Stopping accounts from freezing with accurate financial records

Ross McGee
Ross McGee

The boom in fintech has always been questioned by those who promote accuracy, compliance, and security above everything else. The general public though are ostensibly very happy with their digital wallets, mobile POS systems, and Open Banking. As a result, real questions enmasse regarding fintech regulations only come around when financial operations rarely break through into the mainstream media.

Something that does grab the attention of the general public is the prospect of them no longer having access to their funds due to accounts being frozen. So why does this happen and how can it be avoided not just in FinTech but across financial services through the enaction of effective financial processes?

Why are customer accounts frozen?

Freezing of customer accounts are nearly always done as a protective measure. In fact, a report by the FCA in 2023 detailed that “financial crime or dormancy were the main or only reasons they [banks] froze accounts”.  

However, in rare instances, it is known to occur because financial firms are unable to ascertain who client money should be assigned to due to reconciliation failures. In this scenario, they have a responsibility to not allow money to be withdrawn in case it goes to the wrong party. Regardless of how much inconvenience it causes customers, they will not be able to access their funds again until reconciliation provides assurance on who client money is owned by.

Is there a freezing problem with FinTech?

Although fraud is largely out of the hands of financial institutions, they can stop freezing by other means. That is through an internal responsibility to ensuring financial accuracy when it comes to client money totals.  

Whilst the likes of firms in the UK are regulated by CASS to ensure that the position and totals of client money are known at all times, the same is not true for many American FinTech companies. Despite a lack of stringent regulation often being heralded for the rapid advances in the FinTech sector, some do view it as a negative, especially when concerning banking-as-a-service businesses. This is because when such firms enable customers of other FinTechs to make deposits that they then facilitate to be held in a variety of sponsor banks, only the banking-as-a-service knows for sure where every single cent or penny is held.

It should therefore be down to these firms to reconcile accurately; however, with a lack of regulation in place this is never guaranteed. Consequently, the Federal Reserve and the Federal Deposit Insurance Corp. have made efforts to encourage banks to manage the risks of using fintech partners. In the meantime, customers remain at risk of having their accounts frozen due to reconciliation errors, leading to disasters ranging from not being able to pay mortgages, to having to delay surgeries.

How to stop a freeze from within?

Even though regulation might not be enforced currently, FinTechs can still look to the success of their more regulated banking partners for a readymade formula on how they guarantee positions and totals of client money – efficient, accurate, and regular reconciliations.

By cross-referencing data sources to ensure accuracy of the movement of money, reconciliation is the number one way to prove client money totals, who owns it, and where it is held. However, performing reconciliation isn’t always an easy feat. It can take long periods of time and be extremely error-prone, especially when high volumes of transactions are involved that are moving between various sources – a common occurrence when banking-as-a-service firms act as a middleman between their clients and sponsor banks.

So how can banking-as-a-service companies and other FinTechs be expected to step up to the mark and perform reconciliation to the same level as their more established banking peers?  By doing what they do best – turning to technology.

All the problems that banking-as-a-service businesses might face when it comes to reconciliation can be overcome through automated reconciliation software. Here’s how:

  • High volumes of transactions not only mean that manual reconciliation would potentially take days to complete, it also increases the likelihood of human error occurring. However, with powerful automation that runs bespoke matching rules, reconciliation can be completed without mistakes in minutes, no matter how many transactions are involved.

  • Various sources for money to move between increases the complexity of reconciliation as funds interact with more accounts. Consequently, collection of statements from every source is required to create a complete picture of money movement. Once again, this is a time-consuming endeavour if done manually. Moreover, data from different sources is rarely formatted consistently. This means that data transformation – another opportunity for human error to occur – must also be done prior to reconciliation. Fortunately, Aurum’s automated reconciliation platform has a bank of over 600 APIs plus automatically transforms data to prepare it for reconciliation, neutralising these problems.

  • Access to accurate records is fundamental when it comes to providing evidence of client money totals and who owns it. Without this, no firm can rightly allow customers to withdraw funds at any time of the day. As a result, comprehensive audit trails should be produced and stored indefinitely as an output of reconciliation. By using a 3rd party automated reconciliation provider such as Aurum, this is achieved as standard.  

Reconcile with regulation

Despite there currently being little regulation within the FinTech sector, instances of 85,000 customers losing access to a collective $122 million in savings due to reconciliation faults is something that customers nor companies wish to experience.

It goes to show that poor reconciliation practice can be damaging to financial bottom lines, trust in FinTech, and most importantly, the lives of everyday people. However, with a remedial solution existing in the form of automated reconciliation platforms such as Aurum, exercising reconciliation to regulation-levels before it is even implemented, is arguably the best course of action for everyone.

If you’re looking for resilient, scalable reconciliation that is trusted by Moneybox, Octopus Investments, and more book a demo today to discover Aurum.

Ross McGee
Ross McGee

Content and Community Marketing Manager

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Ross McGee is a marketing manager at Aurum Solutions who deep dives into financial processes, technology, and best practices to share insights that help finance professionals of all levels maximise their potential.

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