Centralising Payments and Services: The Baltics and Poland

The concept of payment factories has been around for some time, however the exact definition of the term has often been the cause of some confusion. A payment factory helps multinational companies to centralise payment processes in one geographical area. This is a big step away from the more traditional, multi-banking approach, which required corporates to foster and maintain banking relationships in several countries at any one time.

Today, payment factories are not just for large multinational corporates but are increasingly becoming a ‘must have’ for small and medium-sized enterprises (SMEs). Payment factories assist with the automation of accounts receivables (A/R) and accounts payables (A/P) processes, with the end goal being to achieve straight-through processing (STP) by enabling synched file exchange between the bank and a corporate’s enterprise risk planning (ERP) system.

Payment Factories and the Baltic Countries

New European markets are increasingly at the forefront of the demand for payment factories. This is particularly true of the Baltic region where the countries have become increasingly popular as corporates take advantage of labour arbitrage – i.e. the labour costs are lower. It is easier to set up a payment factory in the Baltic region than in other areas of the world because it is a smaller, more innovative market, which is keen to embrace new technology. There is also a legal reason in terms of data protection – i.e. some data cannot move out of Europe.

The recession has focused the attention of corporates on reducing costs and running businesses efficiently, which is one of the main drivers to setting up a payment factory. By centralising payments in the Baltic region, corporates can reduce their administrative and IT costs, as well as simplify their internal processes and better control their overall liquidity. In this way, payment factories can potentially reduce costs and risk.

There are disadvantages to setting up payment factories. Establishing a payment factory can be time consuming and complicated, depending on factors including a company’s infrastructure, its ERP system(s) and if the payment process is already completely centralised.

Conversely, there are many advantages once the payment factory is up and running including cost efficiency, reduction of administrative costs and the ability to integrate bank connectivity, authorisation and security in the company’s ERP.

Format standardisation is a key trend across the Baltic countries and Poland and fulfils the requirements for payment centralisation. Standardisation has been driven by several factors including the need for flexible, compatible file formats and the increased importance of a corporate’s ERP systems. In many ways ERP providers are defining the rules of the game – dependent on the ERP system’s capabilities companies are defining requirements towards the banks. In future, there needs to be greater co-operation between banks and ERP providers to achieve better results.

Shared Service Centres (SSCs) in Poland

A shared service centre (SSC) is very similar to a payment factory but differs in that it should be recognised as a separate organisation or unit dedicated to servicing transactions on behalf of several business entities.

A SSC often has more responsibilities and activities than a payment factory. SSCs also offer flexibility and transparency of payment processes, and in addition they can manage HR processes, financial analysis, knowledge management, liquidity management and other administrative tasks.

In Europe, Poland is a central hub for SSCs with roughly 160 SSCs established since 2004. Together they employ approximately 50,000 people, including core financial positions and also IT specialists, HR and administrative staff who support SSC activities in Poland.

Initially, the country was favoured for SSC set up due to the wealth of low cost, qualified, university graduates who possessed extensive language skills. This pool of talent made the Polish market very attractive to corporates looking to set up SSCs. Since 2004 multinationals are increasingly opening SSCs in Poland not just because of the calibre of graduates but because there are now a number of qualified staff, with years of SSC experience, available.

For example, Nordea Bank has recently set up an operations centre in Poland to provide back office services for Nordea’s group operations as well as banking products. “We used to perform these back office activities in four different countries, on local systems and with limited resources. There was a great efficiency potential to be achieved by centralizing those operations,” says Ossi Leikola, head of banking Poland and Baltic countries, and adds: “Poland stands out as a European location with the right skills and experience to reliably set up and operate such a hub for performance critical activities.”

Payment Factories and SSCs: The Role of Technology

Cash is king, and liquidity and working capital is in many ways connected to setting up payment factories and SSCs on the road to achieving total integration to an ERP system. Technology plays an important role in the process of setting up a payment factory or SSC, as either an ERP or treasury management system (TMS) is required to support a company’s shared services.

When a company sets up a payment factory or SSC, the main goal is to achieve STP and better connectivity between systems. Corporates, particularly those operating across borders, are increasingly demanding XML ISO 20022 as well as SWIFTNet FileAct for their connectivity when setting up payment factories and SSCs.

XML is the desired format due to its compatibility with most ERP systems. Before XML was introduced, previous worldwide connectivity formats were complicated and difficult to use. The introduction of XML has therefore made standardisation more achievable from SMEs to the multinationals, and has supported the growth of payment factories and SSCs as a solution.

Despite this drive towards standardisation, there is still work to be done when it comes to setting up payment factories and SSCs. There are still many obstacles to overcome regarding common communication protocols and security methods. Although the XML format has been agreed upon, the other connectivity options still remain divided and fragmented.

Corporates, together with banks, will need to lobby hard for a common standard. Global and regional banks, corporates and ERP vendors have come together to form a group called the Common Global Implementation (CGI) and are working to define and standardise each field within the XML ISO 20022 format and how it will be used in order to streamline the process globally. The banks, together with the ERP vendors, have to agree to use XML in the same way in order for the corporate community as a whole to benefit.

Northern European corporates are searching for a centralised location where they can send payment instructions and another entity, such as a bank, can deal with the differences that exist between local infrastructures.

Connectivity with a single format, one common security method and support are the cornerstones of any system implementation. From the corporate side, it is difficult to make payments to a Danish supplier in kroner and also a Finnish supplier in euro, as well as deal with country-specific payment formats.

Corporates would like important processes as standardised as possible, so there is a need to harmonise and streamline all processes for them, including local infrastructures, settlement processes and clearing cycles.

Regulatory Influence on Payment Factories and SSCs

While the single euro payments area (SEPA) initiative is not the main driving force for the centralisation of payments, it certainly assists the establishment of payment factories by standardising file formats and fixed payment execution rules. As a result of SEPA, the process becomes clearer and more transparent, regardless of the country where a company has a business.

But, as in most situations, there are pros and cons. While SEPA helps to decrease banking expenses for European payments and to simplify payment flows, it is still far too slow in terms of the number of clearing cycles per day. The downside of SEPA is that it does not meet all of the corporates needs in terms of payment types and frequency.

As well as SEPA, the forthcoming Basel III regulation will set much tougher rules for the banks in terms of lending and risk exposures.

The Future of Payment Factories and SSCs

Customers continue to request global liquidity concentration platforms. They are looking for immediate payment execution, to make the liquidity flow 24 hours a day without any restrictions. This means that banks will need to work closely with the technology companies to establish and refine such a global system.

Payment and collections and the reconciliation of account statements are in the spotlight today. In the future, it will be possible to include pre-processing, the administrative detail prior to payment or before it becomes a collection, such as orders and electronic invoices (e-invoices) in a streamlined, one point of entry process. The aim is to encompass the whole corporate value chain.

To achieve this, there will have to be an end to the current silo existence, which segments invoices, payments and collections rather than integrating the processes in an integrated process flow.

Technology continues to develop at a very fast rate and corporates must continually look ahead as to where the market will be in two or three years time rather than living in the moment.

To learn more about Nordea, please visit the company’s microsite.


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