Published: June 01, 2013
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.
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.
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.[[[PAGE]]]
Moving onto collections and the opportunities for COBO, the introduction of SEPA and ISO 20022 formats removes many of the infrastructure hurdles to centralising collections in the same way as for payments. However, some domestic payment instruments, such as RIBA in Italy, will continue beyond the SEPA migration end date in February 2014. Consequently, companies that currently accept these instruments may need to continue doing so, hampering centralisation efforts. In addition, there remain cultural and organisational objections to centralising collections, such as potential damage to customer relationships by moving collections further from sales activities.
However, despite the possible internal or external challenges for some companies, SEPA offers new opportunities for centralising collections for corporations that operate on both a B2B (business-to-business) and B2C (business-to-consumer) basis. Furthermore, the ability to rationalise euro accounts and make collections-on-behalf-of (COBO) group companies brings considerable advantages. Reconciliation and account posting can be automated more fully, credit and collection processes standardised, and overdues reduced.
In addition to the more generic advantages of centralising collections, SEPA offers specific new opportunities. In particular, the SEPA Direct Debit (SDD) that replaces existing domestic schemes can be used cross-border, and the B2B scheme enables collection by direct debit from businesses as well as consumers. These represent major advances from existing schemes. Companies can now implement SDD on a COBO basis to improve collection rates and ensure timeliness of payment across the Eurozone from a single collections function. As direct debits require less direct engagement with customers once the initial direct debit agreement has been set up, there are typically fewer sensitivities about moving the collections function away from sales teams.
Having supported our customers on a variety of successful POBO and COBO projects, there are a number of important project prerequisites and implementation tasks that we would highlight:
Systems review
Treasurers and finance managers need to review their systems infrastructure to ensure that they support either POBO or COBO respectively: specifically, to use the ‘on behalf of’ field in the ISO 20022 format correctly. For example, if using COBO, the reconciliation process needs to match the item on the bank account, and use the ‘on behalf of’ field to post it to the relevant intercompany account. It is typically easier to implement both POBO and COBO if a single ERP or specialist TMS, payments or collections system is in place.
Intercompany agreements
Under a POBO or COBO arrangement, the entity that will be making payments or collecting cash needs to put authorisation agreements in place with each of the relevant group companies, agreeing which entity will pay/ collect cash, and where the ultimate ownership of cash resides.
Legal and tax implications
While most discussions on the legal and tax implications of POBO and COBO focus on whether these techniques are permitted for entities registered in a particular country, treasurers and finance managers also need to determine any internal obstacles. For example, there may be restrictions in the way that statutes are written, or in the organisational structure of the business. [[[PAGE]]]
POBO and COBO are becoming increasingly popular amongst companies that have already achieved some degree of centralisation of either payments or collections respectively. While implementing these techniques is a bigger step for those that are moving from a decentralised payments or collections organisation, it is undoubtedly achievable and means that system implementations or modifications can be done in a single step. We see these techniques being implemented in the SEPA area most commonly, due to the advantages of a single currency; in addition, restrictions on POBO and COBO remain in parts of Central & Eastern Europe such as Russia, Ukraine and Turkey. Consequently, our customers tend to implement a phased approach, first focusing on euro countries and then expanding on a country-by-country basis.
The opportunity to enhance centralisation initiatives with POBO and COBO are amongst the key benefits of SEPA. Companies that are able to leverage these opportunities are able to simplify cash management structures, standardise and automate processes, and reduce costs. In an environment where treasurers and finance managers are constantly tasked to find new ways of adding value, these techniques can offer considerable potential.
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