The role of suspense accounts
How Suspense Accounts Keep Transactions on Track
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Welcome to another installment of Payment Bites, in this edition, we're shining a spotlight on the often-mysterious world of suspense accounts. As part of our ongoing series, we aim to demystify the complex mechanisms that underpin the financial industry, providing you with insights into how transactions are managed and processed behind the scenes.
Payments processing entails numerous dependencies within a bank's infrastructure. Today, we delve into some of the core system dependencies involved. We'll explore how the accounting system and its various account types contribute to transaction clearing. For those seeking a refresher on the various dependencies inherent in a bank's payments infrastructure, feel free to read the following article.
In the context of banking, a suspense account serves as a temporary holding account used to manage discrepancies or uncertainties in financial transactions. It acts as a buffer for transactions with incomplete information or under investigation, allowing banks to maintain accurate records while resolving discrepancies.
The purpose of this account is to hold customer funds that have been intercepted for different reasons and are to be temporarily held at this account until routed to their final destination. One of the advantages of using suspense accounts is that they ensure proper bookkeeping even while transactions are in a temporary state. When a transaction encounters an issue or discrepancy, it may not be immediately clear where the funds should be allocated. By temporarily placing them in a suspense account, the transaction can still be recorded in the accounting system, maintaining the accuracy and integrity of financial records. This prevents the funds from being lost or unaccounted for during the resolution process, providing transparency and accountability in financial management
One common scenario where a suspense account is utilized is when a transaction requires manual review. During this process, the transaction is temporarily posted in the suspense account as you can see in the previous diagram. In general, funds may end up in the suspense account due to various reasons:
Closure of the main account with remaining balance
When a main account is closed but there's a remaining balance, the funds are typically transferred to a suspense account temporarily before the closure. This ensures that the funds are properly accounted for while the closure process is completed. Once the closure process is finalized, any remaining balance in the suspense account can be reconciled and appropriately disbursed according to the bank's policies and procedures.
Fraudulent Transactions: Manual review on compliance check
In cases where payments are suspected to be fraudulent or involve suspicious activity, banks may place the funds in a suspense account while conducting investigations. When the transaction is flagged as high-risk by the monitoring system, the funds intended for that account are typically further scrutinized. Once the compliance issue is resolved or clarified, the funds can be either credited to the correct account if possible or returned to the sender depending on the outcome of the investigation.
Beneficiary Account is non-creditable
When the beneficiary account is non-creditable, meaning it cannot receive funds and the transaction cannot be returned within the same payment scheme the transaction is credited to a separate suspense account because the account is longer able to receive funds. Typically, this triggers a notification in payments operations teams to reach out to the beneficiary to explore options for returning the funds.
Duplicate transaction detection
When a duplicate transaction is detected, meaning that the same transaction is processed more than once, the duplicate is routed to a suspense account. This ensures that the duplicate transaction does not affect the recipient's account balance or create confusion in the reconciliation process. By crediting the duplicate transaction to a suspense account, it can be properly investigated and resolved without impacting the normal flow of funds. Additionally, this process allows for accurate tracking of duplicate transactions and facilitates their swift resolution by the appropriate teams
Inability to locate the original transaction
When there is an inability to locate the original transaction, perhaps due to technical issues or data discrepancies, the subsequent transaction is directed to a suspense account
It’s a wrap, suspense accounts play a crucial role in payments processing by temporarily holding funds for transactions that for one reason or another cannot be fully cleared on the beneficiary side. They enable banks to maintain accurate records, prevent errors, and ensure that payments are properly allocated to the intended recipients.