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Centralisation is a key trend among corporate organisations today regardless of their size, business or location. Improved visibility and control are the driving factors behind centralisation initiatives and setting up a payment factory is one of the most common centralisation models employed by corporates. The payment factory model is based on a centralised payables process that improves visibility and control as well negotiating power with bank partners.

There are two distinct set-ups when it comes to payment factories. The first is the traditional centralised payment factory where a limited number of people manage the payments and payables processes for a specific region. The second is the virtual or decentralised payment factory where the roles and responsibilities are still retained at the level of the subsidiary but the entire organisation uses one central system for managing payments, bank connectivity and relationships.

Depending on a company's culture and how it wants to be organised, it will choose the most appropriate payment factory model. For example, we have corporate customers whose entire payments process for Europe is managed by five to 10 people in a shared service centre while others have 800 users in a worldwide, decentralised payment factory model. Importantly, both models allow organisations to enjoy similar benefits.

Current Driving Factors

While the payment factory model has been deployed for many years, today, more than ever, there are a number of drivers encouraging corporates to adopt this centralisation model. A few years ago, the major driver was cost savings and while this is still important, wider benefits are now recognised including compliance, security and business process improvement. These factors do ultimately lead to cost savings but there is an important shift in mentality where more corporations realise that centralisation does not need to stop at treasury and accounts payable but can also extend to functions such as accounts receivable.

In addition, the technology that is available today provides greater support and functionality for the decentralised payment factory model. Five to 10 years ago, for instance, the first movers were those corporations who wanted a centralised, black box setup, where everything was managed out of a central department. Today, with web technology, location is no longer of relevance and it is technically possible to set up a decentralised payment factory. Furthermore, five years ago, setting up a payment factory with 500 users located across the globe was almost impossible but today's technology can now help enable organisations to do so. This is a significant development for those companies who, from a historical or cultural point of view, were unable to take away payment processes from their subsidiaries. For these companies, centralisation through a payment factory is now more easily achievable through the decentralised model.

Benefits of the Payment Factory Model

Today, security and compliance are the main priorities when it comes to payment factories, such as making sure there are no uncontrolled touch points within payment processes. In addition, it is also about making sure that, in terms of business process improvement, there is a pre-validated and approved workflow that can be deployed across the organisation. This means that whatever type of payment, whichever affiliate is involved or whatever ERP system that affiliate happens to use, everyone uses the same workflow and steps for approval and validation before a payment is sent to the bank. This also enforces the principle of segregation of duty and ensures there is a secure bank connectivity model in place with standardised audit trails and that all processes are properly documented.

As long as payments are performed using a local electronic banking system, however, corporates will be dependent on the capabilities of those e-banking systems. While some can be sophisticated others do have limitations, which makes it harder to control what's happening at the affiliate level. For instance, with certain electronic banking systems, it wouldn't be uncommon for the person keying in the payment to also be able to approve that payment as well. Establishing a solid and controlled workflow generates numerous advantages for corporations - especially those who have to comply with Sarbanes-Oxley. This is where there has certainly been a shift in mentality around the payment factory that has led to the understanding that it not just about the software but a new way of handling and managing payments flows.

The ability to mitigate operational risks, and therefore reduce the probability of errors, is also important in the payment factory set-up. Furthermore, setting up a best practice workflow also enables the improvement of visibility over cash flows. It allows a company to utilise data from the source rather than data that has been processed by the subsidiary, which can be tied into overall treasury management. From conversations with our corporate clients, it became evident that before they implemented a payment factory, they had no visibility on around 30-40% of their cash - a substantial chunk of a company's cash flow. The importance of cash visibility is even more critical right now, as all companies face the consequences of the liquidity squeeze.

The current economic climate also puts bank relationships under the spotlight, such as the independence corporates have in choosing banking partners and how fast they can switch partners if their credit line with one is suddenly cancelled. This is where multi-bank payment factories can provide incredibly valuable plug-and-play functionality because, on average, corporates are connected to five or 10 banks.

In terms of the services that are centralised within a payment factory, all corporates start with payments and the opportunity to collect all bank statements should not be underestimated. The fact that a payment factory can create a centralised repository for all bank statements provides huge value to corporates in terms of visibility over cash. We are now also starting to see the addition of other services, such as e-bank account management. Payments exceptions and investigations is also a focus right now. For instance, the payment factory model can provide status reporting and the electronic exchange of messages when a corporate wants to place an enquiry and get a report on a transaction. Looking ahead, e-invoicing will be the next logical step in terms of the payment factory model and we are already getting a lot of questions from our clients about this.

Implementation Challenges

While the payment factory model provides numerous benefits, it is also important for corporates to recognise the complexities of setting one up. A payment factory could have many interfaces because it has to connect to the ERP system, as well as the payroll system and treasury management system. In addition, the payment factory has to handle all incoming information in multiple formats and potentially different statement formats.

When establishing a payment factory, it is therefore important to involve all relevant parties, such as the ERP systems team and your partner banks, right from the beginning of the project. A successful project is based on co-operation between the company's internal project team, the technology vendor and bank partners. Establishing a payment factory is not just about installing a piece of software; it is also about changing how your organisation manages payments and explaining to subsidiaries how payments will be processed in the future. Once the factory is live, it is also important to put in place a robust support structure. As a result, corporates need to work with a vendor who is able to provide international support because, typically, a payments factory will be a global implementation.

At SunGard, more and more of our customers ask us to take care of the implementation and negotiation with their bank partners as well as the software installation. Once the system is in place, they also look to us to manage the solution in terms of hosting, application management and the configuration of additional banks - what we call a fully managed service. And this is a clear trend - companies want a best practice workflow and the system to be configured exactly the way they want it with a professional team that runs and supports them on a 24/7 basis.

Payment Factory 2010

As mentioned at the beginning of this article, while cost was traditionally the main driving factor behind the adoption of the payment factory model, this has now evolved to include the consideration of security and compliance as well business process improvement. For instance, today most CFOs adopt the payment factory model because it provides tangible operational efficiencies for their organisation.

Looking ahead, payment factories will reach a level of sophistication that goes beyond operational efficiency and delve into the area of working capital management. Indeed, the payment factory model provides numerous opportunities to improve working capital, such as in the area of direct debits. For example, direct debits provide a higher degree of certainty about the time and amount of payment collection but it is a complex instrument to manage because every country has its own direct debit formats and rules. A modern payment factory would be able to process direct debits in a standardised way making life much easier for corporates. Initiatives such as the single euro payments area (SEPA) will also support this trend, as it streamlines the direct debit instrument across Europe.

Significantly, there is also more discussion about strategic collaboration with suppliers within the supply chain. It is important to give suppliers insight into when and how they will be paid and not being able to provide this information can become a competitive disadvantage. There have been a few implementations recently where part of the payment factory is exposed to suppliers in an extranet model where they can see exactly when they are going to be paid and where they can extract remittance information.

The payment factory model is by no means a new phenomenon but it is evolving rapidly to meet the needs of corporates as their requirements change. It will most certainly continue to be an important tool in the strategic pursuit towards centralisation and process efficiencies.