Published: November 01, 2014
Working capital optimisation has become a key priority for corporations of all sizes, with senior executives increasingly focusing on credit, collections and alternative financing techniques. In addition to these initiatives, centralising and streamlining payments can make a vital contribution to working capital performance, as well as reducing costs, increasing visibility and control over cash, and improving internal and external compliance.
According to a recent research report published by SunGard [1], only 20% of respondent companies have implemented consistent payment workflows across all of their entities, despite growing opportunities to do so, such as the gradual shift towards electronic payments in the United States and standardised payment instruments in Europe. The format on which euro payments are now based, ISO 20022, is rapidly becoming established as a global standard, making it easier than ever before to achieve a consistent approach to payments.
A decentralised, fragmented approach to payments brings a variety of challenges. For example, payments technology is typically acquired and implemented in each business function that is responsible for payments, precluding economies of scale and resulting in lower levels of automation and control than a single payments platform would allow. Each of these systems needs to be connected individually to the relevant bank(s), replicating resource requirements both to manage interfaces and support local formats. In many cases, there may be no connection between internal payment systems and banks’ electronic banking systems, resulting in manual, error-prone processes and high potential for fraud.
From a senior management perspective, failure to maximise efficiency and control over payments has implications that extend significantly beyond operational and technology issues. Even in cases where a reasonable degree of automation has been achieved locally, it is difficult to standardise workflow controls across entities with disparate processes and systems, increasing the risk of fraud and interference in the payment process, increasing reputation risk, and hindering compliance with internal controls and external regulations. Furthermore, it becomes impossible to manage days payable outstanding (DPO) effectively, with the resulting loss in working capital efficiency.
Implementing a centralised payment can be instrumental both in addressing these issues, and delivering additional cash and liquidity management benefits. A primary driver for many corporations that have implemented a payment factory is to reduce the risk or incidence of fraud. According to the research report referenced above, fraud prevention is the most common reason to centralise payments, noted by 29% of respondents. This applies both to companies that use electronic payment methods and those that are more reliant on cheques, such as in the United States. Furthermore, with cyber-threat becoming an ever more pressing issue for all organisations, risk of fraud or interference in payments processing should prompt corporations of all sizes to undertake a review their payment processes, in addition to the wider cost, working capital and liquidity management benefits of doing so.[[[PAGE]]]
One of the key objections to implementing a payment factory is concern amongst business units and head office departments with payments responsibility that centralisation would lead to a loss of autonomy and an inability to support local payment instruments and cultures. In reality, a decentralised organisational structure does not prevent a company from implementing a payment factory, and does not necessarily need to result in any loss of autonomy or non-compliance with local practices. For example, by establishing a central technology hub, all users with payments responsibility can access the same system, with payments then transmitted to the relevant bank(s) in the required format. User access rights and workflows are consistent, and interfaces with internal and external systems are managed centrally.
By channelling payments through a single hub, companies can then take advantage of multi-bank connectivity such as SWIFT, providing optimum levels of reliability and security. According to the B2B Payments research report, 29% of respondents are already using SWIFT, while a further 41% expect to do so over the next 12-24 months. While it is not essential to centralise payments transmission in order to access SWIFT, the implementation is far easier (as there are fewer internal systems to which to connect) and the benefits substantially increased by doing so.
Payment factories offer a great deal more potential than simply a payment ‘pipe’, however, particularly for companies where the organisational culture permits a higher degree of centralisation. Centralising not only payments formatting and transmission, but also payments processing, reduces the amount of finance resource that is required in local business units. This in turn enables the company to establish a centre of excellence for payments processing, enabling best practices in efficiency and control, and improved scalability without the need to increase resourcing.
The benefits extend beyond operational efficiencies, however. In many cases, companies that centralise payments processing also rationalise banking relationships, creating economies of scale, reducing transaction banking costs and making it easier to manage liquidity effectively. In regions such as Europe, but in other instances too, corporations are now implementing a ‘payments on behalf of’ or POBO model. This model goes another step in enhancing the value of centralised payments processing. Instead of requiring separate accounts for each entity, a POBO model enables payments to be made from a single account per currency. This account is then supported with an in-house bank so that payments are booked in the name of the originating entity. The remittance information indicates the name of the originating entity so that the beneficiary can identify the payment and reconcile it automatically.
According to the study referenced previously, 60% of respondent organisations had over 1,000 bank accounts (of which more than 20% had over 5,000 accounts); the ability not only to rationalise banking relationships but also bank accounts simplifies organisations’ cash management processes significantly. Bank account management (e.g., maintaining authorities on accounts) is less resource-intensive and less prone to error, and bank fees can be analysed and reconciled more consistently. Payment timing can be controlled more specifically, supporting working capital objectives. For example, some companies use the opportunity to increase the number of payment runs rather than creating working capital ‘spikes’ during each week or month to fund payments. Often this can be achieved by using the payment factory to warehouse payments. This allows ERPs to deliver payments ahead of time which are then paid on value date. Furthermore, liquidity management structures can be considerably simpler, further reducing costs and increasing transparency.
Bearing in mind the potential value of centralising payments – and the risks of not doing so – it is surprising that such a relatively small proportion of corporations have implemented a payment factory so far, particularly as there is a general trend towards centralisation and simplification of business support functions. One of the challenges when identifying, as well as delivering, the potential value of a payments optimisation project is the difficulty in establishing clear ownership, particularly given the number of parties who may be involved. For example, treasury offers experience in bank connectivity and secure workflows, but may not have had ownership of non-treasury payments in the past; similarly, accounts payable departments (at both headquarters and local levels), IT, legal, tax and accounting teams are also key stakeholders. In many cases, none of these individual business functions are empowered or incentivised to take responsibility for centralised payments, and it may not be consistent with their performance objectives.
As banks implement Basel III over the coming months, with the associated restrictions on traditional lending, treasurers and finance managers will continue to refine their working capital, liquidity and counterparty risk management strategies. Centralising and optimising payments makes a vital contribution to achieving this, by improving control over working capital and enabling companies to reduce banking partners and accounts. Failing to do so, however, brings substantial financial, operational and reputational risk.
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