
The Evolving Value Proposition of Payment Factories
The experience of six leading treasurers
by Helen Sanders, Editor
In June 2015, leading treasurers joined TMI and D+H in a roundtable moderated by Damian McMahon, director of the finance and treasury group for PwC in Belgium to discuss trends and experiences in in-house banking and payment factories. The panel comprised the following:
- François Masquelier, Senior Vice President, Treasury and Risk Management, RTL Group
- Marie-Astrid Dubois, Assistant Treasurer, EMEA & Asia, Honeywell
- Karen Van den Driessche, Treasury Director EMEA, Avnet
- Luc Vlaminck, Group Treasurer, Remy Cointreau
- Michel Verholen, Director, Global Treasury Center, Zoetis
- Jean-Philippe De Waele, Treasurer EMEA, Johnson Controls
Meet the panellists
Luc Vlaminck, Group Treasurer, Remy Cointreau
“We first set up a global treasury centre in Belgium eight years ago, including an in-house bank. Last year, we started to expand this into a payment factory, which will ultimately cover around 60 legal entities globally, but the project will be implemented in phases. We started with our affiliates in France, and then extended the project across Europe, which comprises around 25 entities and €1bn in payments. We are now rolling out the final steps of the project into Asia and the US. The payment factory operates on a payments-on-behalf of (POBO) and payments in the name of (PINO) basis.”
Michel Verholen, Director, Global Treasury Center, Zoetis
“I started with Zoetis which is a spin-off from Pfizer, seven months ago. When the company was first formed two years ago, most of the Pfizer infrastructure was replicated, but over time, we have been able to review and rationalise our treasury model to meet the specific needs of Zoetis’ business. At the same time as establishing the treasury function, we also implemented a shared service centre (SSC) for operational payments. Therefore, account management, banking infrastructure and connectivity are all managed by treasury, but payments processing takes place in the SSC. There are still some entities that process payments locally, which do not yet share the same ERP, but we are leveraging the SSC infrastructure at present, either by bringing them into the SSC or leaving them separate, but using the standard connectivity solutions. . We are also rationalising our legal entity structure, so ultimately around 55 entities will be using the same connectivity solutions for payments and transaction reporting.”
Karen Van den Driessche, Treasury Director, Avnet
“Part of my role is responsibility for global treasury technology strategy. We do not yet have a payment factory, but we are rolling out a new treasury management system (TMS), SunGard’s AvantGard Integrity combined with Trax and SWIFT connectivity globally. Initially, we are using Trax to transmit and convert payment and bank statement files between SWIFT and Integrity, but we will use it as a payment factory tool as a second phase.
We use multiple SAP instances (nine) and some other smaller accounting platforms. Our payment factory scope will probably start with a roll-out in EMEA, covering over 140 legal entities, and then be rolled out globally. We plan to use standardised XML formats and are currently learning from other corporates’ experiences to define the approach and roll-out plan. “
François Masquelier, Senior Vice President, Treasury and Risk Management, RTL Group
“We have a payment factory in treasury that covers around 90% of our 300 entities, which equates to nearly 99% of our total payments volume, which is around 400,000 payments each year. We use SAP across the business, although we currently have multiple platforms, and we generally aim to integrate new acquisitions on SAP as soon as is feasible, including those we have made in Canada, US and Asia. We use City Financials as our TMS and use CashPoolerWeb (from Datalog) as our payment factory system, which is connected to SWIFT via a service bureau. (i.e., SunGard). We also use ISO 20022 formats wherever possible. Having centralised most of our payments, our next step may be to implement POBO and/ or COBO depending on what is achievable and relevant to our business in each country. For example, we may look first at POBO in Benelux, France, Germany and possibly UK.
One of our challenges is the number and frequency of acquisitions, which has major implications for integration. It is difficult to impose a systems infrastructure on an acquired entity, particularly when this is relatively small, but we need to find a way of creating group-wide financial reporting.”
Marie-Astrid Dubois, Assistant Treasurer, EMEA & Asia, Honeywell
“Like other panellists, we use SAP as our corporate ERP. In addition, we use SunGard’s AvantGard Quantum as our TMS. A few years ago, we launched our global disbursement and SWIFT (GDS) project. This aimed to achieve a common approach to bank connectivity via SWIFT, including XML formats and a standardised, end-to-end automated process flow. This has enabled us to eliminate a large number of payment centres – more than 40 in Europe alone. Our European payment factory implementation is now nearing completion with over 150 active entities in EMEA. We have pilot projects in US and Asia now underway. This is a long-term project, not one that can be completed overnight. We have a centralised payments entity in India, but this handles third party disbursements, excluding tax, payroll and treasury payments, but is not managed by treasury. For us, while POBO offers theoretical advantages, it would be very challenging for us in practice, and add rather than remove complexity.”
Jean-Philippe De Waele, Treasurer EMEA, Johnson Controls
“As a multi-industry group, we use various ERPs, mainly SAP, Oracle and iScala. Although we originally implemented an in-house bank for cross-border payments, intercompany netting, intercompany lending and settlement of internal FX hedging, we now perform these activities and manage liquidity and risk through Bank Mendes Gans, part of the ING group. In 2009, we started to implement SunGard’s Trax, initially in EMEA but ultimately globally, which comprises over 350 entities and 100 banks today. This now acts as our global platform for all payments, which amounts to $40bn each month (including settlement of internal and external derivatives). Salary payments are currently excluded, although we expect to include them in due course. We also use one standard SWIFT complaint XML-file format (ISO 20022) across our banks.” [[[PAGE]]]
Developing the business case
Damian McMahon, PwC opened the discussion by asking how panellists had developed the business case for a payment factory. For both Remy Cointreau and Zoetis, security was the major driver, as Michel Verholen, Zoetis outlined,
“For us, our main project driver was security rather than cost, particularly given the risk of both internal and external fraud. Therefore the business case was relatively straightforward, but needed to be supported with the correct business processes, such as segregation of duties between creating the purchase order, approving the invoice, initiating, approving and executing the payment.”
Luc Vlaminck, Remy Cointreau added,
“There were also ancillary benefits such as the ability to reduce the number of bank accounts and rationalise connectivity, centralise cash and create economies of scale with our banks.”
At RTL Group, the payment factory project was triggered by SEPA, which made it easier to quantify the benefits and justify the investment. It was also a valuable opportunity to rationalise bank accounts, as François Masquelier explained,
“While it was our policy that local entities should not open new bank accounts, policy and practice were often different. By rationalising banks and centralising payments, we could maintain better control over bank relationships and bank account management. The cost advantages of doing this were significant, with initial savings of 25-30%.”
Karen Van den Driessche, Avnet continued,
“For us, achieving visibility over cash flow was the primary objective. We had already pooled around 80% of cash through our in-house bank, but it was important to get a better view of our payment flows to be able to negotiate rates with our banks.”
Luc Vlaminck, Remy Cointreau concluded,
“We discovered that some entities were paying very high bank charges, so we concluded that there was a lot of value by centralising bank relationships and payment processing, and minimising bank accounts, but this was not our primary driver. There are currency risk management advantages too, as we are able to centralise our FX risk into one account per currency. Furthermore, by implementing a payment factory, we have also found it much easier to include newly acquired companies as we can connect them very quickly.”
Although companies were at different stages in their payments centralisation process, participants agreed that rationalising bank accounts was a key first step before implementing a payment factory and offered considerable benefits even before centralising payments, and this was therefore a key element of the business case.
Organisational impact
Damian McMahon, PwC, then asked panellists to what extent the in-house bank and payment factory organisation was imposed on business units, or whether treasury needed to ‘sell’ the business case. In most cases, it was a management imperative, but Karen Van den Driessche, Avnet commented,
“While centralisation may be a mandatory requirement for business units, the way you approach it is important in order to build relationships with them and gain their buy in as far as possible.”
Damian McMahon, PwC also highlighted the importance of business units’ input to ensure firstly that pricing is competitive with rates that would be available locally, and that local payment requirements are supported. Luc Vlaminck, Remy Cointreau added,
“In addition to doing the local fieldwork to convince people of the benefits, we made sure that we would not increase their costs – and of course, our aim was to reduce their costs wherever possible. Not only is it difficult at times to convince business units of the benefits of centralisation, but local bank branches too. This applies even if you are using that bank for centralised payments processing, as they lose potentially valuable clients from their local portfolio.”
Karen Van den Driessche, Avnet continued,
“As we moved to one bank per currency rather than one per country, entities that use multiple currencies actually ended up with more banks than they had before, therefore increasing their workload in the short term. Once we have implemented Trax, this will no longer be an issue as they will interact with their banks through a single tool, but it was important to manage their expectations.”
Bank relationships and connectivity
Jean-Phillippe De Waele illustrated how Johnson Controls had taken a bold approach to banking partnerships by insisting on the use of SWIFT,
“We were clear that supporting SWIFT connectivity was a pre-requisite to doing business with us. There were some countries, such as Serbia and Macedonia, where this was more challenging, but we managed to achieve SWIFT connectivity even in these countries.”
Damian McMahon, PwC noted,
“This is an issue that some of our clients are struggling with. They have implemented a payment factory with SWIFT, but in some countries, local banks are not on SWIFT or do not support SWIFT corporate access.”
Participants agreed that this could be a challenge in parts of Asia and Latin America in particular, although not in Europe. Although most companies tried to enforce the use of SWIFT and particular file formats, this was not always easy in practice, but panellists noted that they passed the cost of developing particular file formats on to the banks that required exceptions to standard formats. Alternatively, the use of as middleware solutions between internal systems and the bank connectivity tool(s) means that companies can amend formats in line with particular bank specifications without affecting core processes or formats.
All the companies represented on the panel use SWIFT as the bank communications platform, which led to some discussion about whether the fact that SWIFT is a co-operative owned by banks was a cause for concern. In general, panellists were agreed that a platform ultimately owned by multiple banks, rather than just one bank, was far better, but as there are no real alternatives to SWIFT for multi-bank, bank-agnostic connectivity, this might result in higher pricing as there is no competitive pressure on SWIFT to influence its pricing policy.
Security and fraud
With security and fraud prevention now high on treasurers’ list of priorities, security is one of the most important reasons why companies choose to use SWIFT. In addition, one of the most significant security concerns that has emerged recently, and is now a widespread problem amongst treasury and payment functions, is impersonation fraud. This is far less straightforward to combat using systems and tools such as digital signatures alone, and requires rigorous processes and training. While it may be relatively easy to establish policies and train users in head office functions and global or regional treasury centres to identify impersonation fraud attempts, this is more difficult when payments are taking place in more remote locations. This is a major driver towards centralised payment factories, as Luc Vlaminck, Remy Cointreau commented,
“The rule is very clear: no payments are made based on a telephone instruction. Payments can only be made through the standard system processes, and can only be approved by authorised signatories, including dual approval as necessary. We are able to enforce this for two reasons: first, as the payment cannot be transmitted unless the proper controls have taken place, and second, as payments processing takes place centrally.”
Michel Verholen, Zoetis added,
“It is undoubtedly easier to enforce controls if you manage the process centrally. The challenge comes where fraud attempts are made in countries that are not included in this process, which may lack the controls or awareness of the risk.” [[[PAGE]]]
Furthermore, Marie-Astrid Dubois, Honeywell emphasised that segregation of duties is not enough if the underlying invoice against which the payment is being checked is fraudulent, a point that was echoed by Karen Van den Driessche of Avnet. Panellists described various strategies that they had in place to overcome this challenge, but it quickly became clear that there is no clear set of best practices to overcome the growing, and changing, risk of fraud. Luc Vlaminck explained that Remy Cointreau has attempted to overcome this by appointing senior signatories who are close enough to the business to recognise unusual payments. Jean-Phillippe De Waele, Johnson Controls described how the company has a process of vendor registration, which requires a recent bank letter confirming the correct settlement instructions, before an invoice can be paid, to provide some certainty over the bank details. While this approach is becoming more common, it can also create problems. Specifically, as Karen Van den Driessche, Avnet noted, their customers demanded the same validation process when they changed their own banks, which was time consuming and risked a delay in invoice payment.
Banks have a role to play by identifying unusual payments or payment patterns. Similarly, companies are relying on their technology vendors to provide functionality to enforce controls, audit user actions, and flag unusual behaviour or attempted actions.
Sanctions screening
A related issue is that of sanctions screening. Damian McMahon, PwC asked panellists whether they had built this into their payments process, and emphasised that while only a minority of companies did so today, it was something treasurers and finance managers should look at,
“Although the bank has an obligation to check that payments do not breach international sanctions, by the time it does so, the money is already frozen. The payer has to apply for the return of funds, which can take a long time. Consequently, it is far better if this screening process takes place before the payment is actually transmitted.”
As treasurer of a pharmaceutical business, which is permitted to do business in countries that are subject to international sanctions, Michel Verholen, Zoetis explained,
“We have a separate process for payments into sanctioned countries, which is managed by a dedicated team as part of our legal department rather than part of our SSC to make sure that the relevant background checks take place. The payment itself may still be transmitted by treasury, however. A related challenge is, of course, that very few banks are willing to process these payments, for obvious reasons.”
François Masquelier, RTL Group, emphasised that sanctions were not always clear-cut, in that some types of activity are permitted in certain countries, which further complicates the process. In addition, he noted that collections from sanctioned countries also created problems as major banks were typically unwilling to process them.
A precursor to COBO?
This led to a brief discussion on collections on behalf of (COBO) which as Damian McMahon, PwC suggested, is a logical next step for many companies that have already implemented POBO. François Masquelier commented,
“COBO is really the final element of SEPA and the PSD. We talk about how SEPA has facilitated POBO, but centralising collections can bring greater value. Today, there are still challenges in Europe due to local specificities in countries such as Spain and Italy, but there is the potential for significant benefits.”
Participants agreed, however, that this is more achievable for B2B than B2C businesses where volumes are far higher and the range of collection methods is likely to be wider. Virtual accounts play a major role in COBO by facilitating automated reconciliations, but information about these solutions is not yet universal. There were also some concerns about banks’ ability to support COBO, particularly given that some panellists had experienced challenges with cash pooling with some banks.
Payments innovation
The final topic of discussion was the type of innovation that treasurers were either seeking, or anticipated in the future, with the potential impact of both technology disruption and new market entrants. Panellists had differing degrees of confidence in banks’ willingness and ability to create innovation. As many banks are returning to their core business, some believed that their focus on innovation may be limited to specific technology to simplify key cash management activities, such as electronic banking and bank account management tools. One of the challenges for banks is that they face pressure on at least three sides: growing customer demand for efficient, automated payments; the critical need to maintain security over payments, and regulatory compliance, all of which require investment. François Masquelier, RTL Group also noted that new market players lack some of the constraints under which banks operate, which makes it easier for them to drive innovation. One possible outcome is that banks will acquire or partner with third parties to meet these diverse objectives; alternatively (or in addition) the use of third party, bank independent platforms may grow.
Panellists also expressed varying degrees of enthusiasm for emerging payment innovations. In some cases, treasurers thought that tools such as mobile signatures on payments would be useful, so long as security continued to develop alongside functionality. Others noted that with significant investment and volumes of payments managed through low cost centres using large-scale ERP platforms, many of the disruptive technologies that are frequently discussed are likely to have little impact. For retail payments and collections, however, many treasurers recognise that new payment innovations offer considerable potential.
An evolving value proposition
The panel concluded that while cost savings, rationalisation etc. were drivers of payment centralisation in the past, one of the major drivers today, and the greatest priorities for treasurers and finance managers, is to address the growing, and changing nature of fraud. With companies of all sizes both fending off, and falling victim to sophisticated fraud methods, such as impersonation fraud, treasurers recognise that combatting fraud is not simply an issue of securing access rights to systems or segregating duties across departments, there are multiple points in the purchase-to-pay process which are vulnerable to fraud. Just as fraudsters are increasingly sharing ‘best practices’ in fraud techniques, we are likely to see more concerted efforts across the treasury and finance community, including banks and technology vendors as well as treasurers, in sharing experiences and best practices in combatting fraud.
With thanks to Damien McMahon, PwC for moderating the panel, and to all the participants. Thanks too to D+H for their kind support in hosting the event.