Bank reconciliation is a delicate and complex operation that allows companies to ensure that accounting entries always coincide with bank account movements.

This operation consists of identifying any discrepancies between the two registers and correcting errors, which may be due to incorrect entries or simply the bank's processing time.

Reconciliation is essential to get an accurate picture of a company's liquidity and thus also of its health, but it can be complex and particularly laborious, especially when many transactions are carried out on different current accounts. Thanks to the introduction of open banking, however, today Account Information Service Providers can offer innovative services that allow bank reconciliation to be fully automated, eliminating time-consuming review sessions and potential errors.

What is bank reconciliation?

Bank reconciliation is a control operation that allows you to verify that the data in the bank statement match those recorded in the company accounts.

This check, which is essential for keeping company accounts under control, allows any discrepancies between the account balance and the bank statement to be identified and errors to be corrected, aligning the two documents.

It is not uncommon for account balances and bank registers to show different figures: it may happen because the cost of a transaction has been wrongly reported, because the movement has been recorded on a different current account from the one used, or simply because the bank has not yet entered a transaction in the accounts.

The fact is that very often the situation shown in the company's accounting records does not fully correspond to that of the bank account: this makes it impossible to know the actual liquidity available to the company, and thus to accurately assess its state of health. If the accounts are not reconciled, the reliability of instruments such as the Debt Service Coverage Ratio (DSCR), which measures the ability to repay debts based precisely on cash flows, is diminished.

Bank reconciliation also allows you to keep an eye on your company's current accounts and ensure that there are no errors or unauthorised debits.

How to do bank reconciliation

To do bank reconciliation, you need to have the two documents at hand to compare, namely the bank statement and the ledger for that current account, i.e. the accounting records that show all the movements authorised by the company on that account.

In practice, this involves comparing the two registers and verifying that they report the exact same movements. In the case of discrepancies, it is first necessary to identify the cause of the error, which may stem from a missing figure, from having moved the wrong account, or simply from the bank's processing time. Once the cause of the mismatch has been identified, one proceeds with error correction.

The comparison and correction operation can be performed manually, using paper ledgers or excel documents, or by using software that can automate the verification process.

Bank reconciliation: automatic or manual?

Companies that have to manage a limited number of bank transactions generally use an excel sheet that allows them to compare the data from the accounts and the bank statement. In this case, one proceeds manually, entering in special tables all the movements resulting from the bank but not recorded in the accounts and those which, conversely, appear in the accounting records but not in the account statement.

However, when managing many cash movements, all the more so if this occurs on several current accounts, this method can be too slow and laborious, as well as prone to errors.

The best solution in these cases is to rely on software that performs bank reconciliation automatically, eliminating the possibility of errors and allowing the company to always have correct and up-to-date data on its cash flows.

Open banking and APIs for bank reconciliation

The ability to perform bank reconciliation automatically is due to the introduction of open banking, introduced in Europe in 2021 with the PSD 2 directive on payment services. This new system provides for financial information to be shared, with the customer's consent, between the different banks and with third parties that develop digital products and services from that information. This means, in short, that customers can access their bank data securely at any time and using any type of medium.

In particular, PSD 2 provides for access, via third-party services, to information on withdrawals and payments and the availability of liquidity on the current account, but also to the user's overall banking profile.

With the introduction of open banking, the way is thus paved for the so-called Account Information Service (AIS), services that allow one to have an overview of all one's current accounts (and the transactions associated with each account) by aggregating them into a single platform.

As a result of the open banking acquisitions, Openapi developed a new API that enables the automatic reading of transactions on different current accounts, thus performing bank reconciliation in real time and without the possibility of errors.