Cash & Liquidity Management

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Collection Factory and Collection on Behalf of: Myth or Reality? SEPA implementation was considered a compliance exercise only a year ago, but corporates and banks are now starting to perceive it as a key enabler for enhanced treasury efficiency and process standardisation.

Collection Factory and Collection on Behalf of: Myth or Reality?

by Aymeric Pourchasse, Treasury Advisory Practice, PwC Belgium

SEPA implementation was considered a compliance exercise only a year ago, but corporates and banks are now starting to perceive it as a key enabler for enhanced treasury efficiency and process standardisation. Among the new SEPA-driven opportunities, the collection factory integrating a Collection on Behalf of (COBO) scheme has become an attractive concept, notwithstanding its associated challenges. Although a lot of corporates talk about it, there are very few that have moved ahead so far. So is COBO a myth or reality?

A collection factory with COBO: what is it?

As one would suspect, a collection factory with an embedded COBO scheme is the mirror image of a payment factory with a Payment on Behalf of (POBO) scheme. A collection factory including COBO can be seen as a processing centre in charge of centralising collections of receivables within a single collecting entity, on behalf of other operational entities.

In theory, SEPA allows barriers of cross-border collections to be torn down and makes it almost transparent for the payer who cannot object to the third party collection. Nevertheless, no real benefit arose when weighing up the pros and cons of a COBO scheme up until recently, due to the major challenges associated with the solution.

A challenging scheme

Although great benefits can be achieved, a COBO scheme can be a complex treasury solution to set up and corporate treasurers can’t afford improvisation.

Advanced treasury set-up is a prerequisite. Indeed, COBO is really designed for large multinationals with a mainly B2B focus and highly sophisticated cash management. As such, a collection factory with a COBO scheme fits perfectly within an existing integrated structure with a payment factory operated in a shared service centre and connected to an in-house bank with POBO. This is already a considerable step, but the next step requires solving additional issues before moving forward, and not all companies will be eligible for COBO, mainly due to three external factors:

1. From an operational point of view, two aspects are key:

(i) Corporates should first assess whether it is feasible, efficient and cost-effective to clear payment instruments in another jurisdiction. Needless to say, clearing a domestic payment instrument on the domestic account of the collecting entity is reasonably straightforward from an operational standpoint. But when it comes to cross-border settlements, this might not be the case as it is essential for corporates to understand the types of instruments that can or cannot be in the scope of a COBO scheme. For instance, in France, local instruments such as cheques or LCRs, which are still widely used, need to be cleared on-shore, partially limiting the interest of COBO. But SEPA instruments by nature overcome this constraint of local clearing and make COBO a sensible option.

(ii) On the other hand, COBO is likely to add complexity to the reconciliation process due to higher volumes of cash flows being settled on the central collecting account with no or limited information allowing identification of the original creditor. As a consequence, corporate treasurers should reconsider their accounts receivable (AR) process to allow identification of the final beneficiary and the origin of the collection. Solving such an issue might require a constructive relationship with the external debtors (customers and others) initiating the payments.

2. Legal and regulatory constraints must also be addressed before being able to validly delegate the cash collections activity to a collecting entity and vice versa, i.e., performing collection on behalf of an affiliate entity. It is therefore necessary to conduct an in-depth analysis on a country-by-country basis for each relevant jurisdiction to assess the feasibility of the COBO scheme. The way corporates structure the financial intercompany relationship between their collecting entity and their operational entities must also be considered by the corporate treasurer. However, corporates already operating a POBO scheme are very likely to have already carried out a similar analysis which they will be able to leverage.

3. Finally, tax implications triggered by a COBO structure should be carefully reviewed. Considering that it is highly likely that local tax authorities will not be familiar with COBO schemes, they may adopt a suspicious and aggressive stance towards transactions going through the collection factory as well as the related activities. Thus, corporate treasurers should ensure that a solid transfer pricing model has been established and that practical issues regarding the determination of the tax points are constantly monitored.

In a nutshell, there are challenges, but a lot is possible.

Great benefits for centralised organisations…

As with a payment factory with POBO, the opportunity to centralise collections through COBO can bring significant benefits to corporates:

  • Rationalisation of bank accounts and related costs – Treasurers could reduce their need for local bank accounts at operating subsidiary level and, as such, reduce associated external bank charges by simplifying their cash concentration structure. Ultimately, in an ideal Eurozone, a single euro bank account could be used to centralise all euro-denominated cash flows. For non-euro jurisdictions, a non-resident local currency account can be opened by the collecting entity.
  • Increased visibility and control on cash flows and balances – Treasurers would obtain better visibility on the overall group cash positions as well as a quicker access to the cash as local accounts become obsolete.
  • Improved cash flow forecasting – Treasurers could better predict and identify incoming cash flows as related information is centralised. This, in turn, would allow better management of debt or investment and, to a certain extent, the related hedging decisions.
  • Improved operational efficiency – Interfaces of bank communication systems should be minimised and processes streamlined to lower the threat of technical issues. This would lead to lighter administration tasks and cost savings.

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