It’s not just payments but increasingly collections too which can benefit from being standardised and centralised. However, the greatest benefits can now be achieved by hosting the payment factory in the cloud for the most advanced treasuries.
During the past 15 years, the use of web-based technologies has become widely accepted. The market is now seeing accelerating adoption of cloud-based solutions for mission-critical corporate treasury activities. Today, a growing number of corporates are implementing payment factory solutions on an outsourced model, on the assumption that trusted service providers are better placed to deliver resilient and flexible platforms cost effectively.
Deployed as a web-based cloud solution, the payment factory can be either virtual or physical, with personnel either operating remotely, but on the same platform, or physically located together in a shared service centre (SSC).
Improving Visibility, Security and Control
Driven by regulations, such as Sarbanes-Oxley (SOX) and the need for strong corporate governance, there is a continuing drive to improve internal controls and financial reporting across the enterprise. An efficient payment factory must therefore provide a platform for strengthening internal controls (for example, correct segregation of duties) and deliver greater visibility of banking, payments and treasury activities.
With a payment factory, corporates can eliminate paper-based processes (e.g. faxing bank statements) and reduce manual interaction in the payments lifecycle. More timely access to payments data allows faster and more accurate reconciliation, while costly investigations can be reduced via strict data validation and matching rules, which minimise potential user errors and contribute to lower operational risk. Higher straight-through processing (STP) rates, achieved through automated routing code validation, such as Bank Identifier Codes (BICS) and International Bank Account Numbers (IBANS), should result in lower bank charges, especially where banks are charging higher fees for manual repairs.
Tight integration with ERP and TMS
Payment factories are particularly well suited to organisations which have multiple enterprise resource planning (ERP) systems. In these circumstances, instead of trying to consolidate payments onto a single ERP system, it is generally much faster and far more cost effective to create a payment factory which becomes a hub between disparate ERP systems, the treasury management system (TMS) and the SWIFT interface, which acts as a gateway to all transaction banking relationships.
As data reformatting is a core functionality within a successful payment factory, this hub is able to seamlessly exchange data with multiple host systems in addition to providing banks and clearing and settlement systems, such as Bacs, with precisely the required format for STP.
Given the focus on cash visibility in most businesses, experience shows that the logical place to start a SWIFT programme is to gain visibility of all major bank accounts globally. This approach usually ensures a rapid return on investment from enhanced liquidity management.
SWIFT at the Heart of Payment Factories
At the core of most successful payment factory initiatives is SWIFT. Increasingly, corporates are joining SWIFT as a proven way to achieve a range of financial, operational and strategic benefits. Over 80% of corporates joining SWIFT choose a service bureau for connectivity and the SWIFTReady Connectivity ‘Best Practice’ label, a sought after accreditation, has only been awarded to a handful of SWIFT partners around the world.
The diagram below shows the relationship between the ERP/TMS systems, SWIFT and the various payment/collection types:
Payment Factories in the Secure Cloud
SWIFT service bureaus which have been awarded the SWIFTReady Connectivity ‘Best Practice’ accreditation are acknowledged to support highly secure and resilient infrastructures for SWIFT connectivity between large corporates, banks and non-bank financial institutions. Such accredited bureaus, which belong to larger software vendors that also build scalable and robust web-based software solutions for payments, collections and cash management, are well placed to provide a fully outsourced payment factory solution that is integrated with multibank connectivity via SWIFT.
Those bureaus holding international attestations such as SSAE 16 (the modern-day equivalent of the better known SAS 70 accreditation) provide additional comfort in terms of their proven and robust processes and resilient infrastructure. Hosting the SWIFT interfaces and software on servers in a secure and effectively bomb-proof data centre, with proven contingency and disaster recovery, should also give the necessary assurances and peace of mind to even the most demanding corporate treasurer and chief financial officer (CFO).
SEPA Mandatory End Date Driving Payment Factory Adoption
A key activity of a payment factory is to handle all payments and collections. The recent announcement of a single euro payments area (SEPA) mandatory end date of 1 February 2014 will be a catalyst for many corporates to implement payment factories.
The mandatory deadline will force corporates to take the initiative more seriously and many will recognise that the best way to leverage the benefits of common standards across multiple countries will be through a payment factory model.
Corporates will be required to use ISO 20022 XML standards to transmit their payment files to their banks. This will be easily managed by payment factories with strong reformatting capabilities which will greatly simplify this requirement without any need to modify the core ERP system. Similarly, a comprehensive payment factory is able to convert Basic Bank Account Numbers (BBANS) into IBANS and add the appropriate BIC, again ensuring compliance with SEPA regulations.
Probably the biggest opportunity for major cost savings and streamlining will be achieved in adopting SEPA Direct Debits (SDDs), either the core scheme or the business-to-business (B2B) scheme. This is particularly relevant for major utilities, insurance companies, telcos and pension funds with many thousands of clients across multiple eurozone countries.
Payment factories are well placed to become the core engine for this compelling opportunity to streamline disparate multi-country collection arrangements into a single large-scale standardised process. Again, a SEPA-compliant payment and collection factory means that, without making changes to host ERP systems, euro mandates can be created, managed and stored and fully compliant direct debits (DDs) can be processed, including the new ‘R’ transactions, or standardised reason codes for reporting and handling errors and exceptions.
When creating payment factories it is vital to take into account any local differences in markets where the corporation has significant flows of payments and collections. For example, the UK has Direct Corporate Access to Bacs and the Faster Payments Service (FPS), unlike most other countries where corporate payment files are submitted to the local automated clearing house (ACH) via their payment banks. It is preferable to find a solution which incorporates these local requirements in order to benefit from maximum flexibility and the lowest cost routing.
Improving STP with Common Global Implementation
The Common Global Implementation (CGI) initiative, facilitated by SWIFT, aims to streamline the use of ISO 20022 standards for corporate-to-bank communication regarding payments and cash management. As a participant in this valuable STP project, Bottomline recommends adoption of these standards, which should help multinational corporations to simplify and reduce time spent on implementing STP initiatives for payment instructions and cash reporting with their various cash management banks.
The payments and collections managed by a payment factory will be primarily electronic payments (e-payments), of course, particlarly in European and Asian payment factories. But in North America and to a lesser extent in specific geographies, such as UK, France and Ireland, it is still important to be able to manage the controlled production and distribution of cheques.
The more sophisticated payment factories incorporate outsourced cheque production and on-site printing capabilities. These multi-currency cheques are specially designed to clear on local bank accounts to avoid high bank collection charges for the beneficiary.
Optimising Working Capital Management
Security, compliance and business process improvement rival cost reduction as a key strategic initiative. Most CFOs adopt the payment factory model because it provides tangible operational efficiencies for their organisation. Looking ahead, payment factories are reaching a level of sophistication that goes beyond operational efficiency and touches on working capital management.
Indeed, the payment factory model provides numerous opportunities to improve working capital, such as using DDs, which provide a higher degree of certainty about the time and payment amount to be collected, enabling easier reconciliation, more accurate cash flow forecasting and improved days sales outstanding (DSO). Similarly, invoices can be distributed electronically, to reduce DSO and accelerate cash flow.
Significantly, there is also a growing trend of strategic collaboration with suppliers along the supply chain. It is important to give suppliers visibility into when and how they will be paid. Not providing this information will increasingly become a competitive disadvantage. There are a growing number of implementations where a payment factory includes a supplier portal where suppliers can submit invoices electronically, check the status of their invoices, when they are going to be paid and download remittance information.
The payment factory model is evolving rapidly to meet the needs of corporates as their requirements change. It will continue to be an important tool in the strategic pursuit of centralisation, process efficiencies and better working capital management.
Additionally a payment factory which is hosted in the cloud by a secure third party that is connected to SWIFT can deliver a more lean and agile infrastructure for the corporate that can afford it. This cloud-based flexible approach can cope with current and future regulation, market trends, and business services.
Treasuries should be centralised but also extend "strategic autonomy" to decentralised units because they need to be responsive and close to the customer, argues Richard Scase, author and business forecaster on global megatrends.
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