The Importance of Accurate Invoicing and Reconciliation of Interchange Transactions Between Banks
Our client, a bank and mid-size financial institution that offers a variety of financial services to its customers, including credit and debit card issuing and processing struggled with reconciling the interchange fees associated with its card processing services.
Specifically, the bank failed to invoice other banks for the interchange fees and could not verify or reconcile the other banks’ interchange invoices received. As a result, our bank client was not able to claim a large amount of VAT (Value Added Tax) that was due to it.
The bank failed to properly invoice other banks for the interchange fees associated with its card processing services. The interchange fees are charged for transactions between two different banks, for example when a consumer uses a card issued by one bank (“issuing bank”) in a merchant account of a different bank (“acquiring bank”). Although interchange is automatically settled by the networks, due to a lack of proper systems and processes, the bank was unable to invoice other banks for these fees.
The challenges were compounded when the bank was unable to verify and reconcile the other banks’ interchange invoices. This made it difficult for the bank to ensure that it was being charged the correct amount for the interchange fees. The bank’s systems were not able to match the invoices with the corresponding network (Visa & MasterCard) transaction reports, resulting in discrepancies and unverified invoices.
As a result of these challenges, the Bank was not able to claim a large amount of VAT that was due to it.
VAT is an indirect tax that is charged on the value added to goods and services, and it is the responsibility of the bank to collect and remit this tax. Due to the lack of proper invoicing and reconciliation, the bank was unable to claim VAT from the government.
The Bank engaged the services of PayIP, a global billing and payment specialist company. PayIP was able to analyse the bank’s payments data and the networks transaction reports and recreate and reconcile the interchange invoices that the bank had failed to generate and failed to verify.
The team at PayIP were able to use their extensive knowledge and experience of the payments industry to recreate the invoices the bank needed to send to the acquiring banks by bank, date and by transaction type.
PayIP also helped the bank to verify and reconcile the invoices received from the other banks (which itself contained errors) and identify the VAT input tax credits that it was entitled to. By carefully analyzing the bank’s payments data, PayIP was able to identify areas where VAT had not been correctly claimed and helped the bank to submit the necessary claims to recover the funds.
In total, PayIP helped its banking client to recover a significant amount of VAT input tax credits that it was entitled to. This allowed the bank to improve its cash flow and reduce the impact of the errors in its billing process.
Even more importantly, PayIP helped the bank to implement systems and processes to ensure that accurate invoicing and reconciliation of interchange fees would be carried out in the future. As a result, the bank was able to reduce its risk of non-compliance and reputational damage.
In conclusion, this case study highlights the importance of invoicing and reconciliation in interchange transactions, and the potential financial consequences for a bank that fails to do so. It also highlights the benefits of engaging billing and payment specialist companies like PayIP to assist in identifying and recovering lost revenue, improving systems and processes, and ensuring compliance.
