating reconciliation and implementing preventive and detective internal controls, your firm can gain efficiency and minimize financial manipulation risks.

Keeping your fee management compliant

Evaluating payment processor costs is an important aspect of financial compliance to identify billing errors and ensure contractual fee structures are followed. Key risk mitigation steps include:

1. Estimate fees based on transactions

Use payment volume data to calculate estimated fees for each payment processor based on fee schedules. Compare against actual invoiced amounts to identify discrepancies.

2. Review contract terms

Regularly review payment processor contracts to confirm billing aligns with agreed pricing terms. Update systems with term changes like revised rates or new fees.

3. Monitor cost trends

Track monthly expenses for each payment processor to analyze trends in transaction volume and overall costs. Investigate unusual spikes that may indicate a control lapse.

4. Standardize rate models

Implement centralized pricing master data to ensure consistent fee calculations across the enterprise per negotiated contracts.

Compliance in general ledger reporting

Transferring payment data securely and accurately from source systems into finance and accounting systems is vital for revenue recognition, cash application, and reporting compliance. Key controls include:

1. Maintain a payment data warehouse

Implement a centralized data store to ingest payment transaction data from all source systems and standardize it before accounting system integration.

2. Automate transformation and posting

Establish direct automated links between the payments warehouse and accounting platforms like Xero and QuickBooks Online to streamline data integration with proper format conversions.

3. Configure business rules

Build flexible business rules like transaction value thresholds, customer types, and credit requirements to determine the appropriate accounting treatment for revenue and cash transactions.

4. Enable audit tracking

Capture comprehensive audit logs with timestamps, transaction details, data modifications, and users for all data integration activities between payments and accounting systems.

5. Restrict system access

Limit authorized personnel access to payment and accounting systems. Segregate duties between payment processing and ledger posting.

Well-controlled integration enables automated, compliant movement of payment data into finance and accounting systems.

Bonus: Best practices to keep your PSP costs transparent

Your finance team can leverage advanced analytics tools to optimize the selection of payment service providers (PSPs). Key techniques include:

1. Track key performance metrics

Regularly assess relative performance, capture transaction volume, approval rates, processing times, and error rates for each PSP on an ongoing basis.

2. Estimate processing costs

Apply transaction data to contracted PSP fee structures to estimate total processing costs for each provider. Compare costs to identify the most cost-effective options.

3. Monitor market rates

Research current market rates for payment services across providers to identify when existing PSP contracts are uncompetitive.

4. Simulate new pricing models

Use transaction data to simulate costs for hypothetical pricing structures when considering new PSP contracts. Estimate potential savings from favorable rates.

5. Benchmark acceptance rates

Compare PSP acceptance rates for different payment methods, countries, currencies, and transaction sizes to guide the optimization of payment routing.

By leveraging advanced analytics, your organization can objectively evaluate comparative PSP performance on cost, service quality, and overall value to ensure compliant and optimized payment operations.

Conclusion

As regulations grow more complex, managing financial compliance requires a proactive approach focused on risk mitigation and automation. Your firm can improve its accuracy and compliance by utilizing solutions like Reiterate to establish a strong technology foundation for the operational accuracy of payment collections and reconciliation.

Reiterate allows you to automate key processes in payment workflows and reconciliation, reducing compliance risks and costs.

To learn more about how Reiterate can help optimize your payment reconciliation and processes around PSP evaluation and compliance, contact us today for a demo.