By Marcus Hughes,
business development director,
The global economic environment continues to pose ever more challenging questions for today’s corporate treasurer with almost daily stories of fresh problems, country bailouts and concerns over the euro. The need for proper visibility and control over cash, core weapons in the treasurer’s armoury, has never been greater.
The challenges of globalisation and creating new efficiencies by standardising processes across the enterprise are also demanding the treasurer’s attention. Other priority tasks include maintaining audit and compliance, managing all forms of risk including those arising from dealing with multiple counterparties and meeting corporate governance.
Treasury automation and centralisation projects are often seen as a first step in addressing these challenges but they typically only tackle one part of the problem. This is why many corporates and non-banking financial institutions are now turning their attention to setting up payment factories as a logical and necessary evolutionary step in achieving efficient cash lifecycle management. In doing so, they create opportunities for leveraging the latest technology and best practice standards for sending and receiving payments and making collections.
The importance of managing payments effectively
“Payments are sometimes described as the plumbing behind the economy. They are an essential part of all our lives and are rightly regarded as a critical national infrastructure,” said Richard North, chairman of the Payments Council Board in September 2011 (1). Managing payments efficiently across the enterprise should also be seen as a critical strategic project for treasurers. One method of achieving this is via a payment factory, which is a form of treasury centralisation.
A payment factory involves using a single centralised platform for:
• All payment and collection types (eg treasury, payroll, expenses, direct debits, cheques, supplier invoice payments, etc.)
• All balance and transaction reporting
• All corporate to bank exchanges, such as deal confirmations
• Managing two way communications with all banks
A centralised process to manage all payments promises improved visibility and control over cash, as well as increased negotiating power with banking partners.
Different payment factory implementation models
There are a number of possible implementation models for corporates looking to adopt a payment factory. These include full centralisation and a virtual or decentralised model, alongside hybrid approaches, such as extending the principles of an in-house bank using virtual accounts. Which model is right for each corporate will depend on several factors, such as organisational culture, structure and strategic priorities and the existence of other cash lifecycle management initiatives.
The traditional centralised payment factory occurs where a limited number of people in one location manage the payments and payables processes for a specific region. It is not unknown for a corporate to manage its entire European payments infrastructure using a small number of people operating in a shared service centre.
The virtual or decentralised payment factory allows roles and responsibilities to be retained at subsidiary level but the entire organisation uses one central platform for managing payments, bank connectivity and relationships. Larger corporates may deploy a worldwide, decentralised model with hundreds of users.
It is important to note that although these approaches are at opposite ends of the spectrum, they both allow corporates to enjoy similar benefits.
What are the current business drivers?
Let us be clear that payment factories are not new initiatives and this model has been in use for many years. In addition to the obvious business driver of reducing costs, other objectives in creating a payment factory are compliance, security and business process improvements. A paradigm shift has taken place and there is now greater recognition that centralisation does not have to stop with treasury and accounts payable processes. You can apply the same automation principles to accounts receivables by using information within bank statements (typically standard SWIFT messages known as MT940s) to automatically identify receivables and post these directly to the debtors account.
Essential components of a payment factory
There are two prerequisites for a payment factory to function efficiently:
1. Flexible payments automation technology
2. A secure and resilient method of communicating with counterparties.
The biggest benefits from the implementation of a payment factory come from the automation of processes such as invoice creation, payment processing, cash reporting and reconciliation. Automation should be applied to all payments and not just those controlled by the treasury department. Products such as C-Series from Bottomline Technologies allow companies to automate both domestic and international payments, bulk files and individual payments, via a single, bank agnostic interface. The integration of other products such as reconciliation software delivers additional automation of processes.
The second prerequisite is how to communicate with counterparties, partners, banks and entities such as overseas subsidiaries. Bank connectivity is often cited as the biggest challenge for payment factories and shared service centres. This is where the SWIFT network can play a vital role as it offers secure connectivity to 8,500 institutions in over 200 countries. SWIFT is also playing a major role in the drive towards greater adoption of e-invoicing which in itself may become another major driver for payment factories in the future.
There are three different options for managing SWIFT connectivity such as building and maintaining a SWIFT interface infrastructure in-house, using SWIFT’s internet solution (SWIFT Alliance Lite) or outsourced solutions. Many organisations are increasingly finding that the most straightforward and scalable choice is the latter option where SWIFT connectivity is outsourced to a SWIFT service bureau.
This approach provides all of the benefits of SWIFT that you would gain from managing an in-house connection, but without the drawbacks and overheads traditionally associated with this such as maintenance, project complexity and access to qualified resources.
Benefits of the payment factory approach
Minimising costs is certainly one outcome of moving to a payment factory model. It allows rationalisation of e-banking platforms, simplifies and minimises the number of systems that need to be supported and maintained, while increasing straight-through processing (STP). However, the following benefits are of greater strategic importance:
Visibility over cash
The payment factory provides greater visibility over all accounts and balances across the enterprise and gives a clearer picture of cash flowing in and out of the organisation as well as better control over timing for supplier payments, early payment discounts and investment opportunities. It also allows a more effective collection strategy via flexible support for the new SEPA direct debit schemes.
Automated reporting of cash balances directly from subsidiaries’ bank accounts ensures that accurate and up to date data can be provided to the centralised treasury team which is essential in determining the true cash position at any point in time.
Security and compliance
You can achieve higher levels of security and compliance by ensuring the use of automated communications that make use of secure channels such as SWIFT. All payments have an associated audit trail and there is clear segregation of duties according to user profiles that govern who has access to the data.
Minimise operational risk
By introducing greater levels of automation, corporates can eliminate paper-based processes (eg faxing bank statements) and reduce manual interaction in the payments lifecycle. More timely access to payments data also allows faster and more accurate reconciliation, while costly investigations can be reduced via strict data validation and matching rules which minimise potential user errors and contribute to lower operational risk.
Better manage relationships with banking partners
Corporates that have adopted the payment factory model often report a shift in the balance of power in terms of the relationship with their banking partners. It minimises the impact of switching banking providers and the lock-in effect of using proprietary e-banking platforms.
A payment factory can give you greater choice over your main banking provider, and facilitate switching payment flows – a process that once took many months, but can now be achieved in days with the right preparation and infrastructure in place. Banks that wish to retain their corporate business have to respond by offering greater value added services and least cost routing.
Future proof infrastructure
A payment factory can deliver a more lean and agile infrastructure for the corporate – one that can cope with current and future regulation, market trends, and business services. It enables corporates to rapidly scale up (or down) as business volumes change and facilitates greater operational efficiency. A payment factory can be a useful extension of other centralisation initiatives such as the introduction of a shared service centre.
Making the investment in a payment factory pay off
The payment factory model is by no means a new phenomenon but it is evolving rapidly to meet the needs of corporates as their requirements change. The increasing adoption of SWIFT for Corporates for multi-bank connectivity is making it easier to achieve the benefits of a payment factory, instead of using disparate e-banking solutions. Undoubtedly the payment factory will continue to be an important tool in the strategic pursuit towards centralisation and process efficiencies.
A rapid return on investment (ROI) can be achieved simply by improving the management of cash and there are instances of corporates gaining access to significant sums of cash that were previously hidden away in overseas bank accounts. These balances can now be optimised for the benefit of the corporate as a whole. Investing in a payment factory can also enable corporates to optimise the working capital of its financial supply chain.
However, establishing a payment factory is not a panacea for cash management problems. Rather, corporate treasurers should view it as an essential component of a good cash lifecycle management strategy that brings optimisation, efficiency and operational visibility to ALL cash-related activities.
1. Payments Council Updating the National Payments Plan