Delivering Value on Behalf of the Enterprise
by Dieter Stynen, Head of Cash Management Corporates, Western Europe, and Head of Global Transaction Banking Belgium, Deutsche Bank
Throughout this Deutsche Bank series on SEPA, we have emphasised that many treasurers and finance managers still erroneously consider their SEPA migration to be a compliance project. Undoubtedly, the potential outcomes of non-compliance could be considerable, but treasurers should not ignore the benefits and opportunities that SEPA offers. One of the most significant areas of potential benefit is centralisation of payments and collections, including payments-on-behalf-of (POBO) and collections-on-behalf-of (COBO). This article explores how SEPA can be a catalyst for POBO and COBO along with other factors that contribute to a successful project.
Driving efficiencies and control
Many corporations have already centralised their payments into a payments factory or shared service centre (SSC). The same opportunities exist for collections, although fewer companies have achieved this so far. There are clear advantages to centralising payments, such as reducing costs, standardising processes, improving controls and efficiency and leveraging a single technology environment.
Centralising collections is also highly advantageous, in that sales teams can dedicate more time to new business, credit and collection processes can be standardised, arrears reduced, and days sales outstanding (DSO) improved. There has typically been greater reticence in the past about centralising collections however, as collection methods differ across countries, and there is more commercial sensitivity about moving collections further away from sales activities.
The next step in successful payments centralisation
Despite the benefits of centralising both payments and collections, there have been some limitations in these projects in the past. Looking first at payments, before the introduction of the Payment Services Directive (PSD), the legal framework that underpins SEPA, companies still had to maintain separate euro accounts in each country. This meant that although many treasurers and finance managers were able to introduce savings and efficiencies by centralising payments, the opportunity to rationalise accounts and simplify cash management was more limited. Consequently, most companies still had multiple accounts that had to be combined into a cash pool in order to centralise liquidity. Since 2009, when PSD was implemented, companies have been able to choose to have only one euro account if they wish, across all of their entities. In addition, as both domestic and cross-border SEPA payments are processed in the same way, and at the same cost, there are no longer any structural reasons for holding accounts in each country, enabling treasurers and finance managers to rationalise and simplify their account structures, reducing costs and streamlining processes.
Under this arrangement, instead of making payments from the relevant entity’s account, the payments factory or SSC can make all euro payments from a single account, and indicate in the remittance information on whose behalf the payment is made (POBO). Without also implementing ISO 20022 formats (which is the format on which SEPA payment instruments are based, but which also has global applicability for all currencies) some companies have experienced challenges with POBO. In particular, remittance information held in free-format fields has been truncated or removed from payment messages. Without this information, the beneficiary does not know on whose behalf the payment has been made, resulting in multiple queries which can be time-consuming to address; furthermore, credit lines may be tied up until suppliers can allocate payments correctly.
In contrast, ISO 20022 formats (both within SEPA and globally) include a structured field to indicate the entity on whose behalf a payment is being made. This data is passed through the payment process without interruption, enabling automated reconciliation without the need to query payments, and prompt account allocation.