Published: February 01, 2012
The 5th Cash Management University, held in Paris, France in December 2011 included a variety of thought-provoking plenary sessions and in-depth workshops on key issues affecting corporate treasurers and cash managers. In the following editions of TMI, BNP Paribas will spotlight content and findings from some of these sessions. This edition focuses on one of the workshop sessions, which was on the topic of payment factories. Senior treasury representatives of two corporations, the first a senior treasury executive of a major technology firm and second, Maurizio Borelli, Director, Treasury & Risk Management of medical device company Sorin Group, presented their experiences of implementing centralised payments. The panel also included Filipe Simao, Head of Client Advisory and Jean-François Rallier, Senior Account Manager, Risk and Compliance, Fiserv, who shared their views and opinions on addressing common challenges and adopting best practices. The panel was chaired by Helen Sanders, Editor, TMI.
The first panellist explained how his company has established a centre of excellence in Western Europe which manages treasury activities for the large majority of the group’s European business units, with a smaller centre in Eastern Europe. The latter centre was originally intended to be the regional treasury centre for Central and Eastern Europe, but its scope has subsequently increased to include other smaller countries of operation such as Portugal, Nordics, Middle East & Africa.
Until 2003, local finance staff conducted payments in each country, but this created issues in terms of segregation of duties and staff absence. In addition, payment processes were different in each country, which was sub-optimal due to the replication of systems and resources.
Consequently, the decision was taken to establish a centralised payments factory. Treasury intended that the new payments factory would enforce standardised, secure payment procedures, reduce operational risk and cost, and create greater economies of scale. All countries in Western Europe (excluding Austria and Greece), the United States and Canada were included, covering all types of payments, such as accounts payable, payroll, tax payments etc., as these payment types are effectively used in all countries. The payments factory needed to support not only electronic fund transfers, but also some in-country payment methods, both electronic and paper-based. EDIFACT messages through an X400 communication system has been used until now, but the company is now migrating to SWIFTNet FileAct. This migration is due to be completed in early 2012, with XML-based messaging to follow. Establishing a payments factory was also an opportunity to rationalise banking partners, so six banks were selected through a request for proposal (RFP) process, each one covering one or more of the 20 countries covered by the payments factory.
Since the payments factory was first established, the volume and value of transactions has increased steadily, now reaching around 1.8 million transactions per year, with a value of around €20bn.
Key to its success has been to put in place an appropriate funding mechanism. The existing in-house bank already provided day-to-day funding to most countries using intercompany current (call) accounts, and this is the model that is used wherever possible. In certain situations, the paying entity has to fund the disbursement accounts separately.
In around half the countries, the payments factory is able to operate using the ‘payments on behalf of’ model i.e., payments are processed from non-resident accounts in the name of the in-house banking entity, as opposed to opening separate accounts in the name of the local entity. This is evolving as conditions within each country change. When this has not been possible, dedicated accounts have been opened in the name of the relevant local entity, but these remain under the control of treasury.[[[PAGE]]]
While this payments model brings considerable advantages, by rationalising account structures, simplifying payments processes and creating greater economies of scale, there are some challenges to overcome. Central banking needs to be considered, and the company needs to work with each central bank to ensure compliance with local requirements. There are also some issues relating to the use of non-resident accounts. For example, the receiving bank may impose additional fees, which is particularly problematic in the case of high volume payments such as payroll. In some cases, the company has had to revert to using local accounts for this reason.
The panel were agreed that despite the challenges that exist in some countries, the ‘payments on behalf of’ model is a key enabler for an efficient payments factory. Some of the earlier adopters experienced greater challenges than those that have implemented more recently, or are planning to do so, as there are now solutions to many common issues.
Limitations in the amount of information that can be exchanged through the relevant clearing system may also create challenges for a payments factory. For example, the beneficiary needs to know the entity name as well as invoice details to permit payment identification and reconciliation. Related to this is the question of legal validity of settlement if the invoice entity and paying entity are not the same, for example in the event that a vendor goes into liquidation. Most importantly of all, the prerequisite of an effective payments factory operating the ‘payments on behalf of’ model is an appropriate intercompany financing and receivable system to guarantee the acceptability of the process from a tax perspective, and enable the automated posting of transactions.
There have been a variety of lessons learned from implementing and leveraging the payments factory. Firstly, the benefits have been considerable. The number of bank accounts, with the associated documentation and account maintenance, has reduced dramatically. The systems environment has been simplified, standardised, and is easy to use. It is an important facilitator of centralised, standardised treasury processes and greater control. Furthermore, it can be adapted easily to accommodate changes to the corporate structure.
It is important, however, to be realistic about the degree to which the payments factory, and in particular the ‘payments on behalf of’ model can be extended, for both internal and external reasons. The ultimate aim is to implement this model wherever possible, whilst adapting to conditions in each country as appropriate.
Maurizio Borelli, Sorin Group outlined his company’s experience of implementing a centralised payments environment. Sorin Group is a leading provider of medical devices headquartered in Italy, serving around 5,000 hospitals globally, with a revenue of around €746m. Historically, although treasury strategy and policy has been centralised in Italy, including financing, investment and risk management, payments and collections have been decentralised.
This treasury organisation led to a variety of challenges. Treasury employees were in different locations across Europe processing payments. Processes were therefore fragmented and inconsistent, and did not allow effective segregation of duties. In addition, FX flows across European legal entities had not been optimised. Power of attorney authorities were not uniform across the business, leading to a lack of control and consistency over treasury’s role.
The decision was taken to centralise the treasury function more effectively in Italy, including payments. This aimed to bring a number of benefits. Decentralised treasury staff would be replaced with a single treasury team based in Italy, so that both policy and execution would take place at corporate level. This would include a single payment centre, and European cash pooling to centralise cash more effectively. Procedures would also be standardised, leveraging SEPA to harmonise payment and collection formats and simplify cash management structures. This is based on a ‘payments on behalf of’ model with a uniform power of attorney structure.[[[PAGE]]]
The project was first launched at the end of 2010, and completed a year later. Initially, the scope of the project was limited to entities in Italy, but this has since been extended to most European countries, both for payments and pan-European cash pooling. UK and Switzerland are included in the payments factory but GBP and CHF are pooled separately. Sorin Group went through a bank RFP process and appointed three banks in Italy and BNP Paribas across Europe. The process of initiating and approving payments is still undertaken by each entity, but all payments are released by central treasury after format validation. Around 77% of payments use SEPA credit transfers, based on XML, while the remainder are generally cross-border payments outside of the SEPA area using CBI format.
In addition to greater process control and efficiency, implementing a centralised treasury and payments factory has been an opportunity to promote greater cash flow discipline. For example, weekly and monthly cash flow forecasts are submitted by subsidiaries to permit the optimal use of cash and funding when required.
Implementing a payments factory has brought considerable advantage to the business. Controls have been improved through greater segregation of duties, which reduces operational risk. The payment process is more efficient and transparent as manual payment methods have been replaced with electronic payments, increasing automation and reporting capabilities. Costs have been cut as fewer resources are required and external banking costs have been lowered by around 49% as a result of the bank selection and economies of scale. Cash flow planning has been enhanced as a result of greater visibility of information and control of cash across the group, therefore improving financial decision-making.
There have inevitably been some challenges to overcome. The approval process remains crucial, whether conducted at a local or central level. Consequently, authorised approvers need to be available at all times. It has been very valuable to involve local finance managers in the process to ensure support of the new administration and treasury procedures. As an early adopter of SEPA, which was pivotal to the cost savings and efficiencies that Sorin Group was able to achieve, some of our banks were unable to provide the necessary degree of expertise and support that was required. We have gradually refined our processes to diagnose errors in payment files, which in turn has reduced the number of rejections and back office manual activities.
Looking ahead, Sorin Group intends to enhance its electronic banking capability to improve flexibility, control, error detection and reporting. In addition, the company intends to leverage mobile tools such as iPhones and iPads for remote payment authorisation. Based on the success of cash pooling and payment factory in Europe, Sorin Group will be extending these capabilities to its subsidiaries in the United States. In addition, the company is considering centralising collections on a pan-European basis to achieve further efficiencies and control.[[[PAGE]]]
One topic of discussion amongst the panel was the extent to which an uncertain future for the euro would affect the value proposition for payment and/or collection factories. Overall, it was concluded that a centralised approach to payments would be even more valuable if a company has to manage a larger number of currencies. The trend towards centralising collections has been fuelled by currency and payment method harmonisation in the Eurozone through a single currency and SEPA, so there may be less momentum in the future for collection factories in the event of currency fragmentation; however, the value of centralised collections remains very strong.
The panel concluded that based on the experiences of both case study companies, payment factories deliver value to international companies of all sizes. Recent innovations and regulatory developments, such as SEPA, SWIFT Corporate Access and standardised formats based on XML, are all fuelling the success of these projects, and allow structures put in place now to be ‘future proofed’ as corporate requirements and economic and technology trends develop in the future. The right bank(s) and the right technology are undoubtedly enablers of positive change, and create the opportunities for smaller, as well as larger companies to leverage industry best practices in process control, efficiency and cost reduction.
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