Fintech | How Dedicated Virtual Accounts Removed The Pain Of Settlement And Reconciliation For Small Businesses
For obvious reasons, I brag a lot about the payment system the fast-growing fintech giants in Africa have been able to put together. From MPesa to Paystack to Flutterwave, the payment infrastructure is nearly as sophisticated as the big giants like Paypal, Square and Stripe.
I was paired with a team for a software engineering project. When it came to the payment bit of the design, as much as I was trying to avoid intellectual violence and groupthink, I was neck bent on integrating a payment system that makes life easy for merchants.
I referenced how we struggled with settlement in Chaka until Monify’s Merchant’s virtual Bank Account came to save the season. It was a lifesaver and the strenuous reconciliation process became a breeze. After Monify, other fintech and even significant banks rolled out the Merchant’s Virtual Bank account.
Merchants love it.
With Paystack as a case study, this article examines the utilization of open banking and digital payment systems in the payment systems of Paystack.
Follow the link to learn about Paystack’s dedicated virtual account documentation.
Dedicated Virtual Accounts (DVAs)
Merchant’s Dedicated Virtual Accounts is a temporary account that allows Web and Mobile Merchants seamlessly receive payments from customers. These payments can be made to the Dedicated Virtual Account from any bank account of their choice. When a customer is onboarded on the merchant’s account, a Dedicated Virtual Account is generated from the API Gateway and/or Webhook technology.
What are APIs: APIs (Application Programming Interfaces) are a set of protocols, tools, and definitions for building software applications. They define how different software components should interact with each other, enabling developers to create applications that can communicate with other software systems and exchange data in real-time.
Webhooks: are a way for web applications to receive real-time notifications when specific events occur. When an event occurs, the application sends an HTTP request to a predefined endpoint, triggering a specified action. Webhooks are commonly used in integration scenarios, such as notifying a chat application when a user completes a purchase.
When payments are sent to the Dedicated Virtual Account, payments are immediately tracked, verified, and deposited into the merchant’s actual Bank account.
To explain the architecture or flow of the transaction above.
Upon successful customer onboarding, the Merchant’s KYC data is passed to the Paystack database, and the API returns the Dedicated Virtual Accounts information. That means any fund that lands in the Dedicated Virtual accounts automatically drops into the customer’s wallet on the merchant’s application.
1. Actor (New customer): Creates an account and is being onboarded onto the Marchant’s Fintech app after KYC.
2. Merchant KYC: The KYC by the given fintech merchant is the basis on which Paystack will provide the customer with Dedicated Virtual Accounts. The approved KYC data are passed to the Paystack (The Dedicated Virtual Accounts provider) via an API and in return, the API returns the customer’s Dedicated Virtual Account.
3. Merchant DB (Database): Every information customer information, including transactions, app usage, other metadata and KYC data and stored in the DB.
4. Customer wallet: A wallet as a feature is created on the Fintech App because it holds the funds transferred to the Dedicated Virtual Account.
5. Dedicated Virtual Account: The focus of this article. It is the technology with which merchants can receive payments from customers.
6. API Gateway: Serves are the connection between Paystack infrastructure and the merchant’s infrastructure.
7. Merchant software: If the merchant’s product has customers that send funds in, the Dedicated Virtual Account technology serves as the best option for settlement.
What Problem Has This Solved?
The question that comes to mind is, what problem does Dedicated Virtual Accounts technology solve?
Before now, merchants, go through the pain of daily account reconciliation and dispute resolution with customers. This only does not only reduce customer satisfaction but increased the churn rate. Transaction disputes on top of the several technical glitches on the merchant’s software or inconsistency in service were a big pain, till the Paystack technology came to the rescue. Below are the 5 core problems Paystack has been able to solve with this technology.
1. Settlement and Payment reconciliation
Before now, the accounting team used an Excel sheet or ledger for daily account reconciliation, plus funds are manually credited to the customer’s wallet from the backend. Each operational day in a typical merchant company, payment reconciliation screams for automation, which can improve a company’s performance to a great extent. The main benefits of automated payment reconciliation via a wallet include.
2. Less administrative hassle
Currently, most merchants, with the aid of the Paystack Dedicated Virtual Accounts provide payment information in a digital format that APIs can identify and utilize for matching purposes. As a result, most transactions are matched correctly, minimizing the need for manual labour. Consequently, workers can concentrate on addressing the smaller portion of problematic transactions, allowing them to allocate valuable staff resources towards other rewarding tasks.
3. Increased accuracy
In the process of payment reconciliation, the overwhelming numbers involved can result in errors during manual reconciliations and interpretations. This is mainly due to human exhaustion and potential oversight. Conversely, automation can efficiently analyse all the figures, and compare and identify matches with precision.
4. Faster error and fraud detection
Automated payment reconciliation typically identifies unmatched records more promptly compared to manual processing. Additionally, payment reconciliation automation has the capability to flag any suspicious activity that persists over a specific time frame. For example, it can detect recurring duplicate payments to a customer’s wallet for the exact same amount every month. In a different used case, the dedicated virtual account has helped to track down suspicious users who purposely wire-branch fraudulent money to a wallet.
5. Faster financial closing
Completing payment reconciliation at the earliest possible time enables a company to conclude its bookkeeping for a specific period promptly. The introduction of Dedicated Virtual Accounts APIs implies that payment reconciliation need not be limited to month-end procedures. It can be an ongoing process.
6. Scalability
Dedicated Virtual Account technology has been a major booster for a lot of businesses in Nigeria. The old payment dispute has been laid to rest. This confirms the fact that companies that aim to expand are ideally equipped with a financial system that can expand alongside them. Dedicated Virtual Accounts API provides an effortless solution for reconciling an ever-growing number of payments.
7. Compliance
The incorporation of automation in transaction and reconciliation processes guarantees accuracy, thereby facilitating a company’s adherence to industry regulations. Consequently, the organization avoids penalties associated with noncompliance and obtains an audit trail, which is added advantage of automation.
With a Dedicated Virtual Account, all payments can be traced to the same customer and payments have a 99.9% success rate.
Dedicated Virtual Accounts Technology Increased Operational Efficiency
Excellent use of the Dedicated Virtual Account to enhance the rate of straight-through reconciliation significantly. By assigning one virtual account per client or customer, reconciling receipts against open accounts receivable become more straightforward in “one-to-one” relationships than the typical “many-to-one” relationships found in traditional account structures.
To put this in better perspective, utilizing virtual accounts in this manner eliminates the need to assign personnel to manual reconciliation, which could result in significant cost savings. Additionally, faster reconciliation may lead to faster cash application and better availability of working capital. This improved reconciliation process could even lead to a better client experience.
Below is a typical Dedicated Bank Account Receivable reconciliation use case.
In the above reconciliation use case;
One Physical Account: payment flows from different customers, and different channels at different times to the same physical account. Imagine when a thousand customers make payments in one day. It could lead to a reconciliation disaster or misplaced receipts and other similar transaction errors.
Dedicated Virtual Account: payment flows from different customers, different channels, and different wallets at different times to the merchant’s wallet. Regardless of the number of transaction inflow, the merchant wallet receives all and in cases of refund or transaction errors, it is easy to track transactions.
Refund
There are no refunds for dedicated virtual accounts, in a case where the customer double pay, the fund rests in the customer’s wallet on the merchant’s platform where the customer can choose to withdraw.
Transaction fees
The customers find their dedicated virtual account via bank transfer or USSD which is most likely free depending on the account bank they transact with. So Paystack charges the merchant for the service. Ideally, depending on the merchant’s transaction volume.
Settlement to Merchants
While certain transactions operate in real-time or with a 30-minute delay and are available 24/7, this does not guarantee that the merchant will receive the funds instantaneously. Payment aggregators or banks typically settle with the merchant multiple times throughout the workday, with some choosing to settle at the close of business.
It should be noted that Paystack holds received funds in a designated merchant wallet. The merchant could withdraw funds to their settlement account at any time.
Use cases
The solution demonstrates seamless functionality in several excellent use cases, including:
Investment: Clients can transfer funds to the wallet of an investment firm or brokerage to make purchases. This is widely used in Mutual Fund and Stock Brokerages, as well as crypto exchanges or gold investment harvest-type schemes.
B2B Payments: Transfer of funds to pay off pending invoices.
Loan Repayment: Monthly instalments can be paid off easily by logging into one’s bank account and transferring the necessary funds, negating the need for a Payment Gateway.
Wallet Top-up: A cost-effective method for topping up wallet balances.
Education Institutes: Traditionally, tuition and other academic fee payments have been made directly to the school’s bank account, which requires students or parents to deposit money in a bank and then send payment evidence to the school. By assigning a dedicated virtual account to each student, parents or students can deposit or transfer funds to the designated account, making it much easier to reconcile than a traditional bank deposit.
Conclusions
While it may not possess tremendous value for some merchants, this solution is nonetheless significant as it completes the range of collection solutions that I have observed. I will conclude with the limitations and use cases of the dedicated virtual account technology.
Limitations of Dedicated Virtual Account Technology
Upon receiving a funds transfer from a customer, the merchant is notified of the transaction and its source, but not of its purpose. Unlike in a Payment Gateway where a unique order ID is used to link a payment to a specific order, no such ID is present in this case. Therefore, it is necessary to say that it is not suitable for all merchant types.
Because of the above, the e-commerce use case might not give the best experience as it is required of the customer to provide accurate remarks along with the transfer to avoid any confusion — that defeats the goal of the technology.
