Published: October 07, 2014
A popular workshop on the opening day of BNP Paribas’ 7th Cash Management University looked at best practices in setting up a payments factory, and also explored the possibilities that exist for driving similar efficiencies on the collections side. The workshop included two corporate case studies from Uwe Boesl, general manager at Novartis Investment, and Bertrand Janssens, treasurer at Nexans. They were joined on the panel by George Stein, product marketing director with ACE, and Filipe Simao, Head of Client Advisory, BNP Paribas Cash Management.
Novartis, a healthcare company based in Basel, Switzerland, began implementing a treasury and finance transformation programme in 2012. Uwe Boesl explained that one of the key objectives of this programme was to have full control and visibility of both the financial risk and liquidity of the group, to maintain global cash pool structures wherever appropriate and to concentrate cash management with a select number of core banks. The programme also aimed to develop and streamline the organisation’s payment infrastructure in order to route payment in the most cost efficient way.
To meet the objectives of the transformation programme, Novartis had to move away from the local approach to cash & payment management it previously had. Boesl said that before the project, the company had a local country approach to manage short-term cash and funding and that this had created multiple banking partners - 56 for euro accounts alone.. Another benefit was to establish central controls for cash management and payments. To get to grips with this, the transformation programme centralised the management of affiliates’ cash and liquidity to an in-house bank set up in Luxembourg. Through centralisation, the company was able to reduce its core cash managing banking partners to just three for Europe.
Group treasury at Novartis now manages an in-house bank (IHB) and a payment factory. These communicate with three banking partners via SWIFT. With the use of SAP Cash Management Module the internal communication to and from affiliates worldwide has been ensured. Boesl explained that Novartis uses SAP modules to standardise, simplify and automate the interactions between the company’s accounting organisations and the IHB and payment factory. For example, invoice processing occurs at the accounting organisation and the payment files are then sent to the IHB/payment factory. The IHB/payment factory manages areas such as cash pooling, and is also able to establish the optimal payment routing thanks to its SWIFT connectivity with the company’s core banks. The IHB and payment factory send statement files back to the finance service centres, where reconciliation on a high automated level occurs.
As well as the reduction to just three core ‘cash’ banks in Europe, Boesl said that a number of the real benefits of the project have been around the company’s processes. For example, the standard processes for payments have established a higher grade of automation, while the short-term cash forecast is now delivered within a much shorter timeframe than previously. Beside that the reconciliation process of A/P in affiliates has been standardised and automated. Overall, Boesl said that the group treasury now has a much better transparency over its cash and payments across the organisation.[[[PAGE]]]
The second corporate case study of the workshop was delivered by Bertrand Janssens, Financial Manager at Nexans, a global leader in the cable industry. Janssens explained that the IHB/payment factory project the company had undertaken was one of four interdependent projects with global objectives, the others being bank rationalisation, bank communication using SWIFTNet, and the implementation of a new treasury and risk management system.
In the Nexans payment factory architecture, direct payments, payments on behalf (PoB) and intercompany payments via the IHB are interfaced from the local ERPs to the payment factory. The payment factory is connected to the banks via SWIFTNet, while it also sends bank statements and reports back to the business units. One interesting item to note here is the use of PoB. This is a technique that corporates can use to reduce costs associated to cross-border payments, by using one central treasury bank in the country of the currency converting all payments into domestic payments. Implementing PoB has reduced drastically the number of bank accounts the company holds in all currencies since subsidiaries only requires a bank account for collections, as well as bank flows with all intercompany payments going via the in-house bank.
Looking ahead to the next steps of the project, Janssens described how the company would continue to roll out the new payment factory around the world, turning it on for the group’s operations in Australia, New Zealand and South America. There are challenges involved in going global with a payment factory, most notably the time zones that need to be covered by the central treasury. Also there are some legal constraints to operating a payment factory in certain jurisdictions. Finally, Janssens pointed out change management as an important issue to consider when rolling out a payment factory globally. Some local entities may be reluctant to change from a system that is working efficiently from their perspective. It is important to share the vision of such a type of product with the entities that will become part of it, and to demonstrate the overall benefits to the organisation.
While many corporates are aware of the benefits that running a payment factory can bring to the organisation, a less explored area is the concept of the collections factory. In presenting a case study of a current client’s payments centralisation implementation, George Stein of ACE Software Solutions said that the possibilities in this area have been greatly boosted by the harmonisation of formats that is taking place, citing both the Single Euro Payments Area (SEPA) in Europe and the Common Global Implementation - Market Practice (CGI-MP) initiative globally as examples of this.
While many corporates are aware of the benefits that running a payment factory can bring to the organisation, a less explored area is the concept of the collections factory.
Stein explained that the XML format behind both SEPA and CGI-MP can support both PoB and also collections on behalf (CoB), as much more information can be supported with XML than was previously possible with other formats. This includes remittance information for credit transfers, which means that in Europe it is possible for corporates to leverage a pan-European collection capability. Stein noted that there are tax and regulatory implications to this, but from a technical perspective the technology exists to transmit that data that is required to do PoB and CoB. He added that, where necessary, intelligent payment platforms can perform data enrichment to make sure that the message carries the information required, meaning that the ultimate beneficiary or paying party are clearly defined. They can also collect and distribute all payments and collections information from and to business units.
CoB can be achieved by using virtual bank accounts with real IBAN for collections from external customers. The corporate’s banking partner provides the treasurer with a number of virtual accounts that are then assigned to individual customers. This virtual account number is quoted by the customer as the crediting account number when it makes a payment. The banking partner identifies the customer and the crediting account number from the virtual account number, while the information on the statement the treasurer receives will identify the remitter and the level of credit added to the company’s account.
Bertrand Janssens from Nexans commented that his company has investigated CoB. While it is not something that the company does at the moment, he said that he liked the benefit that CoB offers in terms of decreasing external bank accounts without going to a full accounts receivable (AR) shared service centre. He also mentioned that CoB has the potential to improve efficiency in collection reconciliation through the use of individual virtual accounts by customer. However, he noted that there are some limitations to this technique, including some legal constraints and a lack of clarity in some countries.
The challenges of CoB were also picked up by Filipe Simao, Head of Client Advisory, BNP Paribas Cash Management. He said that while from a technology and standards perspective, the ability to do CoB exists, there is a lack of clarity from operational and regulatory perspectives. From an operational perspective, some of the means of payment cannot be collected on behalf. Simao used the example that, in France, cheques cannot be collected on behalf of, as they cannot be endorsed by someone else. From a regulatory perspective, Simao noted that the current wording of the Payments Services Directive (PSD) could imply that corporates doing PoB and CoB between companies from the same group must have a special payment institution status. Simao said that the European Association for Corporate Treasurers (EACT) has written to the European Commission asking them to clarify this in the new version of the PSD that is currently being negotiated.
While challenges clearly exist for corporates that are looking to consolidate their collections in a similar way to their payments, driving efficiencies across the collections process is clearly high on the future agenda for treasury professionals, banks and technology vendors.
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