Cash & Liquidity Management

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The Final Step in Payments Processing? Since the Single Euro Payments Area (SEPA) and the payments services directive (PSD) took effect, many corporations have been keen to extend the benefits of centralised payments by implementing ‘payments on behalf of’ (POBO) structures.

The Final Step in Payments Processing?

by Helen Sanders, Editor, TMI

One of the most significant evolutions in cash management over the past few years is the centralisation of payments through payment factories and shared service centres (SSCs). Since the Single Euro Payments Area (SEPA) and the payments services directive (PSD) took effect, thereby creating a harmonised payments landscape in the Eurozone, many corporations have been keen to extend the benefits of centralised payments by implementing ‘payments on behalf of’ (POBO) structures. It was no surprise, therefore, that the BNP Paribas Cash Management University workshop on POBO was particularly well-attended, During the workshop, moderated by Helen Sanders, Editor, TMI, two corporations, IBM and Avnet, joined BNP Paribas’ head of client advisory, Filipe Simao to discuss their payments centralisation projects and the relative value of POBO for their organisations.

Payment centralisation models

Filipe Simao first outlined the various approaches that corporations take to centralising payments. In some cases, payment functions access a single technology platform and payments are channelled through a single bank connection while the payments organisation remains unchanged. A second model is to centralise the accounts payable functions into one or more payments factories or SSCs. The ultimate step is not simply to centralise processing and platforms, but to channel payments through a single bank account (usually per currency) as part of an in-house banking structure. Filipe described some of the benefits of this approach,

“Any treasurer trying to manage large numbers of bank accounts will recognise the advantage of using a single account for each currency across all of the business entities in a region. Treasurers gain greater control over cash without the need for pooling structures or interbank transfers, compliance requirements are less onerous, and the administration required to manage signatories on bank accounts is reduced.”

Cost reduction is also a significant factor. Not only are bank fees reduced by holding fewer accounts, but non-EUR transaction fees are also lower as payments are transacted domestically rather than cross-border. In addition, as centralisation of payments usually involves a reduction in the number of banking partners, corporations were often able to negotiate lower prices with their banks to reflect higher payment volumes.

A blended model

As a relatively new concept, implementing POBO is not without its challenges, particularly as the regulations in each country differ, as Alain Rividi, Treasury Program Manager at IBM discussed. IBM’s Treasury Payment System (TPS) project first went live over a decade ago, with a single execution platform supporting third party payments (e.g., vendors, payroll, tax etc.). Payments are executed as domestic payments wherever possible, reducing transaction costs and accelerating settlement. Currently, 19 countries in Europe are connected to the TPS for most payment types, and some payment types in US and Canada. The TPS has been deployed in Japan and South Africa recently, with further roll-out continuing.

The centralised TPS is closely integrated with the in-house bank for funding and settlement, and each participating entity has an internal bank account for correct posting of disbursements. Although POBO was anticipated in the original design of the TPS as a way of decreasing the number of bank accounts, and reducing cross-border payments, Alain Rividi highlighted some of the complexities that need to be overcome,

“It is important to look at the central bank reporting implications, as transactions will mostly be executed from non-resident accounts, which can cause issues in some cases. Beneficiaries also need to be able to identify the payment correctly for reconciliation and posting, specifically the ordering party. This is a particular challenge outside SEPA, where it may not always be possible to identify the ordering party in a consistent way, or where this information may be lost or truncated.”

Alain continued,

“Not only must beneficiaries be able to identify the incoming payment, but it’s important that these are treated as domestic rather than cross-border payments to avoid fees being incurred by the beneficiary. Similarly, the processing and clearing time must not be affected by implementing a POBO structure to avoid working capital issues and the risk of late payment.”

Payroll may also be a challenge in some cases, particularly as employees expect to receive salary payments from the entity that employs them rather than an overseas entity. Furthermore, treasury or the SSC (depending on where ownership of centralised payments lies) needs to convince internal stakeholders of the benefits and provide assurance that processes and accounting will be transparent and accurate. Accounts payable need to be confident that neither the workload, nor the number of supplier queries, will increase. In some cases, there may also be legal issues to consider, such as mitigating the risk that a debt settled by another group entity is considered to be paid, which may require a change to the general purchasing conditions.

To overcome the regulatory, market and cultural variations in each market, Alain explained that IBM has developed a blended approach to POBO implementation:

  • “In most markets, including Canada, France, Germany, Ireland, the Nordics, Switzerland, UK and US, a full POBO structure is in place, with disbursements taking place through a single account per currency owned and operated by IBM’s treasury centre.
  • In the Benelux countries, Italy and Spain, a ‘partial’ POBO structure has been implemented. Incoming cross-border transactions are performed on a POBO basis while domestic/ local payments are transacted through an account held in the name of the local entities, but these accounts are still operated by the treasury centre, with a zero-balancing arrangement to the central POBO account, in order to maintain full ownership of the transaction centrally.
  • In the Baltic States, Japan, South Africa and Turkey, the TPS is used as a central ‘pipe’ for payments processing and transmission, but execution is through local accounts managed and funded by local cash management teams.”

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