Published: October 01, 2012
Making payments efficiently, securely and cost-effectively is a priority for every company, but this becomes particularly complex for multinationals with a diverse global supplier base. When reviewing regional and global payment practices, centralising payments into a shared services centre (SSC) or payments factory is a common way of standardising processes, internal technology and banking channels, ensuring a consistent approach to security and control, and achieving economies of scale. Centralisation is not, however, a magic wand for payments efficiency, and the right processes, technology, payment models, banking relationships and account structures are also essential elements. As payments centralisation has been a trend for a number of years, there is often a misconception that all large companies have already embarked on this route. As this survey demonstrates, however, this is not the case.
This month’s ‘Treasurer’s Voice’ was conducted in association with SunGard Corporate Liquidity, and we are pleased to feature comments from Andrew Owens, Managing Director, Global Payments, SunGard Corporate Liquidity. Two hundred responses were received from individuals located in all major regions, including Asia and Latin America. Over 59% of respondent companies had an annual turnover exceeding $1bn. Where the results vary substantially across companies of different sizes, and/or located in different regions, this is indicated accordingly.
Although the centralisation of payments is a topic often discussed, the results of this survey make it clear that only a minority of companies have yet achieved a high degree of centralisation. Only 34% of companies have centralised payments globally or regionally (30% of companies of >$1bn turnover) while the majority have typically achieved partial centralisation (figure 1). Thirteen per cent of companies have not yet embarked on any payments centralisation initiatives across all respondents, including 14.6% of companies with a >$1bn turnover. The proportion of companies with an entirely decentralised approach to payments is a higher proportion than expected, demonstrating that there is still considerable opportunity for efficiency and control gains. As we mentioned earlier, centralisation alone is not a solution to all payments-related challenges, but it is a proven means of achieving economies of scale and standardising processes and controls when trying to deal with multiple payments functions across the business.[[[PAGE]]]
Amongst those that have fully or partially centralised their payments, the majority (55%) have done so through a financial shared service centre (SSC). Twenty nine per cent indicated that they have implemented payment factories within treasury, while the remainder have a separate payment factory.
As figure 2 shows, a surprisingly high proportion of respondents (32%) indicated that their payment factory or SSC operated on a ‘payments on behalf of’ model (i.e., the payments factory/ SSC makes payments on behalf of, as opposed to in the name of subsidiary companies, supported by an in-house bank). As the concept is relatively new, it is likely that the question was misunderstood in some cases, particularly as an equivalent number of respondents indicated that they were not familiar with the concept. Andrew Owens, SunGard agrees,
“The two statistics that are most surprising here are firstly, the number of companies that are using a ‘payments on behalf of’ model (particularly amongst smaller companies) and secondly, the number of companies that are not yet familiar with the concept (particularly amongst large multinationals). There are substantial efficiency advantages that can be gained by employing a ‘payments on behalf of’ model as part of a centralised payments process, so it is great to see so many of the respondents taking advantage of this.
For example, the number and therefore cost of cross-border payments can be reduced, as can FX risks and costs across the group. Bank accounts can be rationalised and payment controls enhanced. Although there may be some complexities for both the company and its suppliers initially, increased efficiency and enhanced risk and cost management can often compensate for this.”
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Achieving greater efficiency, control and cost-effectiveness in payment processing is an objective for more than 70% of companies surveyed. For the majority of these (51% overall) payments are a priority, and these companies are intending to embark on a payments optimisation initiative in the next 12 months, although the remainder thought that a project would take place after this date.
Companies that have immediate or future plans to enhance payments processing indicated a variety of elements that were likely to be involved (figure 3). Fifty-seven percent of respondents indicated that they intended to centralise payments processing (e.g., through a discrete payments factory or within a broader financial SSC). In addition, improving security and control was the most frequently cited priority (40%); rationalising banking relationships (38%) and replacing or updating internal (34%) or external (30%) systems were all priorities. Nearly 28% of respondents indicated that they intended to implement SWIFT connectivity as part of a payments optimisation project, which is a higher proportion than previous surveys have suggested, illustrating corporate treasurers’ and finance managers’ growing awareness of, and interest in SWIFT. This trend was strongest amongst larger companies (>$1bn turnover) while only 10% of companies with a turnover less than $1bn indicated that SWIFT connectivity was an objective.
As Andrew Owens, SunGard notes, there is also a relatively high proportion of companies that are seeking to update or replace their internal systems,
“There would appear to be a large number of companies seeking to replace or update their systems as part of a payments optimisation process. In some cases, companies updated their processes when centralising their payments, but are now reviewing their systems for a second phase. In others, they have had their payments infrastructure in place for some years, and are now looking to ensure that these are fit for purpose and provide optimal value, in particular assessing their ability to process XML-based formats, as ISO20022 standards increasingly become the norm in the corporate to bank space.”
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Internal cost reduction remains the biggest single driver in companies’ payments optimisation initiatives (70%) but increasing security and control (59%) and improving cash visibility (48%) are also priorities (figure 4). However, with the deadline for migration to SEPA (Single Euro Payments Area) payment instruments looming in little more than a year (February 2014) it would appear surprising that SEPA migration is a priority for less than 25% of respondents, including only 21% of large corporations; however, this proportion was far higher amongst respondents located in Europe (>40%). Even so, the reality is that only a relatively small proportion of corporates have yet fully migrated to SEPA, so SEPA should be a higher priority. Andrew Owens, SunGard comments,
“SEPA is still less prominent an issue amongst corporate treasurers than it should be. With the migration deadline now clearly defined, corporates will need to start making preparations, which has a major impact on payments processing.”
Only 16% of companies indicated that format standardisation was a driver. Fragmented and diverse messaging and file formats are typically major challenges for corporations working in multiple jurisdictions and with a variety of banks. While previous efforts at standardising file formats have achieved only partial success, XML-based ISO 20022 standards for financial messaging are now being widely adopted by financial participants globally, as well as forming the basis for SEPA payment messages. Corporates in all regions are increasingly leveraging the benefits of a standardised approach to financial messaging, which is an important means of achieving process consistency and bank-neutrality.[[[PAGE]]]
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Nearly 28% of companies indicated that they planned to implement SWIFT connectivity, and a large proportion of respondents had already done so (as this survey included a large number of SunGard clients, which have a strong track record in SWIFT connectivity and a sophisticated client base, this number is far higher than the corporate average). SWIFT connectivity is becoming more easily achievable, not only for the largest multinationals, by working with a service bureau or SWIFT’s web-based offering, AllianceLite2. Although bank independence and standardisation are most frequently cited as advantages of using SWIFT for bank connectivity, these would appear to be secondary considerations to enhancing payment security (53%) and the ability to rationalise banking channels (51%). Enhancing reliability, reducing bank communication costs and increasing visibility of cash are also important factors in corporate treasurers’ and finance managers’ decision to implement SWIFT.
There is still substantial progress that companies of all sizes can make towards enhancing their payments infrastructure, but similarly, the opportunities to do so are also expanding. Over the coming years, we would expect to see a larger proportion of companies of all sizes centralising and enhancing their payment processes, and/or achieving a greater degree of centralisation and standardisation than they have been able to do so in the past. Furthermore, those who have already embarked on payments optimisation projects cannot stand still, particularly as business models evolve over time. An effective payments framework requires a combination of the right skills, technology, processes, banking and account structures. With continuing evolution and innovation in these areas, companies can create considerable cost and efficiency advantages, and improve relationships with suppliers by maintaining a best-in-class approach.
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