The path to payments efficiency: payment factories

Alex Wong, solutions consultant, GTS at Bank of America Merrill Lynch Payment factories – though not a new invention – are still surprisingly rare. However, their importance on the strategic value creation chain is undoubted. The step itself of realising a treasury function is the most challenging due to the time, resources and investment needed …

September 22, 2011 | Bank of America Merrill Lynch

Alex Wong,
solutions consultant,
GTS at Bank of America Merrill Lynch

Payment factories – though not a new invention – are still surprisingly rare. However, their importance on the strategic value creation chain is undoubted. The step itself of realising a treasury function is the most challenging due to the time, resources and investment needed by the business to make the decision and establish the actual process. Though the efficiencies and cost savings are complicated to measure, the standardisation process saves on technology, infrastructure, location, office and relocation costs and working capital.

Due to the uncertain financial landscape, the role of the treasurer has become increasingly integral to corporates globally, as they have become increasingly responsible for firms’ financial needs, risk and cost structures. The global nature of cash management has increased the pressure on the treasurer to manage and utilise cash through a corporate’s global operations in the most effective way possible, and it is centralisation which provides the most efficient view. Smaller cash balances for more effective investments, recycling cash internally to better utilise expensive credit facilities or paying down debt are all seen to be smart goals for a treasurer, and this is where payment factories can help.

Payment efficiencies derived from a conversion from paper to electronic payments as well as full straight-through-processing (STP) and enterprise resource planning (ERP) integrations on the route to centralisation have demonstrated the obvious benefits of payment factories. On the other hand, the treasury structure needs to be mature with a long-term outlook and a successful track record of dealing with fragmentation issues and manual processing hurdles. Culturally, challenges around change need to be overcome in order to cultivate buy-in across an organisation in order to enhance risk management controls and efficiencies.

The evolution towards centralisation via the first step of payment factories requires the evaluation of each element, including whether the centralised processes have been successfully integrated and whether they benefit the organisation. Of equal importance is the consolidation of successes and re-evaluation of the future drivers in order to be ready for the next stage of centralisation.

Appropriate infrastructure and acknowledgement of the relevant scale required are crucial as corporates undertake their business in more territories around the world. As corporates increasingly adopt a more global approach to their banking relationships, more than ever, they require greater standardisation across geographies via a uniform platform.

The unique characteristics of individual country’s payments frameworks present cross border constraints but payment factories remove this barrier through the creation of a single, uniform format for each payment, preferably in one file format capable of accommodating all payment types from all countries. Not only this, but the centralisation of transaction information improves the efficiency of managing the financial supply chain. The facilitation of payments will improve the management of processes across all businesses and subsidiaries. As a result of this centralisation, SSCs represent the next step after payment factories in providing the catalyst for driving competencies and procedural changes. As a result, corporates are able to have a better understanding of their cash flow function by having precise timings on payments delivery incorporated into the system.

Innovation surrounding the STP environment and its associated benefits is ensuring that technology is at the forefront of the development of payment structures and the cornerstone of cash management strategies. The ability of now being able to have collective payments in one location via the creation of payment factories anywhere in the region further simplifies payments and improves efficiencies with a uniform automated process.

Regulation is actually helping rather than hindering the move towards centralisation and a single interface through regulatory changes such as the Single Euro Payments Area (SEPA). The benefits of SEPA are directly associated with harmonising payments across the eurozone in order to avoid the difficulty in managing a variety of file formats.

A single interface facilitates the aggregation of global data and improves global operability by standardising the various payment types into the most recent ISO 20022, which interprets a range of language and XML types. Payments can also be divided into urgency and value so this will directly improve the rate of Days Payable Outstanding and the organisation of working capital. A centralised payments structure can help provide the clarity required in liquidity controls and funding needs to help the treasurer’s investment decisions and optimisation of working capital.

Consolidation of infrastructure by the utilisation of payment factories along the path to centralisation allows corporates to focus on creating and using a single platform to increase operational efficiency, standardising processes, and increasing risk management and controls. The adoption of centralisation can become a standard bearer for best practice as corporates grapple with stricter laws on risk management, higher visibility and goals to better manage controls on cash flow. Going forward, payment factories should be the catalyst for change rather than the excuse for inertia.

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